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China’s Regional Boost

While still based in the coastal province of Shandong, China’s largest home- appliances maker, Haier  

While still based in the coastal province of Shandong, China’s largest home-appliances maker, Haier, produces electrical goods in inland Hubei province to tap the local and nearby markets
(photo: EPN)

 
Spurred by galloping production of electronics goods in the Chinese mainland’s coastal regions – the traditional engine of mainland manufacturing over the past three decades – demand has grown for electronics production in the country’s central and western regions, forming new manufacturing and supply clusters. 

The trend is expected to accelerate as development of the inner regions kicks off under the 12th Five-Year Programme (FYP). The FYP sets out to improve the inland region’s investment environment, through policy support,enhanced infrastructure, and by helping relocate supply chains inland. The moves are expected to draw foreign electronics investment from the coastal regions and overseas to the mainland’s inland region, where there’s an abundant supply of workers and technical personnel. The goal is to wean investors away from the coastal regions where labour shortages have become dire. The upside is that there are new domestic markets to explore and skilled workers are available. 

Chengdu, Chongqing and Xian, as well as the central provinces of Hubei and Hunan, make up the western regional triangle representing models for the gathering trend. 

Electronics plants have been moving inland to meet the increasing input demand on the mainland. For example, Taiwan’s Foxconn, the largest producer of Apple’s iPhone and iPad, along with its parts and components suppliers, has been setting up production facilities in the central and western regions. Local giants such as Midea and Haier are more interested in expanding their production capacity in central China in order to capitalise on the logistics infrastructure there. Other multinationals are studying how to make the most of the western region’s skilled labour and engineering personnel.

The low export-to-sales ratios illustrate how industries in the inland regions rely heavily on domestic sales, with enterprises largely producing parts and semi-manufactures for further processing in coastal regions. These manufacturers have therefore benefited from the keen input demand on the mainland over the past few years. The number of manufacturers are expected to grow further during the FYP period, with the mainland determined to develop inland economies and industries. 

Tapping Western China’s Advantages  

  Western China has nurtured a large number of electronics engineers and related technology personnel
 

Western China has nurtured a large number of electronics engineers and related technology personnel (photo: EPN)

To serve their global business needs, multinationals are increasingly “going west” to capitalise on western China’s advantages. Intel, for example, relocated its Shanghai production lines to Chengdu a couple of years ago. Half of its chips produced worldwide are now tested and packaged in its Chengdu plant, which flies against the general perception that western China is not a convenient export base. 

Intel air-freights the wafers from its fabrication plants in the United States, Israel, Ireland and Dalian to Chengdu, and sends the packaged chips from Chengdu to domestic and global markets by air, primarily through Hong Kong. 

IBM, on the other hand, has set up its service centre in the Chengdu Tianfu Software Park to perform IT outsourcing tasks for its clients on the mainland and overseas markets. IBM’s service centre is well-supported by Sichuan’s local workforce and returning software engineers, who are now less willing to work in the more congested coastal regions. 

Western China has nurtured a large number of electronics engineers and related technology personnel. Its well-developed military industry is also a source of high-tech talent for electronics players, with the mainland now transforming more military technology for civilian applications.  

Hewlett-Packard’s (HP’s) Chongqing facilities also started operations last year to assemble computers for the booming China and global markets. Apart from cost considerations, HP is capitalising on the abundant supply of local workers.

The movement of multinational electronics companies proves that western China is no longer an obscure region, with its talent, labour and markets conducive to the development of electronics clusters. Also, mainland giants and Taiwan players are increasingly keen to capitalise on the resources and market potential of the western region, while upstream suppliers have followed their clients to tap the increasing input demand there. 

Central China Opportunities  

The central Chinese mainland city of Wuhan is home to the so-called “Optics Valley of China,” the la  

The central Chinese mainland city
of Wuhan is home to the so-called “Optics Valley of China,” the largest production base for optical fibre cable and optical apparatus
(photo: EPN)

 
Foreign investors are attracted to set up production facilities in central China  to take advantage of lower operational costs, tax benefits, the availability of engineering talent, as well as relatively abundant labour supplies. 

But upstream electronics suppliers are also aware of the growing input demand stemming from production activities there. A natural distribution hub, Hubei, is one example. With its skilled labour force and developing supply chains, it has attracted a number of overseas electronics investments in recent years. Foxconn set up production lines in Wuhan, producing computers and electronic game devices for export, while TPV Display Technology makes LCD display monitors and televisions for distribution to domestic clients in the province and nearby. 

China’s own Gree, Midea and Haier, on the other hand, produce electrical appliances in the province to tap the local and nearby markets. But Hubei’s electronics suppliers overall still only have limited capacity. Its enterprises need to rely on the Pearl River Delta (PRD) and Yangtze River Delta (YRD) for supplies, such as passive components and testing equipment, and imports for core components such as ICs and semiconductors from abroad. 

Wuhan, in Hubei Province, is also home to the so-called “Optics Valley of China,” the largest production base for optical fibre cable and optical apparatus. It is also a leading mainland laser industry base whose businesses are mainly related to industrial laser and medical/consumer electronics applications. The swift expansion of the China opto-electronics market has sparked input demand in Optics Valley, where enterprises have been expanding their production to meet increasing orders. 

Hunan Province is also an emerging industrial base. Cities such as Changsha, Hengyang and Chenzhou are eager to establish development zones to promote technology industries and take in processing production that have relocated from coastal regions. Given its proximity to Guangdong and its lower operation costs, Hunan could be an ideal destination for Hong Kong’s electronics companies to relocate or set up additional production facilities outside the PRD. 

But Hunan will continue to rely on material supplies from other provinces, as its supply chain is not likely to be developed quickly enough in the short term to satisfy manufacturers. With the speed of development, the influx of foreign investment is likely to put pressure on the local labour market, while pushing up land costs in the medium term.

The availability of engineers and middle-level staff is another concern for newly established enterprises in Hunan. Some investors even need to transfer workers and staff from their PRD or YRD operations to help build their Hunan plants. But the upside to the development process is that some transferred staff may actually come from Hunan, and are keen to work in their home province. Hong Kong manufacturers should consider this when looking at Hunan as a potential alternative to the PRD. 

For more details, please see the HKTDC Research reports: “Central China the new location for electronics production” and “ Multinational electronics firms ‘Go West’ in China,” which can be ordered at http://bookshop.hktdc.com/.

 

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