China’s recent growth and domination in the high-tech sector is the result of a disciplined approach and meticulous planning.
During the late ’70s and early ’80s, China underwent an institutional transformation which turned out to be critical to the development of their high-tech sector. This period saw an unprecedented focus on R&D in the fields of microelectronics, computing, laser technology, fiber-optic communication, robotics, bio-engineering and new materials. In fact, development of the high-tech sector took off in 1988 as a result of the myriad of government sponsored / supported programs, such as High-Tech Industrial Development Zones.
China’s entry into the World Trade Organization (WTO) also helped the transformation and has had a far-reaching effect on the country’s high-tech sector. They have put significant effort into not only transforming current industries into high-tech industries, but also building up their legal framework to enable further development of the high-tech sector and opening it up for foreign companies.
Additionally, companies are now as equally focused on China’s domestic consumers as they are on overseas customers, since technology products and services are no longer a luxury for the Chinese people. This has helped the country to become one of the world’s largest technology markets. With the elimination of many trade barriers, foreign companies are also starting to move their factories to China and establish R&D centers in the country, hoping to make full use of the country’s relatively low-cost talent resources.
As a result of all these developments, China’s high-tech sector has shown consistent positive growth over the last decade. With the country’s launch of its own NASDAQ-like stock exchange, it is expected that more technology companies will receive funds to help grow China’s economy.
Market Sector Overview
Tompkins International recently conducted a detailed analysis of China’s high-tech and home appliance markets and compiled information relating to their current supply chain state and projected trends. Here are a few key findings relating to market overview:
- China’s high-tech and home appliance sectors are segmented into five sub-sectors. The total number of up-scale* manufacturers in these segments is 16,515. Distribution by revenue and number of manufacturers is illustrated in Figures 1 & 2. Average revenue per manufacturer is highest for computers and lowest in the electronic
- Total value of China’s high-tech and home appliance sectors has consistently increased at nearly 21% CAGR** over 2001-2008, reaching RMB 5,125 billion in 2008 (i.e. US $753 billion).
- China’s high-tech and home appliance sectors are estimated to continue their growth through the downturn, however at a slightly lower rate, i.e. 12%.
- Most of the new investments are flowing into electronic parts and components, accounting for almost 51%.
- The combined value of exports and imports in the high-tech and home appliance sectors
reached $885.4 billion in 2008, with $521.8 billion of exports and $363.6 billion of imports.
- The global downturn has caused trade growth to decline since late 2008. Although year-on-year growth in exports and imports in the high-tech and home appliance industries was 13.5% in 2008, this was still much lower than 26.2% year-on-year growth in the industry in 2007.
The high-tech and home appliance industries in China are highly fragmented, with the top 100 players accounting for only 23% of the total market of RMB 5,125 billion. The top 10 players shown in the table below had total sales of RMB 605 billion, or 11% of the total market of RMB 5,125 billion (Figure 3).
Key Facts on Distribution Networks
Compared with many other industry sectors, the high-tech and home appliance sectors in China have a range of products and a very complex distribution network. A few key findings relating to distribution overview include:
- The use of third-party logistics companies (3PLs) is relatively high in this sector, both in warehousing and transportation.
- The sales channels of China’s consumer electronics and home appliance industries are largely driven by retail’s distribution network.
- Large OEMs have their own distribution channels to support their own branded stores and other retailers.
- Haier, a large home appliance manufacturer, is the top player in the industry with 42 distribution centers and 1,500 own-branded stores. Haier has over 30 million square feet of warehouse space across China.
- Haier claims that its distribution network can distribute any product to a city consumer within eight hours, a country consumer within 24 hours, and four days for a remote area.
In the case of OEM logistics, most OEMs pursue just-in-time deliveries and try to hold as little inventory as possible. In order to ensure timely supply of components, they require downstream suppliers to build factories nearby, thus cutting down on storage requirements and warehouse size.
Some of the leading players – such as Lenovo, Foundertech and Haier – have set up very sophisticated warehouse systems, mainly for their production lines and finished products storage, ranking as class 1 in Tompkins’ grading system which means they hold priority potential for high quality equipment/services in direct relation to MHE/service providers. Tompkins’ grading system was designed based on five aspects of warehouse management efficiency: storage, technology, conveyance, industrial trucks and order fulfillment
A typical high-tech and home appliance distribution network in China is illustrated below (Figure 4).
In summary, China’s high-tech sector has gained vitality in the past two decades, but much of the development has been built on a massive infusion of foreign capital.
China’s high-tech sector is quite fragmented, with the top 100 players accounting for only 23% of the total market of RMB 5,125 billion. This could present some great opportunities for consolidation in the future.
China’s warehousing and distribution capabilities still lack sophistication; however, they are trying to catch up with growing demand. Overall, there are significant opportunities for warehousing and distribution network modernization as the country’s domestic consumers fuel consumption, driving a requirement for more robust distribution networks.
* Manufacturer with revenue more than 2 Million RMB
Reference: High-Tech Industries in China – Advance in Chinese Economic Studies by Chien-Hsun-Chen and Hui-Tzu Shih.
**Source – Ministry of Industry and Information technology