Electronic Manufacturing, What Are The Alternatives to China?

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012018 to 092019 USA Imports Percentage Change By Country

Electronic Manufacturing, What Are The Alternatives to China?

If Not China Then Where?

As the tariff  war between China and the USA goes on, more electronics companies are looking to move out of China, the big question is where? For new electronic products the only choice that makes sense is to remain in China or make a move towards Taiwan, for more mature electronics the options open up some more in the developing South East Asian manufacturing industry, be aware that each country carries a specific set of new challenges for your operation.

When it comes to manufacturing electronic products, cost is not everything when selecting a new country. In fact, the salaries in China stopped being low many years ago. Labor cost is important for textile and shoes, but for electronics labor typically makes up no more than 5% of cost.  The reason so much electronics manufacturing continues to be done in China is its tremendous supply chain.

Take a look at the following graph and notice how Vietnam, a country with a very low hourly manufacturing wage has considerably increased the amount of products it exports to the USA ever since the beginning of the trade war. At first this might make you think that countries with low labor costs have the upper hand, but keep in mind that Vietnam’s main manufacturing industry is not electronics.

012018 to 092019 USA Imports Percentage Change By Country

Information Source: Tradingeconomics.com

 

If you single out  imports of electronics to the USA, there are two clear winners, China who in 2018 made up 44% of all electronics imported by the USA. , and Taiwan, who according to the latest UN data, dominated USA imports of office electronics and communication equipment.

Countries with low manufacturing labor such as Vietnam and India, accounted for around 5% of all electronics imported by the USA.

imports_of_electronics_by_the_usa

The reality is that when it comes to electronics manufacturing, it only makes sense to move out of China if your electronic device is already in a mature stage, when you know exactly which parts you need and from which factory, wherever you move you’ll most likely have to source parts from China.

It’s only in this stage that you can seriously try to pick up your bags and move your production anywhere in the world, the tricky part here is finding a country with the most suitable workforce, expertise, capital, logistics and set of government regulations that will allow you to maintain your business profitable, is in this scenario that we’ll explore the alternatives to China.

When you are still in the process of developing a new electronic device you have to evaluate and develop a large number of parts, and China’s component eco-system has 10 suppliers for every possible component within an hour’s drive.

Once your device is completely mature you can collect kits of components and send them from China to wherever you want, but doing this too early is asking for trouble. Missing components can completely kill your Time To Market.

In the words of Etienne Charlier, Partner at Riverbanks Investment

“China has built very strong ecosystems in particular industries and the electronics industry is an excellent example. While costs rise in all aspects of electronics manufacturing, and many suppliers have to restructure or disappear, China has developed an ecosystem whose density and extent is second to none: from the variety and scale of component suppliers, to the availability of production and test equipment solution providers, and including technical and engineering talents. I have still to find a place that combines it all”

Let’s first understand something

What brought many manufacturers to Chinese lands during the 90’s was a system that was composed of government benefits, ready to use industrial zones, and export promotion, this was a unique system that is not being replicated by any other country nor it seems like it will be.

It’s also worth noting that china’s transport infrastructures -roads, ports, and airports- are by far more developed than most South and South East Asian nations.

So, when moving operations from China to another country, expect challenges to arise. Things won’t be as easy as moving components and tooling from A to B.

Let’s take a look at pros and cons of moving electronic manufacturing operations to some of the most likely alternatives

Electronics Manufacturing in Vietnam

PROSCONS
Low labor costLack of experience in manufacturing electronics
Ease of doing business for foreign companies and investorsThey rely heavily on components imports to manufacture all kinds of products
Good location (close to China) to import the necessary electronic componentsLack of manufacturers focused on electronics
Weak and saturated logistics infrastructure
Not enough manufacturing capacity
Lack of educated and trained personnel to manufacture complex electronics

Vietnam started to gain popularity as a manufacturing destination mainly because of its cheaper labor cost, even before the trade war between China and the US, companies were already moving, as proof of this we can take a look at Samsung, in 2011 they moved part of their operations to Vietnam to benefit from low labor costs.

But labor costs are not everything, as more and more companies are making or trying to make the move to Vietnam, the country’s logistics infrastructure and manufacturing capacity are being pushed to the limit, if we add to this the fact that there is a lack of expertise when it comes to manufacturing complex electronic products, we are faced with the reality that moving to Vietnam- specially for companies with large quantities of electronics production- becomes a challenge.

Lead times of Electronic Components

Electronics Manufacturing in India

PROSCONS
Extremely low labor costElectric power availability for plants averages 8 hours a day
Ease of communication ( They speak English)Electric energy for industries is very pricey
Skilled workforce with strong technical and engineering capabilitiesMost of the skilled workforce is already employed
Weak logistics infrastructure
Government bureaucracy makes it very time consuming for foreigners to open a plant or outsource one
Laws favor small scale manufacturing, which makes it difficult to run large productions
The manufacturing industry of India mostly focuses on jewelry and textile

Ease of communication and low-cost labor might sound very promising for anyone looking to settle in India, but when you realize that moving manufacturing to India comes with very specific set of challenges, such as government laws that discourage large production runs, a lack of expertise in electronics manufacturing, and lower productivity rates due to idle time in factories, you realize that India might not be the best choice.

In the words of Balaji Viswanathan -CEO of Invento Robotics.

“If India has to compete with China, we have to completely overhaul all the economic laws – taxes, labour, factories – we put in place since 1947. Otherwise we will continue to be costlier than Vietnam and Bangladesh

Electronics Manufacturing in Thailand

PROSCONS
Thailand’s logistics infrastructure resembles China’sHigh labor costs
Tax incentives for investorsLanguage barrier
Right to lease government land for up to 99 yearsPolitical instability
The ease of doing business in Thailand outranks that of China’sGeographical location, Monsoon flooding happens from time to time
Expertise with integrated circuitsHighly dependent on imports of electronic components from China
Development of electronic clusters
Geographical location, right in the center of SEA

Thailand is positioning itself as a very good alternative for electronics manufacturing outside of China as it offers an environment that incentivizes companies to do business in Thailand as well as a trained workforce and good logistics infrastructure.

Please bare in mind that labor costs in Thailand are higher than in China, if low cost production is what you’re going after then Thailand might not be the best option for you.

Electronics Manufacturing in Taiwan

Taiwan started its electronics industry some 20 years ahead of China, and behind the scene Taiwanese firms still dominate the world’s electronic manufacturing. Apart from Acer, Asus and HTC Taiwan has few electronic brands, as most firms prefer to leave marketing to foreign brands and stay focused on Design & Manufacturing.

Brands such as HP, Siemens and Apple all heavily rely on Taiwan’s ODM’s, in fact 10 out of 10 ODM’s are Taiwanese. Over the years they have moved a lot of their factories to China, but rather than go “factory-direct” the big brands have all chosen to continue to do business with the Taiwanese, valuing their engineering prowess and business ethics. If you’re going to teach another firm how to design your notebooks for you, you do not want them to turn around and do a Huawei on you.

They are not the cheapest, but they fully master the Greater China component supply eco-system. Whether they do the actual manufacturing back in Taiwan, in Vietnam or wherever, Taiwanese firms can be relied on to get the job done.

PROSCONS
Strong supply chain and logisticsLabor & overhead cost is higher than China’s
Rule of law & IP protection, almost no corruptionGlobal trade disadvantage due to the 1 China policy
Highly skilled labor force for engineering and manufacturing
Great internet connectivity
Government support to promote advanced manufacturing
Higher robot density than China
Focus on electronics and other technology heavy industries
Higher levels of productivity
Taiwanese firms tend to make good business partners

As you can see, when it comes to manufacturing of electronic products, Taiwan is a very good option, the island nation has a very developed supply chain and logistics system and a skilled workforce very focused on electronics. Interestingly salaries for engineers in Taiwan are now lower than in Shenzhen or Shanghai.

While you might find that overall Taiwan is more expensive, you’ll also find that manufacturing electronics here is better for your peace of mind, especially if you put it in comparison with other manufacturing nations that are just starting to get their act together.

Conclusion

When it comes to manufacturing electronics, especially new ones, you simply can not escape the China component ecosystem. If your product is already in a mature stage, then moving manufacturing to another country becomes more plausible.

Some of the options manufacturers are looking at are Vietnam, India, Thailand and Taiwan, each one of them comes with a different set of challenges as no one country works in the same way China does, you have to figure out which is the most convenient one for your specific needs.

When it comes to designing and manufacturing a new electronic device you still need access to China’s component eco-system, because at that point you still don’t know which components you’ll need and from which manufacturer you’ll get them.

In China, you have 10 options of manufacturers for any component you’d like to test, in countries like Vietnam, Thailand or India, they just don’t have any, this is why they have to import from China to finish manufacturing.

If you do need to get out of China, even in the early stages of your new electronic device, Taiwan is your best shot. Remember you have to make sure your IP remains safe, you don’t want a knock off version to reach the market before you do. Taiwanese companies excel at protecting IP, there’s a reason why Apple and Microsoft work with them after all.

Taiwan, for the past 20 years, has been working with the Chinese ecosystem and know it very well by now, plus, the proximity of both makes for a fast delivery of any components Taiwan needs to source from China.

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Eulises Quintero

Currently working as the content manager for TITOMA. With an extensive background in content marketing and a real interest in electronic products I'm able to produce some of the pieces of content you'll find here, all with the help of the TITOMA team of course. On my free time I like to travel, explore and work out.

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