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Despite rising labor costs, China will remain a manufacturing powerhouse for the electronics industry as many companies and their supply chains are now entrenched in the country, according to speakers addressing the annual Electronic Components Industry Executive Conference in Rosemont, Ill., near Chicago.
About 300 electronics component and distribution executives attending the conference also heard that the worst is over concerning the economic downturn and that growth will return.
“One of the inherent advantages of China is that not only does it have it low-cost labor, it has lots of it," said Thomas Dinges, senior principal analyst supply chain for researcher IHS.Thomas Dinges, senior principal analyst supply chain for researcher IHS, said that most electronics manufacturing will stay in China, although labor rates in the country are rising.
“In fact, I don't think there is another low-cost region that will consume the amount of production that China does," said Dinges. “One of the inherent advantages of China is that not only does it have it low-cost labor, it has lots of it." He added that there are only a couple other countries that “have a similar dynamic. One is India, but there are political infrastructure issues to deal with there.”
Dinges noted that most of the equipment that is built in India is for the Indian market, not for export. "Originally it was thought that India would be good for exporting because it was closer to Europe and China,” but this has not happened.
Dinges said that Indonesia is a locale for electronics manufacturers because of low-cost labor. "It has one billion people, but it is spread out and there are infrastructure issues there."
Despite rising labor rates in China, major handset manufacturers and PC companies will stay in China, but probably move further inland where lower labor rates are lower, according to Dinges.
“I don't think the PC industry can get out of China. They are so entrenched," he added.
Dinges went on to say that while electronics companies have used China to build products for export, in the next “four or five years more than 50 percent of the production that is in China will stay in China.” That’s up from about 40 percent in 2012, according to Dinges.
Gordon Hunter, chairman, president and CEO of Littelfuse Inc., echoed Dinges’ comments. Addressing the gathering, Hunter said that Littelfuse has factories in eastern China, the Philippines, and Mexico, and has no plans to leave China despite the rising cost of labor. Littelfuse makes circuit production devices and discrete semiconductors.
“We have had tremendous labor cost increases every year in China for the last five years, more than double-digit increases per year in direct labor costs,” he said.
Hunter added that labor costs In China will continue to rise. “Over the next five years it's clearly stated in the China’s five-year plan urban disposable income will increase by 40 percent and minimum wage will increase by 80 percent,” said Hunter. “Direct labor costs will go up dramatically. So what does this mean to us”?
“Over the next five years, it's clearly stated in the China’s five-year plan urban disposable income will increase by 40 percent and minimum wage will increase by 80 percent,” said Gordon Hunter, CEO, president and chairman of Littelfuse.Hunter noted that while no one likes to see rising labor costs, labor represents less than 10 percent of Littelfuse’s cost of goods sold. He said Littelfuse has to cope with those rising costs by implementing lean business practices.
“Implementation of leaning throughout the enterprise is going to be critical for us," said Hunter. “It starts in the factories, but more and more it's across everything we do including with our product development cycle, logistics, and everything we do in the back office. It just has to be the way we compete,” he said.
Hunter noted that Littelfuse has already accomplished the “big moves by moving factories to low-cost places. Now we have to be relentless every year in having a passion for taking cost out.”
To be profitable, reducing costs may be especially important over the next several years as economic growth will be modest, according to Dinges. He said that the U.S. economy will improve "but it's going to be a challenging finish to this year."
“Our macroeconomic teams tell us that Europe will be lucky if it is flat next year, China will grow 7 percent, and economic growth in the U.S. will maintain a 2 percent growth rate," said Dinges.
He added that economic growth will be in the 2-3 percent range over the next several years. “The good news is our macroeconomic guys say there will not be a major recession in the United States," said Dinges.
Many of the distributor and components executives at the conference said their business was strong in the first quarter, but has been flat to down in the second and third quarters.
“This is not an industry that is often flat," said one distribution executive attending the conference. "This is an industry that more often than not outperforms the rest of the economy."
While business has been sluggish, executives said there were positive signs that business was starting to prove. Consumer confidence was increasing and the Purchasing Managers Index (PMI) was above 50 in September, indicating improving business conditions.
Conference attendee and Hotenda President and Chief Operating Officer Mark Larson said business would bounce back once the overall economy improves. He said business is flat in North America, but down in Europe, due in large part to the financial crisis there.
Larson said that with purchase orders "line items are smaller, but there are more line items. It is like we are working harder to get the same output.”
One bright spot for Hotenda has been that despite the downturn, the company continues to grow its customer base by about 8 percent per year. The distributor has about 380,000 customers, according to Larson.
Larson and other executives said while business is sluggish, design activity continues to be strong.
“We've seen some great numbers in the last few years from the design and prototyping world” said Hunter. “The design community in North America is alive and well.”
Strong design activity means OEMs are designing new products and, when the economy turns, it could fuel another wave of growth for the electronics industry.