Offshoring Patterns to China: Evidence from the Electronics Industry Ari Van Assche Department of International Business HEC Montréal

Fear of China Inc.

Goal of Presentation Is China merely a low-tech assembler or is it turning into a high-tech competitor? Evidence from the electronics industry will be used to answer this question. Implications for North American electronics firms will be discussed.

Evidence for high-tech competitor hypothesis Schott (2005): « China’s export bundle increasingly overlaps with that of more developed countries, rendering it more “sophisticated” than countries with similar relative endowments. » Rodrik (2006): «China has somehow managed to latch on to advanced, high- productivity products that one would not normally expect a poor, labor abundant country like China to produce, let alone export.»

Rodrik (2006) Created indicator EXPY that measures income level associated with a country’s export basket. –Identification of income level associated with each product. Tropical agricultural goods poor Complex manufacturing goods rich –EXPY is weighted average of these values for each country.

China’s export bundle is that of a country with an income-per-capita 3 times higher than China’s Source: Rodrik (2006)

CAGR of China’s electronics export 2.5 times higher than world

China’s share in world electronics exports rising

Electronics trade significant portion of China’s total trade

BUT: Evidence not inconsistent with low-tech assembler hypothesis Suppose that China: (i) imports «rich» components from more developed countries. (ii) uses cheap labor to assemble «rich» final goods for exports. Can explain why China’s exports seem sophisticated even though their production techniques might not be.

Low Chinese value added Chinese value added accounts for only 15% of the value of exported electronics products (Lardy, 2005). The rest is import content.

Data and Methods To further explore this hypothesis, I have extracted Chinese electronics trade data (SITC 75, 76 and 77) from Feenstra’s world trade database: Data divided into: –Trade in electronics components –Trade in electronics final goods

Trade balance = Exports - Imports

Taiwan Inc., not China Inc. In 2003, foreign invested enterprises accounted for: – 92% of China’s exports of computers, components and peripherals –74% of exports of electronics and telecom equipment. –64% of China’s processing exports Taiwanese companies responsible for 60% of China’s electronics exports (Economist.com, January 13, 2005).

More than 80% of high-tech exports in 2003 clustered in Yangzi and Pearl River Delta Pearl River DeltaYangzi River Delta GDP Per Capita 2.8x national average.GDP Per Capita 4.2x national average.

In brief China’s coastal area has become a leading location for the assembly of electronics, mostly by Taiwanese firms that have relocated their assembly activities to China. These firms use China as an export platform to the US, Canada and Europe.

Implications for China China’s electronics sector is a lot less high-tech than it looks. Most Chinese electronics exports just assembly jobs. China’s industrial upgrading not necessarily faster than other countries with similar endowments.

Taiwan Inc.: Friend or Foe? In 1990s, North American electronics firms have en masse outsourced their low margin manufacturing capacity to specialized contract manufacturing firms. –Between 1990 and 2000, the share of CM in electronics manufacturing has risen from 0% to 13%. Who did they outsource to?

Taiwan Inc. as middlemen Circuit boards and final product assembly outsourced to North American CMs Assembly of notebook computers outsourced to Taiwanese companies such as Quanta, Compal, Inventec, Hon Hai and Acer.

Implications for North American firms Strong division of labor and partnership between North American, Chinese and Taiwanese firms: –U.S. Inc.Architects –Taiwan Inc. Middlemen –China Inc. Assemblers

Source: UNCTAD

Implications for North American businesses and consumers Offshoring of electronics manufacturing to China has played important role in the creation of the « New Economy » in the second half of the 1990s. Feenstra et al. (2005) find that the trends in electronics trade prices can explain part of the perceived productivity growth acceleration in the second half of the 1990s.