NEW YORK " Starting this month, China will begin to pry open another segment of its economy by giving foreign companies the right to set up wholly owned export divisions, further changing the dynamics of electronics companies operating in China.
Analysts said the decision will accelerate China's integration into the global economy by eliminating the obstacles hitherto faced by manufacturers and service providers eager to reduce their component costs. The nation is already a major production center for IT equipment.
The process may take some time to evolve, but some high-profile companies have indicated they would be setting up direct procurement divisions in Shenzhen, one of China's fastest-growing economic zones. Dell, General Electric, Hewlett-Packard, Motorola and Philips Electronics were among the companies named in a report by research firm iSuppli Corp.
"This new regulation undoubtedly will boost foreign companies' purchasing of electronic components in China," said Bryon Wu, a China-based analyst with iSuppli. "China has formed a huge supply base for passives, connectors, magnetic devices, boards, cables, metals and plastics. Not only does the China supply base produce such goods at the lowest costs in the world, but the quality of its products can meet the requirements of global OEMs."
Many electronic companies already acquire components in China, using local export firms to handle the shipment of purchased goods. For instance, IBM Corp. last year reportedly bought components and other goods worth $3.5 billion from China, according to iSuppli. Under the old system, foreign companies were allowed to source components from local manufacturers but had to contract with government import and export agencies to ship goods out of the country, adding to the transaction's cost.
"Removing the government agency will create a more efficient export channel and shorten the time to develop new products, qualify suppliers and deliver higher-quality goods," said Francis Bassolino, director at Alaris China, a Shanghai procurement and manufacturing consulting firm. "It also will lower costs because it is removing a step in the export process, getting the end customer closer to manufacturers."
Aside from the benefits of directly managing their procurement and export processes, foreign companies that take advantage of the new regulation would also be able to enjoy the reduced value-added tax (VAT) on exports now reserved for indigenous companies. Wu of iSuppli noted that China would have had to remove restrictions on foreign ownership of import and export businesses by December 2004 under the terms of its World Trade Organization membership.
Considering that China still lacks Western-style legal and other structural facilities to support its integration into the global economy, some electronics executives warn that the implementation of the new regulation may not be wrinkle-free.
"As with any new policy in China, it is good practice to quickly monitor how the Chinese legal and political system will actually administer the regulation and what additional amount of in-country oversight by the foreign entity will be required," said Glory Kamph, CEO of Interliance LLC (Costa Mesa, Calif.). "The policy's real benefits and hidden costs will only be known after it is put into practice."
--Additional reporting by Jack Robertson.