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China Sets Aggressive Goals for High Tech Manufacturing Sector

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An article published in The Wall Street Journal notes that China’s Ministry of Industry and Information Technology this week set an aggressive goal for forging global industry giants in the consumer electronics sector in the next two years.  It is described as an effort to have 5 to 8 Chinese high tech electronics companies to have revenues of a least 100 yuan ($16 billion) by 2015. This target for the high tech electronics sector is part of a wider effort to consolidate many of China’s fragmented major industries that together suffer from overcapacity.

According to an the WSJ article: “The blueprint for the electronics sector indicates Beijing’s desire to foster higher yielding, branded companies and move away from an economy centered around low-cost electronics manufacturing.” Further, as outlined in Prediction #7 of our Supply Chain Matters 2013 Predictions for Global Supply Chains, the effort encourages Chinese high tech companies to support these goals through mergers and alliances, including exploring overseas acquisitions.  The WSJ notes that as of 2011, there were only two Chinese manufacturers that were within scope of this objective, those being telecom equipment maker Huawei Technologies and personal computer maker Lenovo.  Other Chinese electronics firms such as ZTE Corp. have struggled to overcome weak product demand and technological barriers.

Of more interest, in late December, the WSJ reported that ZTE had plans to ramp-up competition in the hyper-competitive U.S. smartphone market by providing higher-end devices that could compete with Apple’s iPhone and Samsung’s Galaxy line. That article noted that ZTE has a goal of $1 billion in 2012 U.S. revenues. In China, ZTE has plans to upscale its product line with the introduction of a separate smartphone brand designated as Nubia, as well as doubling the number of owned stores over the next two years. The company incurred a significant loss in 2012, but was able to secure a $20 billion financing agreement with China Development Bank because of the government focused ambitions for this and other select high tech companies.

Supply Chain Matters took special interest in the above noted developments because of their implication on high tech and consumer electronics supply chains. Not only will the U.S. consumer electronics sector remain highly competitive, but China’s consumer market stands to be ever more challenging for foreign based firms.  As China’s electronics manufacturers shift to higher margin products, there may well be other implications for associated industry supply chains such as toys or automotive electronics.

A big question mark in our minds will be on how Chinese leaders view the high tech contract manufacturing players such as Foxconn, in the light of this new industrial goal setting.  While major Chinese based contract manufacturers do not provide branded products today, they are the lifeblood of the major high tech branded OEM’s who compete in global markets.

In a related industry goal, China’s leaders also want to drastically reduce the number of miners of rare-earth metals which are utilized primarily in high tech production. The price of these metals plunged 70 percent in 2012 because of the many miners adding deflationary forces.

While industry policy may be a harsh term in some countries, it seems to have new vibrancy in China, and will surely lead to more competitive market dynamics.

Bob Ferrari

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