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

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

the outbreak of hostilities hit the Americantechnology companies, since the rise in price will affect small electronics, and from December 15, it will go to computers, smartphones and tablets. For sky-high-priced “iPhones”, it can turn out to be unbearable. Apple has already gone beyond common sense with a price tag above $ 1,000 and which is losing sales for the quarter. But not only Apple would like to raise prices for its products due to the increase in the tax burden. A big move was started by all the large companies that sell their goods in the United States. And not only them.

Expensive and uninteresting

The trend for the transfer of production from Chinaobserved for a long time. The first in a series of reasons was the increase in labor costs in China. No matter how hard the government tried to hold the yuan, Chinese factories are no longer the cheapest pleasure in the world. Cheaper Vietnam, Malaysia and other Asia.

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Smartphone shipments in the second quarter of 2019, IDC

The second is India. The Indian smartphone market (and smartphones are one of the largest consumer electronics categories in the world, nearly 1.5 billion devices are sold annually) is huge. This is the second country in the world after China with a population of more than 1 billion people, while, unlike the Middle Kingdom, it is far from saturated. The local government imposed additional duties on imported electronics, so companies that want to seriously compete for a local buyer open sites here (Apple, Samsung, Lenovo, etc. already produce electronics domestically).

Finally, the last in chronology, but by no means in consequences, is the trade war between the USA and China, especially its last round - in the form of duties.

Asian miracle

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

In addition, some companies intend to return toTaiwan. Unlike other competitors in China, this location is more expensive, but manufacturers are interested in the fact that there is more west-oriented management, some of the 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 rising demand.

New registration

Closer to spring and summer, information began to leak in the media about where exactly these or other IT giants were planning to move.

So, it became known that Apple plansreduce production in the Middle Kingdom and asked suppliers to estimate how much it would cost the company to transfer 15-30% of production to India. At that time, 5 million people were already working for the company in China. And Apple already has established production in India, where top models and a budget employee SE were produced. In addition to India, the company considered 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 is moving motherboard production toTaiwan, Nest is likely to move to Taiwan, Malaysia or Thailand. Pixel smartphones, according to the publication Nikkei Asian Review, will move to Vietnam to the former Nokia factory.

Vietnam is considering Nintendo as an additional platform for the production of video game consoles, and TCL as televisions.

Server equipment makers Quanta Computer and Inventec are exploring manufacturing sites in Taiwan.

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

Component maker for Apple 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 China Association forChina Overseas Development Association (CODA) He Zhenwei said China's small and medium enterprises are also considering other countries to produce goods for the US market.

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Jabil contract manufacturing in Uzhgorod has also expanded this year

Samsung opened the largest factory a year agosmartphone manufacturing company 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 fee for importing its electronics to the second largest Asian market. In addition, a year ago, Samsung announced that it would close a factory in China and open two in Vietnam. In general, BusinessKorea calls Samsung and LG the two main investors in the Vietnamese economy, as well as companies that are actively recruiting labor now. The publication said that Samsung plans to hire 180,000 employees, while LG employs 2,000 people, but the company plans to invest $ 1.5 billion in the country's economy until 2028.

Lenovo has launched wearable electronics in India. In the summer, expansion of production in India was announced by one of Flex's largest contract manufacturers.

Jabil grows in Asia, outside of China, but alsothis spring the company opened another site near Uzhgorod - thus, the Ukrainian plant became one of the largest in Europe. Jabil management notes that the demand for production “anywhere, but not in China” has been observed for a long time, in general, there is a demand for more local production in the world. In Mexico - for Mexico, in Europe - 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 a good education, technical, in particular, low labor costs and discipline of workers, as well as interaction from the authorities.

In fact, major contract manufacturershave long gone beyond the territory of China and opened production 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 largest Asian hub, followed by Mexican and European. Flex has production in Europe, Africa, the Middle East, the Americas and Asia. Foxconn also has production worldwide, including in the USA. Foxconn has sites in all major manufacturing locations.

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According to Oleg Naumenko, CEO of Hideez, nowalmost every factory manufacturing in China opens up sites in other jurisdictions. If earlier only large factories were engaged in this, now the time has come for medium ones. Some buy equipment, some transport from old locations.

Own specifics

A manufacturing giant, China is a country withwith a population of almost 1.4 billion. Industry brings China 46.6% of GDP, most of the components for electronics are produced here. In China's Silicon Valley, Shenzhen, 90% of all electronics in the world is produced, and only one of Foxconn factories in China employs 1.5 million people, in fact a whole city.

In China, manufactures several hundred appliancesAmerican companies, and data on customers around the world, although not available, but this figure is probably more at times. Data on the average wage in production in China varies from source to source, but as of 2019, we are talking about the order of amounts of $ 1000. The main beneficiary of the trade war between China and the United States is called Vietnam.

There are 95 million people living in Vietnam. The average salary in the country is approaching $ 300. Before Vietnam, there were about 500 electronics manufacturing factories in Vietnam. Including companies such as Samsung, Fujitsu, Canon, Intel, Sony, Sanyo, JVC, LG, Toshiba, Panasonic. Every tenth smartphone in the world is manufactured in Vietnam, and electronics is one of the main export items. Export of smartphones in 2016 brought the country $ 41.3 billion, other electronics - $ 23.6 billion.

The region has not yet formed such a cultureproduction, as in China. But for companies, the country is interested in the low cost of labor, the presence of some kind of production, including components (although this is not comparable with China), location (to China, where most of the components are produced, not far), as well as low environmental standards and support with side of the state.

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

Already known cases when Chinese companiesthey delivered goods to Vietnam, there they changed them slightly, repacked them and brought them to the United States (such a 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 “behaves even worse than China.” The Vietnamese government promised to fight a loophole. Apparently, we are talking about goods worth billions of dollars only in 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 itself insoftware development outsourcing. But since the beginning of the 2010s, the government of the country had production ambitions. In 2013, the country imposed duties on the import of electronics, which encouraged companies to open factories in the country and even at some point led to the heyday of local smartphone manufacturers (but Chinese sharks still pulled the blanket over themselves in recent years).

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

Taiwan is another location that benefits fromtrade war is obvious. A lot of expertise is concentrated here, as well as component production. In terms of exports in 2016-2017, the island entered the world top 20. A third is electronics. Taiwan is one of the leaders in semiconductors. It also takes fourth place in the global ranking of countries for the location of production. The rating takes into account risks, cost and business conditions.

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Taiwan is more expensive than China, it’s not without reason that the vendors thereThey chose production in China, and due to demand, the price will still rise. The population of the island is almost 24 million, twice as much as in the “Chinese Silicon Valley”. But nevertheless, in comparison with other locations, Taiwan is spoken of as a small location where everyone is definitely not fit. And that will push prices up. At the same time, for companies that need strong expertise and quality is very important, this location will remain attractive.

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

He was also famous for illegal production andneglect of the environment (for example, Thailand brought electronic waste from the EU when China refused to accept it). Thailand has a large amount of the shadow economy (about 40% according to government estimates) and at the same time, free economic zones have been created for the development of the export direction.

Philippines will also get from the festive tableChinese pie. In the country, despite the difficult political situation, GDP has been growing for many years (see the chart above), primarily due to production. As of May 2018, 60% of exports are electronics and semiconductors. Industry produces 30% of GDP, and 14% of workers are involved in the industry. The Philippines occupies the 12th place in the ranking of the attractiveness of countries in terms of production location (only China, Malaysia, Taiwan are higher from Asian countries). The country has low labor costs outside of Manila (minimum wage $ 5-10 per day), the average salary is $ 200 per month.

Apart from Asia, another popular destinationproduction becomes Brazil. Inexpensive labor force, densely populated region, convenient logistics throughout America. Recently, even Huawei announced the construction of its own factory in this location. The company will invest $ 800 million in a factory in Sao Paulo. The company plans to increase its share in smartphones in this market and produce devices for the domestic market and other neighboring countries. Foxconn and other major contract manufacturers have manufacturing facilities in Brazil.

Moving worse than fire

Revision gg asked Ukrainian hardware startups to comment on what would be the most difficult to transfer production to new regions.

Oleg Naumenko identifies two key problems -It is a component base and quality control. 90% of all components are manufactured in China and it will be difficult for companies to refuse them, since, in fact, any replacement is already a new device, it needs to be tested again. And over time, political exacerbations may affect the component base. The production of components is an order of magnitude more complex and resource-intensive process, it has more risks.

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Oleg Naumenko, Hideez

Anyone has quality control todaya decent factory, and serious vendors are building a quality control system right on it. According to CEO Hideez, most often this is done in several ways - an automatic system for testing firmware and a stand that checks each board, as well as manual verification. Also, vendors have people who are involved in checking electronics before shipment.

Usually, quality control is done by employees.companies that were transported to China, as well as local ones. But without the management of the company in China, it is impossible to ensure a normal quality control, since the Chinese will always agree with the Chinese. In case of production relocation to another country, the control team is also to be transported. If these are people with families or those who managed to take root 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 another problem - the problem of trust. It just drives manufacturers from China, because after the "spy scandals" around Huawei equipment, China is no longer trusted.

Valentin Gritsenko, marketing director of AjaxSystems, recalls how the manufacturing boom in China began - with the fact that the state provided optimal conditions for production and cheap labor. While the situation with cheap labor in other Asian countries is better than in China, conditions are not good everywhere. The same India is a storehouse of surprises from the state. The third factor is the production of components, which was mentioned above.

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Valentin Gritsenko, Ajax Systems

Ajax initially abandoned China. In the early stages of a startup, the proximity of production and R&D, the ability to control all processes are especially important. In addition, he produces security systems, and in the field of security, his 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 firstanother problem arises - lack of personnel. The labor market needs time to adapt to change. “In general, there is no higher mathematics in the production, you can teach people. But in China there really are more people, and in the new location you will have to spend time learning, searching. This will all be driven by salaries, ”explains 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 have to transfer 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 returns production toTaiwan, where it all began. Naumenko says that American partners have long persuaded him to transfer production to the States - they say that China has a poor reputation for security (formally, the persecution of Huawei began as a charge of espionage). But production in the States will cost about 30% more expensive, and components will still have to be transported from China, almost nothing is produced in the United States.

In the dry residue

Talk about which country will be newChina, conducted for many years. Perhaps, since the technological power of China has become obvious, as well as the fact that the country has ceased to be a global raw materials appendage. So the current situation rather accelerated and exacerbated the processes that were already going on in the world. In various publications, one can already find forecasts of how much China's GDP will decline due to the transfer of production. But this is only one side of the coin. On the other - the increase in the added value of Chinese goods due to manufacturability and unique developments. Perhaps the torus war will push the Chinese economy back a few years. Perhaps (more precisely, even probably) it will lead to a slight increase in prices for some goods due to a mess with production. Absolutely, China will not leave everything, since this site remains attractive due to expertise, convenience, availability of staff and still a good price, there will remain production aimed at other markets. But precisely in the near future we will see an even greater technological split between East and West. And even more of their own Chinese technology.

For those who want to know more:

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  • The consequences of the sanctions will be "terrible": China threatened Samsung, Intel and Microsoft
  • How to make the world's best home appliances: LG factories with their own eyes
  • Overlooked war: QLED TVs are winning

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