Great outcome: where do electronics manufacturers flee from China and how will it affect us

On September 1, new US trade tariffs on goods made in China went into effect. This time in

the center of hostilities hit the Americantechnology companies, since the rise in prices will also affect small electronics, and from December 15 – will go to computers, smartphones and tablets. For exorbitantly expensive iPhones, it may be unaffordable. Apple has already gone beyond the limits of common sense with a price tag above $1000 and losing sales in the quarter. But not only Apple would like to raise prices for its products due to an increase in the tax burden. All large companies that sell their goods in the USA have started a big move. And not only them.

Expensive and uninteresting

Trend towards transfer of production from Chinahas been observed for a long time. The first in a series of reasons was rising labor costs in China. No matter how hard the government tried to restrain the yuan, Chinese factories – is no longer the cheapest pleasure in the world. Cheaper are Vietnam, Malaysia and other Asia.

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Smartphone shipments in the second quarter of 2019, IDC

Second &#8211; this is India.The Indian smartphone market (and smartphones are one of the largest categories of consumer electronics in the world, with almost 1.5 billion devices sold annually) &#8211; huge. This is the second country in the world after China with a population of more than 1 billion people, while, unlike the Celestial Empire, it is far from being saturated. The local government has imposed additional duties on imported electronics, so companies that want to seriously compete for local buyers open sites here (Apple, Samsung, Lenovo, etc. already produce electronics within the country).

Finally, the last factor in terms of chronology, but by no means in terms of consequences, is &#8211; this is the trade war between the US and China, especially its latest round &#8211; in the form of duties.

Asian miracle

In October 2018, Bloomberg journalists found thatin developing countries of Southeast Asia &#8211; investment boom. Thailand, Vietnam and the Philippines will become new production sites for companies that supply their electronics to the United States. Thus, investments in the Thai economy increased by 53% and reached $7.6 billion. The Philippines saw six times more investments ($861 million). In Vietnam, production increased by 18%. Another popular destination &#8211; Malaysia, where, according to a Bloomberg publication, Kayamatics and Panasonic planned production.

In addition, some companies intend to return toTaiwan. Unlike other competitors in China, this location is more expensive, but it is interesting to manufacturers because it has more Western-oriented management, some components are produced, and there is a production culture and well-established logistics. According to Oleg Naumenko, CEO of Hideez, Taiwan today has already become more expensive than China by about 10%, and prices in the region will obviously increase due to increased demand.

New registration

As spring and summer approached, information began to leak into the media about where exactly certain IT giants were planning to move.

So, it became known that Apple is planningcut production in the Middle Kingdom and asked suppliers to estimate how much it would cost the company to move 15-30% of production to India. At that time, the company already employed 5 million people in China. And Apple already has established production in India, where top models and the budget SE were produced. In addition to India, the company was considering Mexico and Vietnam. And the founder of Foxconn, by the way, asked Apple to consider Taiwan.

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Samsung factory in Vietnam

Google moves motherboard production toTaiwan, Nest will probably move to Taiwan, Malaysia or Thailand. Pixel smartphones, according to the Nikkei Asian Review, will move to Vietnam to a former Nokia factory.

Nintendo is considering Vietnam as an additional site for the production of game consoles, TVs &#8211; TCL.

Server equipment manufacturers Quanta Computer and Inventec are considering production sites in Taiwan.

About plans of HP and Dell to transport 30% from Chinacomputer production became known earlier this summer. The companies considered Thailand and Taiwan. In addition, Dell launched trial production in Vietnam and the Philippines in the spring.

Apple component maker Delta Electronics and headphone maker for companies like Bose are expanding production in Thailand.

For Lenovo Group, Acer and Asustek Computerthe US market is equally important, and these companies are considering other locations for relocation. Sony, Microsoft are also planning to leave China (although Microsoft's plans are still rather vague, the company denies relocation information).

Secretary General of the Chinese Association forOverseas Enterprise Development (China Overseas Development Association, CODA) He Zhenwei said that China's small and medium-sized enterprises are also considering other countries to produce goods for the US market.

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Jabil contract manufacturing in Uzhgorod also expanded this year

Samsung opened its largest factory a year agofor the production of smartphones in India. True, then the company was guided rather by the hope of winning the Indian market from Chinese brands, primarily Xiaomi, since the company would have to pay a duty to import its electronics to the second largest Asian market. In addition, a year ago Samsung announced that it would close a plant in China and open two in Vietnam. In general, the BusinessKorea publication names Samsung and LG as the two main investors in the Vietnamese economy, as well as companies that are actively recruiting labor now. The publication says that Samsung plans to hire 180,000 employees, LG currently employs 2,000 people, but the company plans to invest $1.5 billion in the country's economy by 2028.

Lenovo has opened a wearable electronics manufacturing facility in India. In the summer, Flex, one of the largest contract manufacturers, announced the expansion of production in India.

Jabil is growing in Asia, outside of China, but alsothis spring the company opened another site near Uzhgorod &#8211; Thus, the Ukrainian plant became one of the largest in Europe. Jabil management notes that the demand for production “anywhere but in China” has been observed for a long time; in general, there is a demand for more local production in the world. In Mexico &#8211; for Mexico, in Europe &#8211; for Europe, etc. Ukraine was chosen due to its convenient location (goods produced at the plant can be in Europe within 24 hours), the presence of a large number of people with good education, technical education in particular, low labor costs and disciplined workers, as well as interaction with the authorities.

In fact, large contract manufacturershave long gone beyond the territory of China and opened production facilities in different parts of the world, taking into account the demand for different products and local expertise. For example, Jabil now has 120 factories around the world. The Asian hub is the largest, followed by &#8211; Mexican and European. Flex has production facilities in Europe, Africa, the Middle East, the Americas and Asia. Foxconn also has production all over the world, including in the United States. Foxconn has sites in all major manufacturing locations.

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According to Oleg Naumenko, CEO of Hideez, nowAlmost every factory that manufactures in China opens sites in other jurisdictions. If previously only large factories were engaged in this, now the time has come for medium-sized ones. Some buy equipment, some transport it from old locations.

Own specifics

Manufacturing giant, China &#8211; this is a country withpopulation of almost 1.4 billion. Industry brings China 46.6% of GDP; most electronics components are produced here. China's Silicon Valley, Shenzhen, produces 90% of all electronics in the world, and just one of Foxconn's factories in China employs 1.5 million people, in fact an entire city.

China produces several hundred equipmentAmerican companies, and although there is no data on customers around the world, this figure is probably many times higher. Data on the average manufacturing salary in China varies from source to source, but as of 2019 it is in the order of $1,000. Vietnam is said to be the main beneficiary of the trade war between China and the United States.

Vietnam has a population of 95 million.The average salary in the country is close to $300. Even before the trade war, Vietnam had about 500 electronics factories. Including companies such as Samsung, Fujitsu, Canon, Intel, Sony, Sanyo, JVC, LG, Toshiba, Panasonic. Every tenth smartphone in the world is produced in Vietnam, and electronics &#8211; one of the main export items. Exports of smartphones back in 2016 brought the country $41.3 billion, other electronics &#8211; $23.6 billion

Such a culture has not yet been formed in the regionproduction, as in China. But for companies, the country is interesting due to its low labor costs, the presence of some kind of production, including components (although this cannot be compared with China), its location (it’s not far from China, where most components are produced), as well as low environmental standards and support from side of the state.

Russian Vedomosti writes that the country's GDPgrew only in the first quarter and in the second quarter grew by almost 7% compared to last year. The country's trade with the United States grew by 40% in the first four months of 2019. Vietnam is in the top 5 countries for the US trade deficit, and it is growing, which is something that usually makes the US president very angry.

There are already known cases where Chinese companiesThey delivered goods to Vietnam, where they were slightly modified, repackaged and transported to the States (sort of like Belarusian jamon, only in industry). Trump has already made it clear that he knows about this and he does not like the situation and Vietnam “is behaving even worse than China.” The Vietnamese government has promised to fight the loophole. Apparently, we are talking about billions of dollars worth of goods in just the first five months of this year.

Although India is not included in the world tops as the best place for electronics production, thanks to legislation and a huge population, the country has also become a haven for electronics factories.

In the world of technology, India has made a name for itselfoutsourcing software development. But the government of the country has had production ambitions since the beginning of the 2010s. In 2013, the country introduced tariffs on electronics imports, which encouraged companies to open factories in the country and even at one point led to the rise of local smartphone manufacturers (but the Chinese sharks have still taken over the blanket in recent years).

India has special economic zones,oriented towards export development. Two-thirds of the companies in these zones are in IT and electronics manufacturing. In 2015, when Foxconn announced investments in a new plant in India, the Indian Prime Minister announced plans to increase production to 25% of GDP by 2022, up from 18% at that time. However, not everything is so simple in the Indian state &#8211; Both Foxconn and Nokia have already had to close production here due to difficulties with taxes and bureaucracy.

Taiwan &#8211; another location that benefitsfrom the trade war is obvious. A lot of expertise is concentrated here, as well as the production of components. In terms of export volumes in 2016-2017, the island entered the world top 20. A third comes from electronics. Taiwan &#8211; one of the leaders in semiconductors. It also ranks fourth in the global ranking of countries for production location. The rating takes into account risks, costs and business conditions.

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Taiwan is more expensive than China, no wonder the vendors thereThey have chosen production in the Middle Kingdom, and due to demand, the price will continue to rise. Island population &#8211; almost 24 million, twice as many as in &#8220;Chinese Silicon Valley&#8221;. But still, in comparison with other locations, Taiwan is spoken of as a small location where everyone will definitely not fit. And this will push prices up. At the same time, for companies that need strong expertise and quality is very important, this location will remain attractive.

Even before the trade war, Thailand was a country withmore or less developed industrial sector. Electronics (components for computers, cars and the cars themselves) &#8211; the main export item for Thailand (43%), despite the fact that 14.5% of the population (about 1 million people) is involved in production. The country is in 3rd place in the world in the production of microchips and hard drives.

It was also famous for its illegal production andneglectful attitude towards the environment (for example, electronic waste from the EU was brought to Thailand when China refused to accept it). Thailand has a large shadow economy (about 40% according to government estimates) and at the same time, SEZs have been created to develop exports.

The Philippines will also get some from the holiday tableChinese pie. In the country, despite the difficult political situation, GDP has been growing for many years now (see graph above), primarily &#8211; due to production. As of May 2018, 60% of exports &#8211; These are electronics and semiconductors. Industry contributes 30% of GDP, and the industry employs 14% of workers. The Philippines ranks 12th in the ranking of attractiveness of countries for production location (only China, Malaysia, and Taiwan are higher among Asian countries). The country has low labor costs outside of Manila (minimum wage $5-10 per day), average salary is $200 per month.

In addition to Asia, another popular destinationproduction becomes Brazil. Inexpensive labor, densely populated region, convenient logistics throughout the Americas. Recently, even Huawei announced the construction of its own factory in this location. The company will invest $800 million in the factory in Sao Paulo. The company plans to increase its share of smartphones in this market and produce devices here for the domestic market and other neighboring countries. Foxconn and other large contract manufacturers have production sites in Brazil.

Moving worse than fire

Editorialggasked Ukrainian hardware startups to comment on what would be the most difficult aspect of moving production to new regions.

Oleg Naumenko identifies two key problems&#8211; This is the component base and quality control. 90% of all components are produced in China and it will be difficult for companies to abandon them, since, in fact, any replacement &#8211; This is a new device, it needs to be tested again. And over time, political aggravations may also affect the component base. Production of components &#8211; The process is an order of magnitude more complex and resource-intensive and contains more risks.

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Oleg Naumenko, Hideez

Today everyone has quality controla decent factory, and serious vendors build a quality control system right on it. According to CEO Hideez, this is most often done in several ways &#8211; an automatic firmware testing system and a bench that checks each board, as well as manual testing. Vendors also have people who test electronics before shipment.

Quality control is usually carried out by employeescompanies that were transported to China, as well as local ones. But without management on the part of the company in China, it is impossible to ensure normal quality control, since a Chinese will always reach an agreement with a Chinese. If production is moved to another country, the team responsible for control must also be transported. If these are people with families or those who have managed to put down roots in China, it will be more difficult. In a new place you will need to look for new people. Or even transport Chinese employees with you if the location does not have a production culture.

There is one more problem &#8211; trust problem. It is just driving manufacturers out of China, because after the “spy scandals” surrounding Huawei equipment, they are no longer trusting China.

Valentin Gritsenko, Marketing Director of AjaxSystems, recalls how the manufacturing boom in China began &#8211; with the fact that the state provided optimal conditions for production and cheap labor. If things are better with cheap labor in other Asian countries than in China, then conditions are not good everywhere. Same India &#8211; a treasure trove of surprises from the state. Third factor &#8211; This is the production of components, which was already mentioned above.

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Valentin Gritsenko, Ajax Systems

Ajax initially abandoned China.In the early stages, the proximity of production and R&amp;D and the ability to control all processes are especially important for a startup. In addition, it produces security systems, and in the security field, its own production is valued as a sign of quality, and Ukraine, as a country of production, has a much stronger brand. Especially for Europe.

When the production and testing processes wereadjusted and documented, the proximity of production to development for Ajax has become less important. According to Hrytsenko, large manufacturers who are now moving from China will not face big problems, since they have all the processes already debugged. It will be more difficult for small beginners. The logistics of components will become more complicated, therefore, the countries of Asia that are close to China have the greatest chances for continuity.

On a large scale at first it mayanother problem will arise &#8211; lack of personnel. The labor market needs time to adapt to changes. “In general, there is no higher mathematics in production; you can teach people. But in China there really are more people, and in a new location you will have to spend time on training and searching. This will all be stimulated by salaries,” explains the marketing director of Ajax Systems. If they pay less in the field than in the factory, then everyone will go to the factory.

Hurt everyone

And although the press pays attention mainlyThe fact that large American and international vendors will have to move production is only part of the problem. In practice, this applies to any companies that want to sell their goods in the United States. Even Ukrainian startups that sell their gadgets in America are forced to look for new sites.

For example, Hideez is bringing production back toTaiwan, where it all began. Naumenko says that his American partners have long persuaded him to move production to the States &#8211; they say that China already has a bad reputation in security matters (formally, the persecution of Huawei began with accusations of espionage). But production in the States will cost about 30% more, and components will still have to be transported from China; almost nothing is produced in the USA.

In the dry residue

Talk about which country will become the newChina has been going on for many years. Perhaps, since the technological power of China became obvious, as well as the fact that the country has ceased to be a global raw material appendage. So the current situation has rather accelerated and intensified the processes that were already taking place in the world. In various publications you can already find forecasts of how much China’s GDP will decrease due to the relocation of production. But this is only one side of the coin. On the other &#8211; growth of added value of Chinese goods due to manufacturability and unique developments. Perhaps the trade war will set the Chinese economy back several years. It may (or rather, even probably) lead to a slight increase in prices for some goods due to the confusion with production. It’s absolutely certain that everyone will not leave China, since this site remains attractive due to expertise, convenience, availability of personnel and still good prices; there will still be production facilities aimed at other markets. But we will definitely see an even greater technological divide between East and West in the near future. And even more of China's own technologies.

For those who want to know more:

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