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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.

16 comments on “China’s Top 10 Economic Challenges & the High-Tech Implications

  1. rohscompliant
    November 8, 2012

    Do you think the 'changing of the guard' in China will affect their business climate going forward? Specifically the changing of the people in power that happens every 10 years in China…….that I have been reading about so much lately? Are they business 'friendly' or hard line communists??? Will it have an effect?

  2. Barbara Jorgensen
    November 8, 2012

    Consumer pressure from the Apple/Foxconn debacle has contributed to some positive changes, but anything that is forced upon a country or company usually isn't welcome. But if workers continue to fight for better pay and conditions, people at the top will begin to listen.

  3. FLYINGSCOT
    November 8, 2012

    I also wonder how China will ever manage to creat a cool brand that people in China aspire to.  Once they crack that then the West is done for 😉

  4. Daniel
    November 9, 2012

    Bolaji, now Chinese political system is corrupted; very recently Chinese communist party president made a statement that if corruption is growing like this, with in a couple of decade's Chinese communist party may throw out from power. Corruption is one of the major issue facing my Chinese peoples and government.

  5. Daniel
    November 9, 2012

    Barbara, in China the entire systems has changed with in last 4-5 years. Now employees are bothered or much aware about their rights and wages, so we cannot make them to work for more than 8 hours under normal compensation/salary packages. They all have feelings that MNCs are extracting and squeezing them for more profits. But they never realizing that because of these MNCs only they are getting exposure to such a good salary and living standards.

  6. bolaji ojo
    November 9, 2012

    Rohscompliant, Great set of questions. One fact about the Chinese people would suffice, though. My experience has always been that the Chinese people have always been industrious. Unfortunately, communism and the planned economy system obscured this fact for decades.

    Think of any Western-educated Chinese man or woman and you'll find that once they've had enough experience working with a multinational, they tend to prefer to start their own business. One of the reasons the Chinese communist-style planned economy system failed is because people like to sell and buy directly and have some control over their own lives.

    That's a long way of saying whatever the changes in the Chinese political system, the economic sphere will be open and continue to remain open.

    The Chinese Communist Party will accept this as long as its hold on power is not challenged.

  7. bolaji ojo
    November 9, 2012

    It may take some time for a China brand to become “cool” but I think you just put your finger on what we should expect Chinese entrepreneurs will start aiming for within the next decade.

    The transitions we can document are (1) China joins global economy (2) China becomes the world's manufacturing center (3) China moves from exporter of manufactured goods to become a big global player by buying foreign companies and brands, becoming an investor in international market and (4) China creates local brands that become internationally desirable/must have brands.

    Step 4 will be the hardest for the Chinese entrepreneur but that won't stop them.

  8. bolaji ojo
    November 9, 2012

    The revolution that throws out the Chinese Communist Party will most probably end China as we know it today. What goes for democracy in China is not what the West practices and whether the nation can survive the implementation of Western-style democracy is a question begging for answer. I personally don't believe it will.

  9. rohscompliant
    November 9, 2012

    The Cherry QQ sub compact car is the best selling car in it's class in China……..it is cool to people there…….yet they ripped the whole design off from GM Daewoo (now GM Korea)…..the car is an EXACT copy of a GM car that was built over there. US (& other country corps) corps that set up shop over in China have no rights to their own intellectual property. The Chinese gvt allows their company's to take any intellectual property from any intl company located in China. Cherry QQ was actually able to launch the car before GM could. GM was mired in paperwork & regulations from the Chinese gvt. The Chinese gvt plays an active role in screwing over intl companies (non Chinese) to benefit their own 'cherry' picked companies and industries!!! How do we compete with that????

  10. Wale Bakare
    November 9, 2012

    I agree with you. And besides it's no longer a new trend – demand for better pay package and environment by the chinese has been on for a while. As a matter of fact, addressing its impact on high-end techie products should only be next discussion not its extent of how consumers would get hit in their pockets.

  11. Wale Bakare
    November 13, 2012

    That factor is actually something drawing not only China back but few of the emerging economies.

  12. Daniel
    November 14, 2012

    Bolaji, from what we had seen in Asian countries is, there is no difference between Democracy and Revolution in terms of corruption. India and China is the biggest democratic and revolutionary county receptively in world, but in terms of corruption there is no much difference between these two places. The only difference I had visualized is, in India every five years some new set of peoples will get a chance to practice corruption where in China faces are not changing.

  13. Daniel
    November 14, 2012

    Wale, corruption is a common factor in all most all country but the rate of corruption is less with some of the western countries. Even there are corruptions in under economic countries in African continent.

  14. Daniel
    November 14, 2012

    Wale, as of now the only attraction about China is low wages and single window system for foreign investments. If companies are going to addressing the demands from Chinese workers, then the Chinese markets may not be attractive. Moreover, Chinese local markets are also not attractive because they are much interested in local brands and government is keen to promote locally made items.

  15. Shelly
    November 16, 2012

    World's largest foundry Foxconn shows trend of moving business to Southeast Asia countries due to Chinese base pay rise, so it seems China is losing its cheap labour advantage. With Chinese population aging, there is necessity to change development method. Meanwhile, corruption is indeed a problem. However, as a world's largest consumer market, and with the purchasing power rise, China should still be payed attention.

  16. Daniel
    November 19, 2012

    Shelly, you are right. Now Chinese labour markets are not so attractive when compare with the olden days, but still better when compare with the other countries. Another factor is Chinese government is very strict in family planning for more than one decade and forcing everybody to limit with one kid. So within a couple of year/decade the number of senior citizens becomes more than youngsters/youth. This will surely affect the productivity of nation because youths are assets for the nation. Eventhough they have the large population, consumerization of foreign goods are very less.

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