By Amy Wang, China Outlook Consulting -- Electronic Business
China is the world largest electronics manufacturing base for PCs, handsets, TVs, and other digital-portable products. At present, EMS (electronics manufacturing services), including international, Taiwanese, and local players, represents a major business in China. However, Chinese OEMs have started outsourcing to reduce cost, making use of new manufacturing processes to reach new markets. Outsourcing is becoming more and more popular in China, not only from international OEMs to Chinese EMS companies, but also from Chinese OEMs to international EMS providers, as well as from Chinese OEMs to Chinese EMS companies. Yet even given these trends, a look at the list of the world's top EMS companies reveals that China lacks big EMS players.
Why is outsourcing so popular? Original brand manufacturing (OBM) is gaining penetration in China. Big electronics chain stores—Gome and Suning, for example—outsource both design and manufacturing of consumer electronics to top Chinese manufacturers. Chinese exporters outsource based on what orders they have from international buyers. Chinese government data shows that electronics chain stores took 23% of the domestic market and 73% of the China-made electronics serving export markets in 2006. This is potential OBM business demand, such as digital portable consumer products, handsets, LCD TV, and white-goods products.
Chinese companies that want to focus on product development don't want to invest more on product manufacturing. As a result, they would like to use third parties to do the manufacturing. Major Chinese OEMs usually keep mission-critical manufacturing in house, but outsource other manufacturing to local OEMs. Other Chinese OEMs use the international EMS manufacturing network to reach new markets or to make use of cutting-edge manufacturing processes. Handsets, set-top-boxes, portable digital devices, and other consumer-electronics products such as TVs are outsourced for manufacturing and development.
Semiconductors are also a major category of outsourcing. Chinese fabless companies have long outsourced foundry, packaging, and testing functions to Taiwanese and Chinese service providers. Now, some Chinese fabless players have started to outsource semiconductor design to both Taiwanese and local IC design houses in order to accelerate time-to-market and integrate new design processes. Fabless and IC design houses are actively involved in outsourcing the supply chain.
No homegrown EMS Even though many OEM/OBM companies outsource to EMS providers in China, the nation has few big EMS companies. This situation is quite different from that in Taiwan, which hosts large global EMS companies.
According to market analysts, the lack of EMS companies stems from inadequate supply-chain management, concern over intellectual-property protection, lack of quality-control systems, and lack of manufacturing capacity.
Taiwan companies have gained experience in balancing EMS and their own OEM business. We can see successful examples from Acer, BenQ and Foxconn, but conflicts over balancing use of manufacturing capacity still happen. At the same time, Taiwan's intention of promoting its own branded products also causes it to lose orders from international OEM companies.
TPV technology, the largest EMS service provider for monitor products, had such an experience. To satisfy the needs of outsourcing orders, TPV had to reduce the output of its own brand name products, resulting in the failure of selling its own brand products. Currently, TPV runs two brand names: AOC and Envision.
In addition, it's common for Taiwanese EMS companies to carefully watch product quality and IP rights protection because they must maintain relationships with international OEM companies.
Chinese companies, by contrast, want to be OEMs. Although they do provide EMS services to international OEM companies, their goal is always to produce product with their own brand name. As in an old Chinese saying, "It's always better to be the head of a rooster than to the tail of a phoenix," China-based companies, no matter how small, always prefer to have their own brands. Some top Chinese OEMs do not take EMS orders or do not disclose their EMS business to the public.
Meanwhile, government policy mainly places emphasis on technology innovation, which encourages OEM business and provides no motivation for EMS business in the supply chain.
Nevertheless, many Chinese companies are providing EMS services to international and domestic OEM companies in order to survive in the market. Companies like Bio-Tech Electronics and Kongyu Electronics are leading EMS companies in China, and are aggressive at growing their businesses. Many such EMS companies plan to switch to OEM business as soon as they feel they are ready, but they face the challenge to maintain their long-term OEM-EMS business relationships.
Opportunities and challenges China's EMS business has great potential to grow because China has become an important manufacturing center. However, because of China's immature business environment, Chinese EMS manufacturers will be challenged to demonstrate sustained business commitment to OEM customers.
Outsourcing can move mid-mix and mid-volume products to West China because many government manufacturing facilities will be released to the free market, becoming new resources for international OEMs to penetrate the China market in electronics equipment. Now consumer-electronics products will become the next market driver of EMS business in China.
At the same time, because of cultural reasons and government policies, local Chinese companies lack passion to grow in the EMS direction. In addition, poor protection of intellectual property will remain an obstacle to EMS growth, despite the growing need for outsourcing in China.
Consequently, Chinese companies don't have long-term plans to play in EMS sectors, and China will lack major EMS companies for the next five or 10 years.
