China and High-Technology: Threat or Opportunity?

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Since the advent of economic reform in China, Chinese exports as well as China's share of world exports have grown at a fast pace to surpass that of many developed economies. As a result, by the end of 2006 China had become the world's third-largest exporter after the US and Germany. In April 2008 the WTO announced that China had overtaken the US to become the world's second-biggest exporter, second only to Germany.

Yet the rise in China's exports has also been characterized by an important shift in its export structure. Where twenty years ago China was primarily an exporter of textiles, textile articles and apparel, today China is the world's largest exporter of electronics and machinery-related products, which make up 43% of China's total exports. China is rapidly moving up the technology ladder and is therefore becoming more competitive in exports of high-value capital goods - industries where traditionally Western countries such as Japan, Germany and the US have held the competitive advantage. But to what extent is China really able to compete with these countries today?

To better analyze this competitive landscape, we can make us of the industry classification of the OECD in its STAN Bilateral Trade Database, edition 2006, to compare Chinese and US high technology exports during the past few years.
 
China High-Tech Exports.JPGAccording to the chart above, if we assume that the US' share of high-technology exports will continue the trend it has followed in the past 5 years, China's high-technology exports have already surpassed those of the US. So what does this mean? Is China the new high-technology power? Are there grounds for concern about China's threat to the competitiveness of Western industries?

I believe if these questions were posed to Laozi, the father of the yin yang concept, his answer would not be yes or no, and neither black or white, but rather a combination of both.

Yin: A sourcing opportunity rather than a threat
According to OECD sources,
some 55% of China's total exports are attributed to production and assembly-related activities, and 58% of these are driven by foreign enterprises, of which 38% are entirely foreign-owned. In fact, among the top 10 high-technology companies by revenue, not one of them is Chinese.
China's export performance, therefore, is directly linked to its specialization in assembly operations and the high value-added inputs imported from Western economies. This has facilitated a rapid diversification of its manufactured exports, from low-end manufactures to high-technology products.

Yang: A sourcing opportunity but a future threat
Although Chinese high-tech ability is still subsidized by foreign technology transfers and government support, Chinese companies are developing competitive advantages in several areas of high-value industrial and equipment manufacturing. Good examples are Huawei (a telecommunications equipment maker based in Shenzhen), whose equipment and services were considered good enough to beat Siemens in a German tender; Zhenhua Port Machinery, which had a full two-thirds of global port crane orders in 2006; and Tian Di Science & Technology, the national leader in the design and manufacturing of coal mining equipment.

To effectively make use of China's cost advantages as a high-technology assembly center, foreign companies will have to carefully consider to what extent and with which strategic framework technology transfers are implemented and imported inputs are assembled in China. At the same time, and considering China's evolving high-technology exports, trying to avoid China as a high-technology sourcing destination will likely result in an unfeasible cost structure and a loss of competitiveness. Successfully dealing with China's sourcing challenges and particularities will finally determine whether China is a threat or an opportunity.

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oliver said:

refer to the following research report, which tells the western views on sourcing in China, even it demonstrated as a good performer.

Bad working conditions at EMS-factories in China

A new report of the European network MakeITfair is one of the first studies on working conditions related to the manufacturing of portable music players and video game consoles. The report has examined 4 factories operating in the Guangdong Province in China, namely Celestica, Flextronics, Vista Point Technologies belonging to Flextronics, and Hong Fu Jin Precision of Foxconn.

EMSUse of audio only players (known as MP3s), portable media players (PMPs) and video game consoles has increased rapidly over the past few years. The tiny size and light weight of music players coupled with an ever expanding memory enabling more and more music to be downloaded have boosted the popularity of these products globally.

According to market research carried out in the United States, 85% of children aged 2-14 use game consoles. Three in five use digital music players. Video game consoles have become common in homes across the developed world. With growing demand among mainly teenagers and young adults, manufacturing these devices has increased rapidly over the past few years.

A large and increasing part of the manufacturing process is taking place in developing and transition countries. Currently more than half of the world’s MP3 players, 30-40% of PMP players, and most game consoles are being produced in China. Most of the workers at the production lines are young women who oft en carry a heavy burden as the main family breadwinner. Many workers in China’s electronics sector are denied many of their basic rights.

The supply chain of the electronics industry has become more and more complex over the last few decades, with a high incidence of outsourcing, particularly to Asian countries. Over the years, production centres have moved from one country to another in search of lower costs and proximity to booming local markets. Between 1995 and 2006 the Asia Pacific area’s share of global electronics production increased from 20% to 42%, while production in Western Europe, the US and Japan continues to decrease.

The report has examined 4 factories operating in the Guangdong Province in China, namely Celestica Technology, Flextronics International, Vista Point Technologies belonging to Flextronics, and Hong Fu Jin Precision of Foxconn. Depending on who they supply, they are all first tier or second tier suppliers. They manufacture or deliver components to music player, multimedia phone and game console companies, namely Apple, Microsoft, Motorola, Philips and Sony.

Based on the research from Make-it-Fair, the most common problems at the factories are:
• Discrimination in recruitment. All four factories required job applicants to undergo a medical check-up, including blood tests for highly contagious diseases. Job applicants have to cover the costs of the medical check-up by themselves, except those under 18, whether employed or not. Diagnosed hepatitis B leads to a rejection of applicants at least by three out of four factories. This practice is considered discrimination against hepatitis B carriers, and is still common in many multinationals and employers in China. The Chinese Ministry of Labour and Social Security issued a notice in 2008 warning employers not to discriminate against job seekers on the ground of hepatitis B.

• High percentage of student interns and contract labour. All the four factories hired 16-18 years old student interns from a few months to one year. They were required to perform night shift s and to do overtime like regular workers. Since student interns are not entitled to standard social insurance (except occupational accident insurance) in China, employers save money through hiring them. Another trend is hiring so called contract or dispatch labour through labour agencies. Temporary dispatch labour and students made up 50% and 20% of the workforce in two factories producing for Microsoft. Some of the workers interviewed reported wage deductions made by labour agencies. Contract labour is not very likely to be told or know about labour rights and unions.

• Low wages. In China workers oft en earn the minimum wage for full-time work at the factory, even though these wage levels are very difficult to live on. Although Chinese minimum wages were raised in 2008, workers still have problems covering their basic needs and oft en cannot afford to start a family. Most of the workers are migrant workers from poor rural regions wanting to send money back home. In order to accomplish this goal they keep their own living costs at the lowest possible level by staying in dormitories with several other workers and by eating in the factory canteen. All four factories offered new workers a basic wage equal to the legal minimum wage or slightly above, 770-935 yuans, or 72-87 euros, per month for full-time work.

• Excessive working hours. In China workers oft en take on extra hours to try to raise their wages. Some workers state that they cannot refuse to work overtime. In three factories, workers were employed for 80-90 hours overtime per month during the peak season. In one factory producing for Apple, up to 120 hours overtime was worked; a gross violation of Chinese labour law that limits overtime to 36 hours per month. However, the factories had obtained approval for flexibility in hours from local labour bureaus. It seems that decreased orders have recently reduced overtime - in one factory producing for Microsoft, overtime was 100-180 hours per month until June 2008. After that, the factory limited the overtime to ensure that overtime does not cross the stipulated 86 hours as mandated by "Electronic Industry Code of Conduct (EICC) guideline". It must be kept in mind that the industry code overtime maximum is more than twice the legal maximum in China.

• Negative effects on health. All four factories required workers to work day and night shifts lasting usually one month. Workers found it difficult to adapt to month-long night shift s oft en lasting 11 hours. Also, two factories out of four required assembly line workers to stand through entire shifts, which causes muscle ache. One factory had changed in 2008 to allow staff to sit whilst working. If a toilet break was needed, workers had to ask for permission and a so-called ’off -duty card’. One card was shared among 20-40 workers (a factory producing for Microsoft had just decreased the number from 100 to 40) making it everyday practice to queue for long periods. Some workers also reported inhaling toxic fumes and feeling nauseous in soldering sections.

• Punitive fines. Wage (or bonus) deductions, due to punitive fines are evident in three out of four factories researched in China. Even though these fines are not always illegal, they are oft en based on subjective and unjust grounds. For example, workers are fined for mistakes or conduct related to the unhealthy working conditions offered by the employer, such as falling asleep at work or making mistakes because of the rapid pace of the assembly line. At a factory that produces for Sony, Microsoft , Motorola and Philips workers toiled for 11 hours per day 6 days per week, but they were fined if they fell asleep at work. They had to obey a 44-point disciplinary code.

• Disrespect of union rights. In China, workers’ rights are gradually improving, particularly due to the new Labour Contract Law that came into force in January 2008. All workers should have labour contracts and employers not supplying them should, in theory, be punished. However, the All China Federation of Trade Unions (ACFTU) continues to hold a monopolistic position, as prescribed in the Trade Union Law. The ACFTU is controlled by the Communist Party, its chair is the vice chair of the Chinese National People’s Congress. The ACFTU is oft en loyal to the employer and the government instead of representing workers. Its aim is that all private factories in China should be unionized by 2010. In all four factories, the workers interviewed either did not know whether there was a union in place or regarded it as favouring management’s interest. Three factories out of four claimed to have established labour unions in 2007-2008.

• Life in dormitories. Many workers lived in dormitories inside factory campuses, because most of them had no other option due to low salaries and high rental costs outside factories. Three factories charged workers for basic lodgings 10-80 yuans (1-7.5 euros) per month, one factory provided free accommodation. One room is shared among 8-10 workers, with a living space of 2.5-4.5 square metres for each worker, and very little privacy. On each floor of the dormitory, there were 100-250 persons, who even share the same washroom in some cases. Workers are oft en responsible for cleaning their own dormitories, while third party cleaners operated only in public areas, causing hygiene problems.

Most of the electronics brand companies have adopted codes of conducts stating that the human and labour rights of workers will be guaranteed. However, the situation at the factories covered in this report shows that this is not the case. The industry says it is trying to monitor the suppliers closest to them, the so-called first tier suppliers. The factories covered herein are these first tier suppliers, and yet numerous unacceptable violations of labour law and company codes of conduct came to light.

MakeITfair asked for comments from the factories researched, as well as the relevant brand companies. Only Apple did not answer. Microsoft said some findings in the report were contradictory to the audits of its suppliers carried out by instances it has chosen and trained for the purpose. Yet it promised all claims made by makeITfair would be taken seriously. Sony acknowledged the fact that social and environmental issues associated with the multi-tiered supply chain are challenging. However, it expects its suppliers to make mere self-assessments. In addition to Microsoft , Apple and Motorola conduct audits of their own at some of their fi rst-tier suppliers.

Sony and Philips have only participated in EICC joint audits. In the light of the results herein, audit systems might contain loopholes, if some of the problems coming to light by careful confidential interviews by SACOM have not surfaced in the audits. All the supplier companies sent detailed comments, some of which proved very useful. The information provided by SACOM turned out generally to be correct. As to the suppliers, only Celestica admitted there was room for improvement as pointed out by makeITfair. Foxconn accused SACOM of faked interviews and pursuing a "hidden agenda".

This study also shows that different problems in the industry are oft en connected. In China, low minimum wages mean workers are virtually forced to do a lot of overtime to survive. The excessive working hours and long night shift s affect their health. Any possibility of improving the situation is largely hampered by the fact that anti-union activity is common within the entire sector. It is therefore of utmost importance that electronics companies analyse how they can challenge these attitudes and support workers’ efforts to organise freely. Independent third party auditing and demands from buyers will no doubt lead to improvements in some areas. However, more profound changes and overall improvements will not take place until workers become informed and aware of their rights and are given full and unrestricted rights to organize and express themselves.

Suppliers often complain that they are expected to raise labour and environmental standards at the same time as their customers require them to lower production costs. For improvements to happen, companies need to bring in true incentives for corporate social responsibility (CSR) investments and not use obstructive purchasing practices. They also need to offer guidance to suppliers, and monitor and take responsibility for the effects further down the supply chain.

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