The FINANCIAL — When China joined the World Trade Organization in 2001 its share of global electronics exports was just 6 per cent. Within two years it had become the world’s largest electronics exporter and by 2013 China’s market share was 28 per cent.
The search by Western electronics companies for lower costs has reshaped Asia’s economic landscape as production has shifted there from developed economies.
In the 1980s, Western companies were attracted by highly skilled low-wage workers in Asia’s tiger economies – Hong Kong, Korea, Singapore and Taiwan. Then, when wages rose in the 1990s, companies shifted production to the region’s lower-cost economies, notably Indonesia, Malaysia, the Philippines and Thailand.
Electronics now account for between 20 per cent and 50 per cent of exports in most Asian economies, thanks to low transport costs, the removal of trade barriers and standardisation of components, which makes it easier to switch suppliers.
When China joined the World Trade Organization, electronics companies quickly capitalised on its vast labour market and low wages and its electronics exports overtook all its rivals.
The speed at which China’s electronics exports have expanded created concerns in other Asian economies that their own electronics industries would shrink. However, its gain primarily came at the expense of the US, Japan and the European Union, not the rest of emerging Asia.
Those three economies’ share of global electronics exports fell from 60 per cent to 31 per cent between 1995 and 2013 when China’s share soared from 2 per cent to 28 per cent. But the rest of emerging Asia increased its share slightly, to 34 per cent.
The level of economic development in China remains low and its comparative advantage in electronics is currently centred on basic final goods, especially automatic data-processing machines.
However, an economy’s comparative advantage shifts to more complex electronics as its GDP per capita rises. China’s GDP per head increased sixfold to USD6,747 between 2000 and 2013 and is forecast to reach USD10,586 by 2019. We expect its comparative advantage in electronics to continue shifting towards higher value-added goods.
Intermediary electronics requires more technical knowledge, so their manufacture is concentrated in advanced economies with better-educated workforces. But the assembly process for final goods is relatively basic and is typically outsourced to less developed economies with lower wages.
We think China’s position in the global electronics production chain will stay at the assembly stage for at least five years, primarily because wages there will remain sufficiently low to attract offshore production. And a higher GDP per capita does not automatically shift an economy’s comparative advantage: China also needs to invest in research and development to build its competitiveness in higher value-added goods and to sustain a meaningful presence in the electronics industry.
There will be winners and losers as China moves up the value-added ladder. Thailand stands to benefit most as its electronics industry is similar to China’s but has lower costs. Korea may face stronger competition given that it has a similar industry structure but a higher cost base.
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