Cheap as chips from China

Graeme Philipson
August 7, 2007

Every now and then I wander into Tandy or Harvey Norman for no other reason than to look at how cheap things have become.

DVD players for $30 – or "two for $50" as I saw recently. Little stereo systems for $40. TVs for $80.

Wal-Mart in the US is now selling PCs for less than $US300 ($A350), loaded with Microsoft’s Vista operating system. That doesn’t include a screen, but it’s cheaper than the worthies at the One Laptop Per Child program have been able to manage.

Even a full-blown laptop costs well under $1000 at OfficeWorks. Electronic goods are cheap, cheap, cheap. Why? One word – Asia.

Cheap Asian – mostly Chinese – manufacturing has transformed patterns of consumer spending around the world. People still whinge about globalisation and the erosion of the West’s manufacturing base, but they are happy to buy this stuff.

Electrical and electronic goods – and clothing, footwear, and many other things – are cheaper than they have ever been.

This is partly due to vastly improved supply chain dynamics and lower tariffs, but the main reason is that Asian manufacturers can turn out virtually any product for a fraction of what it might cost to make in the West.

Most of the world’s computers are now made in Asia. What little hardware manufacturing still exists in the West is either automated or low-skilled assembly of components – most of which are made in Asia – or low-volume, high-margin specialised products.

Most of the world’s electronics manufacturing is contracted out. The global contract electronics manufacturing industry is now worth more than $200 billion. Most takes place in Asia. Just five years ago – the blink of an eye – most of it was in the US or elsewhere in the Americas.

And those figures do not include component manufacturing. The world’s semiconductor market is now worth about $300 billion a year. Again, most of the production is in Asia, which also accounts for most of the world’s LEDs, laser diodes and image sensors.

The electronics manufacturing figure includes computers and consumer electronics equipment but excludes products made by companies which sell under their own brands. Most PCs, including those from big names such as HP, Dell and Apple, are now made under contract in Asia.

Even many PCs with Japanese and Korean brand names such as Taiwan’s Acer, are made elsewhere in Asia under contract. Almost alone among the big international PC suppliers, Taiwan’s Asus still makes its own machines.

Taiwan’s story is truly remarkable. With the same population as Australia and minimal natural resources this truly clever country makes two-thirds of the world’s chips, two-thirds of the world’s laptops and a third of the world’s servers. It also makes two-thirds of the world’s LCD monitors.

The world leader in electronics manufacturing is Taiwan’s Foxconn, a company few in the West have heard of, which makes well-known products such as Apple’s iPod and Mac Mini. It also makes all three of Microsoft’s Xbox 360, Sony’s PlayStation 3 and Nintendo’s Wii.

So the old joke that "they all come out of the same big factory in Taiwan" is not so far off the mark. Foxconn had revenues last year of over $30 billion, a figure that has doubled in just two years. These are astonishing figures.

Taiwan’s other contract manufacturers are also doing well. But even as the volumes increase, Taiwan’s market share is declining. Big Brother across the straits, the People’s Republic of China, is gaining an increasing share of all these markets.

So are manufacturers in countries such as Thailand, Singapore, Malaysia and Vietnam. And India, which is modernising almost as fast as China and which will soon overtake it in population, is also starting to diversify beyond software and into hardware.

There is no end in sight. Asia’s many advantages – and in particular a combination of low wages and large and growing populations that ensure a ready supply of skilled labour – are not about to disappear.

Indeed, as their manufacturing processes become increasingly sophisticated, many Asian companies are moving up the food chain, from sub-assemblies to finished products, to the distribution and sale of such products. They are doing it with cars, they are doing it with consumer electronics, and they are doing it with computers.

Where does all this leave the Western IT industry? Most of the big multinational computer companies are still US-based. HP, IBM and Dell dominate hardware, but virtually all their manufacturing now takes place in Asia. So does an increasing amount of their research and development.

The big software companies are also mostly based in North America. Some, notably SAP, are based in Europe. But, like those of the hardware companies, their products have an increasingly Asian flavour, and the fastest-growing multinational services companies are all based in India.

Now the contract manufacturers are taking on other areas such as aerospace and the medical and military, all of which use large amounts of electronic components. The epicentre of the mobile phone industry has already moved to Asia, and China is the world’s largest market.

The trends are too strong to ignore. Most big decisions in the computer industry are still made in Silicon Valley or Armonk or Walldorf. But an increasing number are being made in Shanghai and Taipei and Bangalore.

Who would you put your money on?

Look at the numbers. The 19th century was Europe’s, and the 20th America’s. There has been much talk of the 21st belonging to Asia. Less than 10 years into the century, it has already happened.

Cheap as chips from China – Perspectives – Opinion – Technology – theage.com.au

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