Think China's electronics industry is getting too big? You ain't seen nothing yet. Low labour costs and a fast-growing domestic market will spur China's consumer electronics manufacturing industry to more than double by 2010, according to In-Stat, the US-based market research firm.
The industry is predicted to grow from $71.5bn in 2006 to $167bn in 2010 and if the past pattern continues, it will be foreign capital that funds most of the growth. According to In-Stat's analyst Anty Zheng:
About two-thirds of China's electronics manufacturing revenue comes solely from foreign-funded or Sino-foreign joint ventures The world's top 10 electronics manufacturers have all invested in China and consider China to be a key region in their global manufacturing facility layout."
There is one area where China's electronic sector is still weak -- semiconductors. More than 90% of the chips that China uses for electronics have to be imported. Nevertheless, a few Chinese fabless IC companies have managed to carve out niches producing chips for mobile communications and MP3 players.
Talking of MP3 players, Chinese electronics firms where quick to jump aboard the iPod bandwagon and this year they will produce $33m worth of accessories for Apple's iconic iPod -- an 85% increase on last year, according to Global Sources. Taiwanese firms will produce $71m worth of accessories.
But when it comes to the iPod itself, China's electronics industy hardly gets a look in.
Research firm iSuppli recently did a teardown analysis on the new iPod nano to discover its bill-of-materials cost and identify the sources of the main components.
By now, I guess everyone knows that the iPod is assembled in China because Apple was forced to investigate the employment practices of its Chinese subcontractor, Hongfujin Precision Industry, after media reports that its workers were mistreated.
The iPod may be assembled in China, but none of the key components are sourced from the mainland.
South Korea's Samsung supplies the main processor, based on a design of the UK's ARM. Another UK chip designer, Wolfson Semiconductor, supplies the audio driver chip and Philips of the Netherlands supplies the power management chip. The flash memory comes from either Samsung or Hynix, both of South Korea, or Japan's Toshiba and two US firms, National Semiconductor and Cypress Semiconductor, also supply specialised controller chips.
Due to design changes and component price declines, iSuppli estimates that Apple has reduced the BOM cost for the new 4GB iPod nano, which retails for $199, to just over $72. That's 20% cheaper than the BOM cost of the previous-generation nano, which had half the memory.
Now, if Apple can achieve that level of cost savings from its existing suppliers, which are all established western or Asian chip firms, then China's fledgling semiconductor design industry faces a formidable task.
Im sure that Chinese firms could, if asked, design a suitable chip for the iPod. But could they produce it in volume, at a sufficiently attractive price and with sufficient guarantees that Apple would be prepared to take the risk of using an an unknown Chinese supplier for such a high-profile and lucrative product?
The answer, today, is undoubtedly no. But just wait a few years, and I think the world will be surprised.
More on China's electronic design sector in this earlier EngagingChina story.
