The Fast Boat to China for foreign plants has sprung a few leaks. Not that you would notice.
The continued strong tide of direct foreign investment in China has tended to cover a few early signs that low Chinese labor cost doesn't solve all manufacturing problems. But chipmakers, EMS providers and OEMs are still rushing to build factories in Mainland China.
Toshiba Corp., Hitachi Ltd., and Matsushita Electric Industrial Co. are all planning major expansions of chip assembly and testing operations in the country. Hitachi is moving much of its 3.5in. hard-disk drive production from Japan to China to cut costs.
And Japanese OEMs are shifting production from other Southeast Asia plants to China for lower cost. A Nikkei market study identified NEC Corp. moving PC assembly from a Malaysian plant, Seiko Epson Corp. moving low-end scanner output from Singapore, Minolta Co. digital cameras from Malaysia, and Minebea Co. test equipment from Singapore.
Nor are Japanese companies the only factory homesteaders in the Middle Kingdom. Samsung SDI Co., the small size handset display arm of the Korean electronic chaebol, has completed a new mobile phone LCD panel plant in China. LG.Philips LCD Co. said it will build an LCD monitor plant in Nanjing. As previously reported, Taiwan flat panel makers AU Optronics and CPT are building new thin-film transistor LCD plants in China.
Against this backdrop, the move by Sony Corp. to move some of its video camcorder production from its Shanghai facility back to Japan catches attention. Sony is leaving video camera output for the Chinese market in Shanghai, but is bringing back to Japan the production for export markets.
This defies conventional wisdom that has caused a tsunami of foreign EMS and OEM companies to sweep China, hoping to cut product costs for exports to the rest of the world. But a Sony spokesman said the move back to Japan will take advantage of a closer, well established supply chain management system that allows faster just-in-time manufacturing with no sudden unexpected gaps in parts availability. He said the manufacturing efficiency in Japan offsets much of the lower labor cost that brought Sony to China in the first place.
Jerry Labowitz, Merrill Lynch analyst for the EMS industry, also spotted the contract manufacturing gloss in China was starting to show a little tarnish.
"The plethora of (EMS) capacity coming online in China, combined with relatively low utilization rates, could result in a challenging pricing environment over the next 12 to 24 months, as companies from around the world aggressively compete to fill facilities with production," he said.
China's heralded ramp of its own semiconductor fabs is also facing a few growing pains. Grace Semiconductor Manufacturing Co. is pushing back the launch of initial production in its Shanghai fab. Semiconductor Manufacturing International Corp. in Shanghai is still in pilot production.
Merrill Lynch believes that, unlike labor-intensive product assembly plants, operating a fab in China "is significantly more expensive than in Taiwan or Singapore, and does not necessarily improve market access."
The bumps on the Silicon Road are just that. They are an alert that the euphoric stampede to open plants in China isn't exempt from conventional business economics. And while the Chinese economy and market are expected to continue eye-catching growth, this alone doesn't offset other market problems that can arise.