China has a trade barrier as big as the Great Wall -- a mandate for a high percentage of local content in a variety of goods, including the massively produced cellular handsets.
You would think that the rest of the world would be screaming foul, as exporters always do when facing rigid local-content barriers. But except for some scattered complaints, protests have been pretty muted.
Of course, the local-content conundrum may now be overtaken by the larger crisis involving the U.S.-China standoff over the EP3 spy plane. But for now, at least, foreigners are learning to play by the Chinese rules of the game.
A lot of the supply chain has joined with Chinese partners and agents to either package or fabricate enough of a part to qualify as local content. OEMs, foreign and domestic, do tricky calculations on local services and part values to meet local-content edicts. Sometimes everyone just looks the other way, as long as OEM factories are humming.
The high-margin value-added parts from abroad generally are not yet widely produced in China. So local-content barriers aren't going to keep these crucial chips and parts out of the country. The passive components and discretes needed to complete a product are widely made in China at cheap prices. Once domestic suppliers have been qualified-not an easy task-OEMs would likely buy a lot locally anyway to get the low price.
A rigid Chinese adherence to the local-content mandate is complicated by two big "supply chain" factors no one wants to talk about: counterfeiting and smuggling. Manufacturers in China have to police domestically supplied parts-just to weed out counterfeit units. And smuggling has long been the favorite channel to evade high Chinese import duties. It also leaves no audit trail on smuggled foreign parts circumventing local-content rules.
The bevy of new 8in. foundries slated for China are counting on local-content rules to assure a steady stream of Chinese customers coming to them to make chips. But it will take more than just "Buy China" protectionism to make the new domestic foundries successful. The new China entrepreneurs must compete toe-to-toe with foreign foundries that right now are doing well outside the local-content restrictions.
China has also promised to remove many of the local-content regulations once it joins the World Trade Organization. But that is likely to be a reform phased in over several years, keeping some vestige of the barrier temporarily in place.
For now, with all its vagrancy, it's still business as usual in China.
Jack Robertson is EBN's editor at large. E-mail him at email@example.com.