China, the Supply Chain & You

There's been a lot of debate on EBN and in the media in general about working conditions in the factories of China. It is not immediately apparent to most people why improving overseas standards has any downside for the rest of the globe.

The electronics supply chain is a complex business where solutions continue to evade some of the most innovative companies in the world. I've had the advantage of talking to many of those companies over the course of my career, and a recent discussion may help shed some light on how this is all intertwined.

{complink 577|Avnet Inc.}, along with its nearest competitor {complink 453|Arrow Electronics Inc.}, represents every major supplier in the electronics industry. The two global distributors also reach nearly every electronics end-market, from automotive to consumer to aerospace/defense.

Avnet was the first US-based distributor to establish a significant presence in China in the early 1990s. The Phoenix-based company partnered with a China-based sales organization and eventually made several acquisitions that made Avnet the leading foreign-owned distributor in Asia-Pacific. Harley Feldberg, Avnet Electronics Marketing President, Global, spoke with EBN this week about why business in Asia has been lackluster compared with prior years and the most recent quarters.

Feldberg points out that there are two different drivers that distributors see — straight demand for components, which is steadily gaining ground, and exports from the Pacific Rim. China relies heavily on exports as part of its dominance in electronics. Exports to the West have been tepid of late because of high employment rates in the US and financial uncertainty in Europe. If those conditions continue — and it is likely they will — exports will remain lackluster. Additionally, should labor rates increase in China, due to pressure from electronics consumers, prices of exported products will go up. Consumers are unlikely to pay increased prices as long as the economic situation continues.

What does this mean for the supply chain? If demand slows, China's factories will reduce capacity. Those factories will cancel or delay orders of components, enclosures, plastics, glass, etc. Suppliers of those products, which are located all over the world, will reduce capacity. They may lay off workers. Those workers will be loath to spend money on non-essentials, so demand slows even more.

Let's say that pressure from consumers begins to have a positive impact on Chinese working conditions. Again, higher wages will mean higher costs of manufacturing. Those costs will be passed on the consumers. Prices will increase on all products — not just the premium products you see from {complink 379|Apple Inc.}, but the more competitive alternatives as well. Eventually, OEMs will begin to seek out the next low-cost manufacturing center.

Here's the clincher: both scenarios harm the very workers that Western consumers are seeking to help. They will be laid off. If this is case, demand from within China, which is one of the other things driving the country's economic growth, will also decline.

Keep in mind that one of the main reasons US companies have migrated to China is to tap into the nation's growing consumer market. That market is directly dependent on Chinese citizens' disposable income. One leading indicator of the Chinese economy is the Chinese New Year, the primary gift-giving holiday for the Asian nation. “It's a very complicated market,” says Feldberg, “and, as we are just coming out of the Chinese New Year, it's hard to interpret the incoming order levels leading up to the holiday. The next couple of weeks are going to be important.”

For Avnet's most recent quarter, ended in December, sales from Asia-Pacific reached $1.25 billion, a decrease of 0.7 percent as reported and 4.7 percent with pro forma adjustments. Arrow Asia-Pac sales of $913 million were down 2 percent from the prior year and 7 percent sequentially. For the global supply chain, the quarter ending in March will be revealing.

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5 comments on “China, the Supply Chain & You

  1. DataCrunch
    February 6, 2012

    Hi Barbara, it will be very interesting to see how Chinese New Year (CNY) will become a major shopping indicator, similar to our Black Friday, and the more recent Cyber Monday.   

  2. Daniel
    February 7, 2012

    “Let's say that pressure from consumers begins to have a positive impact on Chinese working conditions. Again, higher wages will mean higher costs of manufacturing. Those costs will be passed on the consumers. Prices will increase on all products”

    Barbara, always the ends suffer is customer. If any increase in cost like transportation, insurance for the workers, infra structure etc, all such facilities are tied up with a cost factor and finally it's passing to the customer shoulder. This is because none of the companies want to share a part of their profit for employee's welfare.

  3. Barbara Jorgensen
    February 7, 2012

    @jacob: it is a neverending dilemma. Companies are beholden to shareholders who also want to maximize profits. In fact, some companies count their shareholders as customers, even though the deliverables (products to customers, profits to shareholders) are sometimes at opposite ends of the spectrum.

  4. Jay_Bond
    February 8, 2012

    One thing that was left out of this discussion was the affect on the global economy. For the last few years the gobal economy has relied on strong growth in China. If these companies are forced out of China, not only will there be layoffs and a reduction to personal spending in China, but the economic growth that the world needs will take a huge hit.

  5. Barbara Jorgensen
    February 8, 2012

    Absolutely, JayBond. The multifacted relationships that make up the supply chain are all affected by the world's ability to  buy and spend. Countries are no longer immune to global influences, even Communist countries. China remains a fascinating mix of capitalism and communism, and the mix is working for China. I hope we are all around 10 years from now to discuss how this model evolves!

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