Robin Lamb and Claire SerantChina's budding electronic components base is challenging the industry's old guard by offering more competitive products and landing coveted positions on the approved-vendor lists of OEMs and EMS providers operating on the mainland.
However, while pundits acknowledge that China's passive component manufacturers are maturing, there is still disagreement as to how much of a threat the country's growing industry poses to vendors in the United States and Europe.
"We recognized the competition going back a couple of years ago and saw that as an area of concern," said Tony Tinaglia, vice president of the Electronic and Mechanical Controls division at Omron Electronics LLC, Schaumburg, Ill.
"We didn't take any drastic measures at that time, but we've been watching to see what would come," Tinaglia said.
Initially, Omron was monitoring just a few suppliers targeting a limited base of high-profile accounts. Through the years, that has changed. Not only have Chinese suppliers broadened their exposure in the marketplace, they have also grown in number.
"There are some very good Chinese suppliers," said Denny Salmang, president and chief executive of Epcos Inc., Iselin, N.J., the U.S. subsidiary of Germany's Epcos A.G. "Yes, they're making the approved-vendor lists. They're competitive technology-wise and competitive in price."
The big question
The question of who will serve OEMs and EMS providers moving into the mainland-longtime suppliers new to China or the country's domestic vendors-is on the lips of many companies that expect their China-based operations to grow significantly in the next decade.
And with EMS providers Flextronics International, Jabil Circuit, and Solectron all disclosing business expansions in the region in the past month, the pressure for component vendors to set up low-priced satellites is only mounting.
"We're in Asia because our customers are in Asia and have asked us to be there," said Darrell Wilk, vice president and director of sales at ITT Cannon Switch Products in Eden Prairie, Minn.
ITT derives about 12% to 15% of its business from China, a figure that could more than double in the next few years. To represent those customers, the company has located 20% of its resources in Asia, of which six sales offices and eight manufacturing facilities are in mainland China.
"There's a lot of pressure to be co-located or located in the same region as your customer," said Shawn Severson, an analyst at Raymond James & Associates Inc., St. Petersburg, Fla. "EMS companies are doing a lot of manufacturing there and want to have someone on site."
A spokesman for Flextronics Asia in Singapore said the company is conducting "as much localization as we can," which is seen as a means to improve lead times and lower handling costs and component prices.
"Our supplier selection criteria include price over performance, delivery, and quality, among others," the spokesman said. "[However], we don't just consider price absent the other factors."
Local buys on the rise
There is little argument that North American and European passives suppliers are maintaining their edge when it comes to fielding high-performance components. However, a number of analysts indicate that China's lower manufacturing and logistics costs are beginning to tip the balance of power.
"The largest projected growth market for new electronic products is China, where the end products are being assembled," said Shawn Wood, an analyst at iSuppli Corp., El Segundo, Calif. "Passive component suppliers must be close to the customer to ensure the lowest possible cost of acquisition while providing the highest level of serviceability."
Alcatel's facilities in China, for example, purchase from local suppliers to shorten lead times and customer delivery and lower logistics costs. The company spent $350 million last year through local vendors, compared with about $200 million for parts made by North American companies, according to Benny Choo, area purchasing director at Alcatel China Investment.
That level is even higher elsewhere.
"About 90% of our procurement budget in Asia goes to local suppliers," said Steve Petracca, executive vice president of business development at Pemstar Inc., a Rochester, Minn., EMS provider. "If we build products in Asia, we'll source in Asia. There will always be high-volume, low-complexity products built in Asia."
Though China's passives suppliers generally are recognized as excelling
in less-sophisticated manufacturing relative to North America, Europe, or Japan, analysts expect that by next year many of the country's vendors will begin to deploy new equipment and processes that will move them up the technology chain.
"Yageo [in China], Fenghua, and others are expanding and buying the best equipment they can get from Japan," iSuppli's Wood said. "It takes about a year to get that into production, [after which] their quality standards will probably be equal to the United States."
Lorne Waldman, corporate secretary at Nam Tai Electronics Inc., an electronics contractor based in Shenzhen, China, said the company is broadly supported by domestic parts makers. "Local suppliers have been upgrading their manufacturing capability and are offering good-quality components," Waldman said.
Still, while they may be beefing up their technology, the reach of China's component manufacturers remains limited. "Do you want to be sourced by a Chinese supplier and only be able to get your product in China, or do you want to be sourced by a Molex when you can get the product in many regions?" Raymond James' Severson asked.
Follow the money
Indeed, overseas component vendors are not standing idly by as the market in China flourishes. Vishay Intertechnology Inc., Malvern, Pa., already has about 65% of it operations in low-cost areas, while Epcos has more than 60% of its production located throughout the Far East.
FCI USA Inc., an interconnect maker based in Etters, Pa., established its first manufacturing facility in China in 1997, but the company has accelerated the transfer of production units to China since 2000 through existing partnership and private-label agreements, according to Anton Hulsink, senior vice president and general manager of the company's Communications and Data Consumer division.
Littelfuse Inc. plans to place 70% of its manufacturing in low-cost areas like China, Mexico, and the Philippines by the end of 2003, while keeping close ties with R&D centers in the United States and Europe.
"From a cost standpoint, we're making a lot of adjustments," said Tom Wortmann, market development manager at Littelfuse, a Des Plaines, Ill., fuse supplier. "We want to have no more than 30% of our production in high-cost areas."
However, as "guests" in China, Epcos' Salmang contends U.S. suppliers are at a disadvantage because they continue to conduct R&D in high-cost regions. "At the moment, manufacturing is done in China [by U.S. companies], but not much new development," he said.
Vishay's Glyndwr Smith, assistant to the chief executive and senior vice president of marketing, doesn't believe China's component suppliers are a threat today, but thinks they will become a formidable force within the next 18 months to two years.
"In most cases, we're finding companies, like a Motorola, that specify Vishay parts tend to stick with Vishay parts through the manufacturing cycle," Smith said. "As local manufacturing comes up to speed in China, it's a lot easier to come up with parts on a local basis. But it's still early."
To some degree, the fact that they are new to the game is what is holding Chinese suppliers back. At last month's Electronic Distribution Show in Las Vegas, for example, Smith noted that Chinese suppliers trolling for customers were using signs, literature, and images written in Chinese characters, not realizing that they have to adapt to the culture of their customers.
"As time goes on, they will recognize and accept that," Smith said. "With an industry that size, they will be a major force. But they have to get up the learning curve to sell to the rest of the world." OR
Additional reporting by Spencer Chin and Faith Hung