How do you export a Chinese PC? Send it to Hong
Kong, and bring it back................
idgchina.com
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China's PC Makers Navigate the Pitfalls
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HONG KONG (07/23/97) - In late 1993, AST Research Inc. set up China's first major joint-venture PC assembly plant in Tianjin. Since then, Compaq Computer Corp., IBM, Hewlett-Packard Co., NEC Corp., Siemens-Nixdorf Informationssyteme AG and others have established PC factories in China. Others are likely to follow suit. This article provides a brief look at the issues faced by vendors that are currently manufacturing PCs and PC components in China. PC sales in China in 1996 were 1.8 million units. The New Century Group forecasts sales will grow to more than 7 million units by the year 2000. We believe that vendors manufacturing in China are better positioned to address this anticipated demand. Joint-venture or foreign PC manufacturers in China don't necessarily pay tax on imported components. Therein lies the advantage. But there are significant hurdles on the road to success.
Broadly speaking, foreign manufacturers bring capital, technology and managerial skills to the venture. The Chinese side contributes land, factory space and knowledge of (and around) government rules and local market conditions. While some local partners bring access to market in terms of established distribution, many don't. China's domestic market has taken off so fast that most local manufacturers haven't yet established worthwhile distribution channels. While this appears to limit their usefulness, a local partner can still help guide foreign manufacturers over the more obvious pitfalls. Vendors need to take a close look at what they want from a domestic partner and what can realistically be achieved. The report from which this information was extracted looks at these issues in more detail.
A further hindrance to relying on local manufacturing to meet the growth in domestic demand for PCs is that joint-venture factories should, by law, export the bulk of production. This is an official government policy designed to foster both the development of a domestic computer industry as well as an export-driven economy. In theory, vendors receive tax rebates of 20 percent on exported goods, however these promises have not been fulfilled by the government for the last two years due to budgetary shortfalls. Rebates are again not likely in 1997.
Chaos of component sourcing
PCs made in China are often sent to Hong Kong to meet government stipulated export requirements, but then brought back into China as an imported product (both legally and through gray channels). Navigating the logistical flow of components and finished goods to the advantage of the manufacturer is a complex task that requires a detailed and up-to-date understanding of the options currently available.
Joint-venture PC factories purchase components both locally and from abroad. In general, they acquire monitors, power supplies and casings from sources in China. Motherboards, CPUs, hard disk drives, floppy drives and CD-ROMs are purchased from overseas suppliers.
As is the case with PCs, joint-venture component factories export almost all (over 90 percent) of their output to overseas markets. The nearest overseas market is Hong Kong. Thus approximately 65 percent of PC component vendors have set up factories close to Hong Kong in Guangdong province. The coastal provinces of Jiangsu and Fujian account for about 30 percent of the remaining total. The report looks at this issue in more detail.
PC manufacturers surveyed by the New Century Group state the need to import components from foreign sources because it is hard to find a competent PC parts provider in China. In order to save on the cost of transportation, joint-venture PC vendors set up factories in Guangdong province.
Component makers prefer to export production to earn foreign exchange. Local PC vendors favor imported components and usually purchase them in Hong Kong.
This situation has led to extreme cases. In one actual case, there is a PC joint-venture factory and a PC component joint-venture factory that are located in the same city, 10 kilometers apart which sell and source each other's products in Hong Kong. The PC manufacturer is buying components from the component manufacturer but components go to Hong Kong and come back again, rather than travel across town.
The days when foreign imports dominated the China PC market ended in 1996 with Legend Group emerging as the No. 1 vendor in the desktop product segment. The New Century Group estimates joint-venture PC production output accounted for 19 percent of overall sales in China during 1996. Based upon current capacity and forecasted future demand, in the year 2000 joint-venture made PCs will represent an estimated 22 percent of all PCs sold in China.
(This article is a summary of a recently published mini report titled "Manufacturing PCs In China" from Hong Kong-based market research firm The New Century Group. )
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