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China’s risk: Bubbles burst, that’s what they do

Michael Palma, IDC

Combined, all of these issues, and many others are becoming fault lines in the foundation that has allowed China to recover from the economic disaster of the Cultural Revolution. This includes the good will of the international community.

The rise of China is threatening to displace large swaths of the global work force that rose to the middle class through manufacturing and related employment. As mentioned above, the inexperience of China’s leadership has caused uncertainty in financial markets, engendering ill will toward Beijing. (See, also: How China manufacturing wages, labor cost impact EMS)

Additionally, China’s foreign policy based on a narrow, and maybe near-sighted interpretation of its own self-interests, has alienated various segments of the international political community. Other nettlesome problems include a poor track record on intellectual property (IP) protection, human rights, and in the past year — product quality.

 

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The end effect of China’s efforts to grow its economy in a controlled manner is to throw its economy and the global market out of balance. Just as the housing / mortgage market in the US, the Internet Bubble, and countless other examples have shown, large systems out of balance tend to correct themselves. In China’s case, the fault lines are deep in the foundation, making it more likely than not that China will experience serious disruptions in the next 10 to 15 years.

Whichever path this disruption takes is impossible to predict, but for the electronics manufacturing services (EMS) industry, and the broader IT industry, such disruptions could cripple the EMS industry.

According to IDC’s latest research, illustrated below, 70% of EMS revenues originate from manufacturing operations in Asia, the vast majority in China. More specifically, China manufactures 100% of desktop motherboards, more than 80% of notebook computers, a large share of server components, more than half of all mobile phones and LCD panels, digital cameras, and an array of components.

 

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Every electronics device category a consumer or end-user touches plus, an increasing share of enterprise systems, are dependent on manufacturing capacity in China. Large-scale disruptions would crush supply, drive up prices, and depress end-user spending, with the ripples spreading out to other parts of the IT industry. There will not be a quick and easy way to shift manufacturing capacity.

 

EMS Industry revenue by region

EMS industry revenue by region

 

From a risk management perspective, EMS firms, OEMs, and their supply chain partners need to ensure they build diversity into their operational footprint in order to survive possible disruptions in China’s business environment.
 

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Smart executives have seen the effects of geographic concentration in other sectors and have learned from these events, whether it was disruption to outsourced services when tensions ratcheted up between India and Pakistan in 2002 or when an earthquake severed a communications link in southern Taiwan one year ago.

There is good reason why redundancy is built into communications networks, yet so many companies have not invested in such a strategy for their manufacturing operations. The future likely holds another paradigm shattering event for China.

Will manufacturers be prepared to survive such an event?




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