Enter China's Electronics Industry The Right Way

Feb. 1, 2004
In the late 20th and early 21st centuries, the movement of manufacturing to China has been perhaps the biggest and most fundamental shift in the world economy. Any company that wants to succeed worldwide must first thrive in China. But success isn't...

In the late 20th and early 21st centuries, the movement of manufacturing to China has been perhaps the biggest and most fundamental shift in the world economy. Any company that wants to succeed worldwide must first thrive in China. But success isn't easy to achieve. First, one must understand China and how the Chinese do business.

China is the world's largest manufacturing economy. It's also on its way to becoming the biggest consumer economy. In addition, China is on a path to becoming the largest semiconductor consumer (perhaps by 2010). By 2005, it's expected to account for 12.2% of worldwide chip sales, according to research by Converge, Inc. (Semiconductor Inter-national, March 2002, www.reed-electronics.com/semiconductor).

By 2005, a predicted one-third of the world's OEM activities will be done in China. China's GDP grew at a rate of 8.2% in the first half of 2003, according to People's Daily (www.peoplesdaily.com). In 2002, it grew by 8%.

Meanwhile, the country's electronics industry is growing at about 20% per year. Eight foundry lines are under construction. An additional 20 are planned for construction across the country within the next 10 years.

Right now, China operates the world's largest wireline and wireless network. At the end of 2002, it had 215 million wireline and 207 million wireless customers. The handset penetration rate in China is barely 15%. Yet the market is growing by more than 4 million subscribers each month.

It's been estimated that Chinese cell-phone production will reach 500 million by 2004/2005. Maturation with low-cost phones (e.g., GSM) has led to IC standardization and commoditization. Meanwhile, cell phones are becoming increasingly similar to PCs. This trend is a huge opportunity for makers of wireless devices—both in China and elsewhere. It also bodes well for the companies that supply those devices.

Following the U.S., China is now the world's second-largest IT-equipment manufacturer. It surpasses Japan and Taiwan. The number of Chinese Internet users grew from only 15,000 in 1995 to 59 million (5% of the country's population) by January 2003. By 2008, 37 million people in China will have broadband connections.

For the rest of the world, several factors drive the benefits of selling to China: new membership in the WTO, the Beijing Olympics in 2008, and tremendous government investment. There also is a growing internal Chinese demand for electronics. This demand has worked to buffer the country's manufacturing economy against the global economic slowdown.

GETTING TO KNOW YOU Everything that's been said about the importance of personal relationships in China is true. The Chinese very much prefer to deal with people whom they know. They want a personal relationship before considering a business one. This relationship involves familiarity, trust, and mutual respect.

Don't expect to be an overnight success in China. You must establish your roots early and work hard for a long time to cultivate relationships. Things may then start to go your way—even more than you expected. The Chinese readily share information. By working with a company that they know and respect, you can attain credibility throughout China. Remember to make sure that any news that's spread about you is good news.

Also, keep in mind that there are many unspoken relationships. "Face" is important. A customer is unlikely to ask questions until you have a really good relationship.

It's also important to be aware of context. In dealing with China, be careful to not neglect the rest of the world. Chinese companies tend to be global and so are their customers and vendors. Don't concentrate on just one part of a company's operations or one part of the world. A company that supplies goods and/or services to a Chinese subsidiary of a global company must coordinate with all of the company's other contract manufacturers—wherever they may be.

China's competitive advantage is low-cost production. It focuses on that strength with great intensity. In test equipment, for example, the Chinese seek out equipment that offers only the truly needed features and the lowest possible total cost of ownership. They perform the same number of tests as other companies. But they're more likely to ask, "Do I really need to do that test or that level of resolution?" They have very good cost-of-test data. They also closely tie costs to how long a device is in a test fixture.

For companies that supply China with equipment, the most important elements to emphasize are ease of operation, application support, and higher yields. Application support is particularly critical. Have people available 24-to-7 to get facilities and new lines up and running quickly. Keep providing this support beyond the startup phase.

Lastly, be sure to have Chinese-speaking people in China to represent you. Choose people who know the territory and the people. Without someone on site who has a connection to the region, it will be difficult to establish and maintain the all-important personal relationships. At the same time, keep in mind global opportunities. The design and specification of equipment may be done in two different countries and assembled in a third. Be prepared to sell and support your products in all of those places.

It's possible to do business in China and do it profitably. But don't think you can just go there and sell. It's a lengthy process. In many ways, it could go wrong. Yet more and more of the world's manufacturing is moving to China. As a result, the move to do business in China is a step that must be taken.

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