The PRC has a number of important organizations that support electronics manufacturing, including the Ministry of Electronics Industry (MEI) and the State Science and Technology Commission (SSTC). Both organizations report directly to the State Council, the administrative arm of the National People's Congress. MEI and SSTC are involved in most activities relating to the electronics industry. MEI is one of 30 ministries in China. It oversees the computer and electronics industry, and it is increasingly involved in telecommunications. The Electronic Technology Information Research Institute, China Computer & Microelectronics Information Research Institute, China National Electronics Import Export Corporation, the Chengdu Electronics Research Institute, and the Great Wall Computing Corporation are arms of MEI. SSTC is one of 10 state commissions. It oversees the nation's R&D policy for high technology. SSTC has a number of affiliated research and development institutions, including the Chengdu Electronics Research Institute and the Chongqing Science & Technology Association. The Institute of Scientific and Technology Information of China (ISTIC) is a department within SSTC.
China has been quite successful in attracting advanced technologies. Table 3.2 shows a number of technologies that have been transferred to China from Japan over the past 15 years -- technologies for products from supercomputers to VCRs and video cameras. Advanced electronic ICs, LEDs, and PCB technologies have supported the development of an electronics supplier base. Today, every major international component vendor, including Intel, is establishing advanced capabilities in China. Fiberoptic cables and switching technologies central to development of a telecommunications infrastructure are being provided by U.S. companies like AT&T and Motorola.Table 3.2
China's electronics industry capabilities were extremely weak in the early 1990s. As BCG summarized in its 1994 report (see also Table 2.6, Chapter 2), China's primary strength was low-cost manufacturing; it offered little else, but proved that its workforce was well disciplined. The five-year plan current at the time of the WTEC study aimed to have 85% of children complete a 9-year compulsory education and to reduce illiteracy among 15-45 year olds from 7% to 5% by 2000. In 1995, China invested ($2 billion for R&D (compared to $35 billion for U.S. non-defense R&D), of which 7% was for basic research. Typical scientists in academia earned only $30-40 per month. Today, there are nearly 170,000 Chinese students seeking PhD degrees in the United States.
In 1991, there were 2,064 approved foreign-funded projects in China's special economic zones (SEZs), representing $6 billion in joint ventures, $2.1 billion in cooperative ventures with the government, and $3.7 billion in fully-owned foreign ventures. By 1992, (850 electronics firms had moved manufacturing facilities to the Pearl River Delta area. By 1996, over 8,000 foreign firms had labor-intensive facilities in that area.
While still producing labor-intensive subassemblies, plants in China are now assembling a growing number of final products, including Scientific Atlanta's satellite decoders, Sharp's personal digital assistants, and a full range of electronic games, telephones, and stereo products.
In 1995, 41% of China's total exports came from joint ventures between foreign and Chinese interests. Growth in joint venture shares of PRC exports has largely been due to (1) the transfer of export-oriented factories to China by Hong Kong and Taiwan firms, and (2) increasing investment by Japanese firms to make goods for their home market. In April 1996, the PRC government imposed tariffs on imports of capital equipment by joint ventures that previously could be imported tax-free. This measure is expected to hurt foreign profits. Another adverse consequence of the increasing value of China's joint venture exports is the potential for significant trade imbalances. In 1996, China's trade surplus with the United States surpassed even that of Japan (Fig. 3.1).
Fig. 3.1. The growing U.S. trade deficit with China
Physical Infrastructure Development in China
Development of China's infrastructure has taken place under a concept of "five opens" and "one leveling." Water supply, power supply, roads, navigation lines, and telecommunication are being opened, and land has been leveled to allow for construction. Beginning in 1986, expressways and railways were built to link the SEZs and the rest of Guangdong and Fujian Provinces, and air routes were established to provide links to the rest of China and the world. Continued development of such infrastructure projects ensures the future two-way flow of goods and services.
Since most employees in Guangdong come from outside the province, factories include dormitories. Employees are mostly single and work 5.5 days per week, 8 hours regular time plus 4 hours overtime per day. Factory operators are paid about $65 per month with overtime. After New Year's, the turnover rate is 30-40% per year for operators and 10% for staff and engineers. Workers go home and often don't return after the holiday. They may stay out for a whole year. After getting rich (by local standards), they go home to their families where they may work for several years. VTech, for example, had 14,000 employees in five factories at its Chinese site; each year it requested 5,000 new employees from the government due to the attrition. To address this, the government is considering moving workers' families closer to Guangdong.
Since China established its open-door policy in the late 1970s, the economies of Hong Kong and mainland China have become increasingly interdependent. China is Hong Kong's largest trading partner, and Hong Kong is China's second largest trading partner after Japan. Imports from China represented 36.2% of Hong Kong's total imports, compared to 14.8% from Japan, 8.7% from Taiwan, and 7.7% from the United States. In 1995, two-way trade between Hong Kong and China grew 17%. Exports to China's economic zones are expected to grow at an annual average of 13%.
In Guangdong Province, which borders Hong Kong, the Pearl River Delta provides the Hong Kong electronics industry with an abundant supply of cheap land, subsidized factory leases, and low-cost labor. The Pearl River Delta encompasses eight cities: Guangzhou, Shenzhen, Zhuhai, Dongguan, Zhongshan, Foshan, Huizhou, and Jiangmen. Shenzhen, the area nearest Hong Kong, provides a seaport, airports, railways, roads, and communications lines to support the rapidly growing area. New power plants and reservoirs have been constructed to meet growing demands for power and water.
Monthly rentals for factory space in the Shenzhen SEZ were about $2-4/m2 compared to about $40/m2 in Hong Kong. In 1996, average monthly manufacturing wages in Hong Kong were over $820 as compared to about $125 in Shenzhen; outside of the Shenzhen SEZ, average manufacturing wages were closer to $65. These rates compared to about $750 per month for manufacturing wages in Taiwan, and $1,500 per month in Japan. An abundance of low-cost labor in these nearby areas allows economic restructuring and the relocation of Hong Kong's sunset industries and rationalization of production and distribution through vertical integration. Areas outside the Pearl River Delta in Guangdong Province were about 30% cheaper, and neighboring provinces of Fujian, Guangxi, Hunan, and Jiangxi had labor costs nearly half that of the Pearl River area. This difference, of course, attracts labor into the area.
Hong Kong's limited land area has restricted the development of its own manufacturing sector. Large-scale production, which is land-intensive, has not been feasible. Instead, Hong Kong has been the facilitator and financier of such investments in the PRC, and its manufacturing firms provide support services, such as the packaging, promotion, and design of products manufactured in the PRC, and direct technical assistance to transfer technology and management into China. Hong Kong also provides a high-quality living environment for senior management and engineers.
With China having labor costs about 10% of those in Hong Kong, cost savings of between 35-70%, depending on the labor-intensity of a product, can be achieved by sourcing parts and components and assembling products in China. As a result, most Hong Kong firms now have their major production operations in China, in terms of both space and numbers of workers. Relocation of Hong Kong's industry to China has provided first-mover access to the Chinese market. Legend, for example, distributes AST's personal computers in China alongside its own brand. AST holds 16% of the market, and Legend holds 8%.
Outsourcing to cut labor costs has made China a major center of foreign investment -- most electronic firms now have some facilities or major supplier in China -- but Hong Kong is China's largest external investor (Fig. 3.2). Hong Kong has accounted for about 60% of China's overall foreign direct investment this decade. Estimates set cumulative investments from Hong Kong at $233.6 billion through the end of 1995. Hong Kong companies employ over four million workers in Guangdong Province, 10 times the number of factory workers in HK manufacturing firms. China's investment in Hong Kong is estimated at $25 billion.
PRC exports to Hong Kong increased from $5.7 billion in 1981 to over $26.7 billion in 1991. Over the same period, Hong Kong component and equipment exports to the PRC increased from $1.9 billion to close to $17.5 billion. This is driving Hong Kong into capital-intensive, technology-intensive, and knowledge-intensive products. However, political uncertainty concerning Hong Kong's status after July 1, 1997, when political control of Hong Kong passes from the UK back to China, continues to be a threat to businesses.
The worldwide market for computer systems grew from $145 billion in 1994 to $234 billion in 1995. From 1994 to 1995, the Asia-Pacific market, outside of Japan, increased its overall share from 7% or $10.15 billion to 11% or $25.74 billion. In PCs, Asia-Pacific nations outside of Japan accounted for 9% or $8.91 billion of the $94.83 billion worldwide market in 1994. The biggest markets were Korea ($3.01 billion) and China ($2.9 billion). PC penetration in the United States was 35%, followed by Australia (35%), Hong Kong (32%), and Singapore (32%). Japan's penetration was 21%, followed by Malaysia (20%), India (8%), and China (7%). Of the 6.6 million Internet hosts worldwide in July 1995, only 229,854 were in Asia.
Fig. 3.2. Foreign direct investment in China (U.S.-China Business Council).
The size of China's computer and related industries has been growing explosively this decade. Imports of parts and components were worth $372 million in 1990, while exports of computers were worth only $200 million; by 1995, exports of computer products reached $3.78 billion. Software sales revenues were only $22 million in 1990 (due in part to software piracy); by 1995, software revenues reached $1.3 billion. In 1990 the Chinese computer industry had 191 hardware manufacturers, a few software and service firms, and a total workforce of 100,000 people. By the end of 1995, a total of over 300,000 people worked for 1,000 hardware manufacturers, 1,000 software houses, and 13,000 companies specializing in marketing and services, and there were an additional 1,500 workers in 50 R&D institutes (China Infoworld 1995). China's computer industry grew in output value from $921 million in 1990 to $6.37 billion in 1995. China's revenues from export of computers and input/output devices for computers grew from $150 million in 1989 to $3.6 billion in 1995.
China's domestic production of quality parts and components has been improved by joint ventures with companies like Hewlett-Packard (HP), AST, IBM, Unisys, Digital, and Compaq. In 1995 Compaq was the market leader in PCs, and Toshiba was the leader in portables with a 16% share. About 95% of the notebook market was assumed to be corporations. Compaq held 8.6% of the total market, followed by Samsung Electronics with 6.5% (concentrated in Korea), and Acer with 6.1%.
Sharp and Wuxi Municipal Electronic Instruments Company have invested $29.9 million in a black-and-white STN LCD factory. Intel has invested $30 million to build a factory to produce flash memory chips, microcontrollers and microprocessors, which is expected to go into production in 1997. IBM has moved its China headquarters from Hong Kong to Beijing and invested $10 million in a second joint venture PC assembly factory with Great Wall to supply domestic and overseas markets.
China's Domestic Market for Computers
In 1994 alone, 2.04 million PCs, 4.09 million monitors, 500,000 hard disk drives, 2.5 million floppy disk drives, and 6.05 million motherboards were made in China, most of which were exported. However, China has been a rapidly expanding market for computers in this decade, since there were few systems already in place, and servers have been needed to establish LANs for the growing number of new businesses. PC shipments in China grew from 100,000 units/yr. in 1990 to 1.08 million units in 1995, valued at $1.93 billion. The Chinese PC market was estimated to be 1.4 million units in 1996. MEI estimates that by 2000 the Chinese output of PCs will reach 8 million units annually, with the majority sold domestically.
Legend is the best-selling domestic PC brand in mainland China. In 1995, Legend was in seventh place overall, with 8% of the market (by 1996, its share had reached 15%). AST was first with 16%, Compaq was second with 14%, and IBM was third with 9% of the market. The fourth, fifth, and sixth place players, respectively, were DEC in an alliance with the Founder Group, Hewlett-Packard, and Acer. The Chinese company Great Wall was number eight. The PC brand vendors were expected to get 80% of the home market. Acer was introducing a basic no-frills machine for around $500 for sales in developing markets.
Besides selling its own brands, Legend is also China's largest distributor for AST. It has over 200 outlets throughout China in which it sells brands like AST, IBM, and HP. Legend was the first vendor in China in 1995 to offer a Pentium 75 MHz PC for less than $1,200.
Intel commanded a 83.8% market share in China's CPU market, followed by AMD with 11.5%, and Cyrix at 3.2%. Pentium machines represented only 4% of the market in 1994 but over 45% in 1995. By the end of 1996, Pentium processors were predicted to increase from 20% to 74% of the market.
Joint Venture Semiconductor Investments
Since electronics is one of China's targeted industries, the semiconductor market in China is expected to grow dramatically, 40% per year, over the next 15 years from $4 billion in 1995 to $500 billion by 2010. According to HP, "Companies can't ignore China," in spite of its inadequate infrastructure, the government's control of the economy, unstable growth rates and investments, and deficits in state-owned enterprises. The following are just a few examples of China's escalating semiconductor endeavors:
China's current five-year plan calls for spending no less than $60 billion by 2000 on the country's communications infrastructure, more than doubling its telephone switching capacity to 150 million from the 71 million lines it had in 1995. China's telecommunications industry is a state-owned monopoly which is operated solely by the Chinese government (Ministry of Posts and Telecommunications, MPT). Market access by foreign firms is limited to experimental joint venture projects in which the Chinese side holds majority ownership. China does need capital to modernize its network, however. MPT has allowed some value-added licenses to Singapore Telecom, a number of Hong Kong cellular companies, and United Telecommunications Corp. (Unicom) to develop cellular and paging networks in China. The Directorate General of Telecommunications intends to allow foreign businesses to take part in some specific telecom projects on a joint basis. Nextel Communications and Shanghai Unicom own 23% of a Shanghai GMMS digital cellular telephone system. "Wireless local loops" that serve fixed locations can be installed faster than wired systems and in 1995 cost less than copper phone lines. Motorola and Ericsson completed connecting China's cellular phone networks across 26 provinces; this is now the largest cellular network in the world. While there are currently only 3 million subscribers, it is expected to reach 13 million subscribers by 2000. MPT adopted Motorola's high-speed Flex system as China's national paging standard for 30 million existing customers, with 70 million customers expected by 2000.
China's primary telecommunications-related exports in 1994 included wire telephone sets, stored program controlled telephone switchboards, radio and TV transmitting equipment, fax machines, radio pagers, radio walkie-talkies, and satellite earthstation equipment. Telecommunications products accounted for only 5.3% of total Chinese exports in 1995, generating foreign exchange revenues of about $2 billion.
Foreign companies with operations in China in early 1995 included AT&T (terminals and modems), Motorola (switching systems), Siemens (base stations and terminals), BTM (LSI sets), Ericsson (base stations and telephone switching stations), and NEC (terminals), in addition to Goldstar, Samsung, Fujitsu, and Northern Telecom. Primary imports included wire and wireless hand-held telephone sets and spare parts, fax machines and parts, walkie-talkies and parts, switchboards, and radar equipment. The market in 1995 (Table 3.3) was expected to be over 25 million lines for local area switchboards, over 19 million telephone sets, between 2.3 and 2.5 million switchboards, 1 million mobile telephone sets, 9 million pagers, 1.6 million mobile communication switchboards, 1 million long-distance switchboards, 600,000 fax machines, and 14,000 satellite communication earthstations.Table 3.3
Source: PRC Ministry of Posts and Telecommunications, 5/12/95