China's Top 10 Economic Challenges & the High-Tech Implications

We are not all racing to learn Mandarin yet, but most, if not all, working-age adults in the Western world and many developing nations know enough to keep an eye on news about and from China. For executives in all industry segments, China is the elephant in the room. It must be factored into any decisions about the future of their enterprise.

If any segment of the global economy can afford to ignore China's gargantuan role, it's not electronics. Over the last two decades, the industry has steadily and tightly yoked itself to the Asian nation. After transferring a majority of manufacturing operations and huge swathes of the supply chain to China, the industry faces the stark reality that it can no more do without China than the country itself could disengage from world markets and revert to a closed socialist economy.

Events in China will have a major impact on all the global economic segments that have become heavily dependent on the nation. This is obviously the case for the electronics industry. Most of its leading companies, if not all, have huge operations in China and are exposed to events there. Furthermore, the entire industry supply chain (not just the manufacturing end, as is commonly assumed) has significant exposure in China. As China goes, so does the industry.

In the last five years alone, China has set numerous records in high-tech marketshare. It has become the world's biggest consumer of semiconductor products, mobile phones, PCs, flat-screen TVs, solar panels, and a wide range of so-called white goods, including refrigerators and cooking ranges. By the way, it is just getting warmed up. As its middle class expands over the next decade (barring any geopolitical disruptions), China will overtake the Western world and become the leading market for medical devices and a range of other goods. Its aging population guarantees this.

IHS iSuppli does a great job of tracking how China is wending its way through the electronics supply chain. It reports that Chinese OEMs will ship 350 million smartphones next year. This is in addition to the country's dominance of the PC, networking/communications gear, and other high-tech equipment sectors.

"China's PC shipment growth is exceptional, especially when compared to the tepid growth anticipated this year in PC shipments for the rest of the world," Elaine Zhi, an analyst for China electronics research at IHS, said in a press release in July. "Shipments to commercial enterprises are leading the consumer segment in both the desktop and notebook segments by several million units in 2012."

However, industry observers and economists have identified major economic challenges for China that I believe we should all keep on our radars. Entrepreneurs and executives are largely aware of many of these challenges, but they need to move beyond awareness and develop a vibrant and flexible risk mitigation program. I compiled a list of the potential challenges to China's economic growth from different sources:

1. How will it handle the transition to a world-class economy while dealing with slowing Western demand?
2. Should China float its currency?
3. How will political events and a leadership struggle affect the economy?
4. Can China control inflation?
5. How will it find the right workers and deal with rising wages?
6. Can it improve labor conditions and avoid the ire of international consumers?
7. How can it sustain local demand created by its middle class/aging population?
8. Can it sustain the electronics supply chain while dealing with urbanization (manufacturing locations and the interior of China)?
9. How accurate is its economic data?
10. Will China completely agree to international intellectual property protection, and how will its decision impact its economic development and global alliances?

In a followup to this blog, I will provide more details and identify how I believe they can pose problems for electronics manufacturers. The list is not exhaustive, and I would welcome additions. Your comments will further the discussion.