China

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Why Hydrogen Matters to China

Hydrogen manufacturing plant

 

As China takes faster steps to achieve green development, hydrogen plays a key role in process of transitioning the energy mix and addressing climate change.

For a long time, China’s primary energy sources has come from coal, oil and natural gas. Over the last decade, fueled by geopolitical tension and the impact of the Covid-19 pandemic, China’s oil and gas supply has been heavily dependent on overseas markets and the volume of imported nature gas has increased steadily during 2010-2020. In addition, in 2021, 71% of China’s crude oil and 42% of its natural gas was imported from other countries. To ensure the country’s energy security, China is now stepping up its efforts to reduce its dependency on fossil fuels and to accelerate its energy transition, aiming to increase the usage of renewable energy sources such as solar, wind, nuclear and hydrogen.

Graph showing China's natural gas dependence

In 2021, China released an action plan detailing their aim to reach peak carbon emission by 2030, and carbon neutrality by 2060. Reforming the current energy mix with renewable energy is a key measure in reaching the target.

Hydrogen is a clean, versatile, and efficient form of energy and is the most abundant element on earth, making it practically an inexhaustible source of energy. It is expected to be one of the key elements in the path to China’s “net-zero” ambitions.

Strategy for hydrogen development

In March 2022, the National Development and Reform Commission (NDRC) and National Energy Administration (NEA) jointly released the country’s first mid to long-term plan for implementing and developing hydrogen usage in China, stretching until 2035. According to the plan, the projected volume for renewable-based hydrogen is aimed to reach within the range 100,000-200,000 tons annually by 2025.

Considering China’s large market size, production potential and the various policies supporting the hydrogen industry, the 2025 goal is quite modest and China is well on the path to reach the target.  Several green hydrogen projects have already been reached in favor of the goals. Even before the plan was released, China’s largest hydrogen producer, Sinopec, launched four green hydrogen projects. These include a solar-based hydrogen production facility with an annual production capacity of 20,000 tons in Kuqa, Xinjiang Uygur autonomous region, another wind and solar-based project in Ordos, Inner Mongolia autonomous region with an annual output of 10,000 tons, a renewables-based project in Ulaanqab, Inner Mongolia producing 100,000 tons per year, and an offshore wind-based project in Zhangzhou, Fujian province producing 10,000 tons per year.

The central government in China is expecting that, by 2025, renewable-based hydrogen could reduce the country’s carbon emissions by one or two million tons every year, a reduction of 17-33% compared to the country’s carbon emission 2020. Moreover, China is rapidly developing its manufacturing capacity for hydrogen production. By 2030, China expects to install 100 GW capacity of electrolyzer to produce green hydrogen. China Hydrogen Alliance (CHA), a government-supported association in the hydrogen industry, is more optimistic for the hydrogen production in the future. It boldly estimated that renewable-based hydrogen production could reach 100 million tons by 2060, accounting for 20 percent of projected final energy consumption.

Apart from hydrogen power, China is also planning on expanding its solar and wind generation capacity, aiming to double the current capacity from approximately 600 gigawatts (GW) in 2020, to 1,200 GW by 2030.

Map showing distribution of China's hydrogen development

In wake of the central government’s call for carbon peak and carbon neutrality, more than 20 provincial governments have released a number of follow up plans with up to 200 incentive schemes supporting domestic hydrogen development. Local policies mainly focus on supporting use of land, subsidizing hydrogen production, and construction of filling stations. Up until now, several hydrogen industrial zones have been formed, including Beijing-Tianjin-Hebei economy zone, Yangtze River Delta, and Pearl River Delta.

There are 38 hydrogen energy industrial parks across the country which has enabled the continuous expansion of the hydrogen energy industry and the gradual improvement of the industrial chain. During 2021, despite China’s strict pandemic control policies and economic downturn, the numbers of newly registered hydrogen-related companies surged to more than 2200, an 89% increase from the previous year.

In comparison, other countries in Asia are also launching initiatives to shift towards a greener energy mix. Japan announced that it aims to reach a net zero greenhouse gas emissions by 2050. To decarbonize its economy, Japan is looking at measures such as innovative technology as well as alternative fuels including hydrogen. The road map ahead is quite clear, where they plan to introduce full-scale hydrogen -generation by 2030 and realize a full-fledge domestic use of hydrogen by 2050.

Similarly, Vietnam also aims to reach peak carbon emission by 2035 and achieve net zero emissions by 2050. The key target as of now is to lower greenhouse gas emissions by 43.5% by 2030 compared to the current state. With the Decision No. 888/QD-TTG, released July 25, 2022, Deputy Prime Minister Le Van Thanh approved the” National Climate Change Strategy to 2050”. Through this national strategy, the government plans to implement its COP26 commitments which include increasing its participation in low-carbon technology development, mobilize natural resources, and align the economy with its net-zero commitment. The goal is to develop a better response to climate change.

Hydrogen demand & application in China

Graph showing hydrogen demand in China

The projected hydrogen demand in China suggests strong growth in the upcoming years. China’s Hydrogen Alliance (CHA) forecasts that China’s hydrogen demand will reach 35 million tons in 2030, making up around 5% of the projected total energy demand. By 2050, the figure will stand at 90 million tons, supporting 10% of the projected energy demand. Moreover, the projected renewable-based hydrogen production capacity of 130 million tons in 2060 would mean that hydrogen energy could account for 20% of the country’s energy mix by that time.

Research from CHA showed that, currently, China’s hydrogen is mainly used as supply source in the industrial sector, such as the petro-chemical industry. Ammonia synthesis, methanol synthesis and refining and coal-chemicals are the three main processes that use the hydrogen, accounting for 32%, 27% and 25% of the total supply respectively. Other sectors only accounts for 16% of the total hydrogen energy. It is forecasted that in 2060, hydrogen will still primarily be used in the industrial field, using around 60% of the total hydrogen demand. Moreover, it is expected that the transportation industry will use 31% of the total hydrogen energy, and construction and power sector will only use 9%.

Chart showing applications of hydrogen in China

Current production & output method in China

China is the world’s largest hydrogen producer, producing 33 million tons of hydrogen per year, a third of the world’s total output. Production is mostly from oil or coal-based plants in refineries or chemical facilities, of which production from coal remains cheaper than natural gas or water electrolysis at around RMB 0.7-1.2 (0.1-0.19 USD) per cubic meter. Thanks to favorable policies from the government, China has witnessed a rapid growth in hydrogen production, growing from 25 million tons in 2020, to 33 million tons in 2021. CHA estimates that hydrogen production will reach 120 million tons in 2060.

Graph showing growth of hydrogen production in China

Table showing China hydrogen cost applications

Challenges to Hydrogen Development in China

While hydrogen is gaining momentum in China, the development of the hydrogen industry is still far from smooth. Many challenges need to be addressed along the industrial chain.

  • The overall production cost of renewable based hydrogen is comparatively high. To address this issue, central and local governments have issued a number of policies and plans to cultivate a favorable business environment and expand the industry’s scale.
  • A lack of technological knowhow in hydrogen production, storage and transportation process, resulting in low efficiency and higher cost.
  • Under- development in Auto industry. While the government has promoted electric vehicles (EVs) more aggressively, hydrogen powered vehicles are generally buses, heavy-duty trucks, with merely 7,000 vehicles on China’s road.

Graph showing hydrogen production costs

Business opportunities

According to Special Administrative Measures for the Access of Foreign Investment (2020), foreign investment is encouraged in participating renewable energy development. Foreign investors are entitled ”equal treatment” as Chinese companies, many restrictions on market entry have been abolished or revised.  However, State Owned Enterprises (SOEs) are the main players in Chinese hydrogen industry and dominating along the industrial chain. Many foreign investors should establish a joint venture to easier gain access to the Chinese hydrogen market.

In China, government policies have a significant influence on industrial development. For the hydrogen industry, policies and plans have formed a favorable business environment to China’s hydrogen development. On the other hand, China welcome inventors with advanced technology to promote hydrogen energy development along the industrial chain, especially in the sectors of production, storage and transportation of hydrogen, FEM fuel cells and the establishment of filling stations.


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    China Contract Manufacturing: A Comprehensive Guide

    Chinese factory worker

     

    Contract manufacturing has been a common and effective solution to relieve the shortage of production output and decrease costs. China has undoubtedly been a major market for contract manufacturing, thanks to its manufacturing capabilities and developed supplier base.

    In this article, we review contract manufacturing in China, including the benefits, risks, but also how you can find contract manufacturers.

    What are the benefits of contract manufacturing in China?

    Let’s start and review the benefits of contract manufacturing in China, some that you might be familiar with already.

    Near market

    China is estimated to be the largest consumer economy today as measured in purchasing power parity (PPP) terms. Over the next decade, it may add more consumption than any other country and is expected to generate more than 25% of all global consumption growth.  Manufacturing products in China can help companies being closer to the market and reduce transportation costs, as well as to ease import procedures.

    Cost effective

    Contract manufacturing is cost-effective and the reason why it has become particularly popular in the last two decades. Outsourcing manufacturing to China can help you save the expense of setting up factories or expanding existing manufacturing facilities. Meanwhile, even if labor costs have increased much in China in previous years, China is still considered a Low-Cost Country (LCC) for manufacturing. There’s also much development room in the China Central and Western parts as most manufacturers are concentrated along the East Coast.

    Manufacturing capabilities

    China has transitioned its market from low-cost supply to advanced manufacturing. The country has become a leader in the manufacturing of advanced products such as in automotive, telecom equipment, robotics, and consumer products. Compared to Vietnam, which is specialized in industries like textiles and electronics, China has an abundance of contract manufacturers and a larger industrial base. Many manufacturers in China are available for a large range of products.

    Flexibility

    Companies with own manufacturing facilities and equipment will suffer financially when workers or machines are idle or perform below capacity. At the same time, rents, salaries, and overheads still need to be paid. With contract manufacturing, however, you can plan for low-demand periods, and reduce your orders accordingly. Similarly, if you need to increase orders suddenly, your Chinese supplier should be able to manage this status too.

    Quantity

    One of the limitations of countries like Vietnam and India, which are China’s rivals in manufacturing, is their inability to manufacture a wide range of products and in a higher scale. So, no matter how large your order is, you are more likely to find a factory that can handle your order in China than in any other developing country. That’s why you must also carefully evaluate and select suppliers, keeping future orders in mind. If your supplier’s production capacity is higher than your average order, you will be able to increase your order without any trouble once sales pick up.

    What are the risks?

    Naturally, there are also risks related to hiring contract manufacturers in China. Below you can find some of the most notable ones.

    Lack of control over timelines

    When outsourcing manufacturing, unless a factory exclusively manufactures for your company (which is highly unlikely), your products might not be given priority. The factory will be bound to commitments given to customers who put orders before you and will only start production after pending orders are completed. This isn’t the case if you own the factory. But you can offset this disadvantage by planning your orders meticulously and sending in orders on time, keeping production timelines in mind.

    IP rights

    If the IP rights of your product are vital to your business, you open for risks of compromising your IP rights by outsourcing the production to China. Thus, one of the first things you should do is to register your IP rights such as trademarks, design patents, and copyrights. China is a so-called first-to-file country which means that the first company to register a trademark or patent is the first company to be awarded it.

    It doesn’t matter if those rights are owned by you in the US or Europe. If a Chinese company has registered your trademark in China first, your products can be prevented from being exported due to Chinese laws and as you have infringed upon the IP rights of the Chinese company.

    Finding contract manufacturers in China

    This is the most interesting topic for many foreign companies, namely, how can one find contract manufacturers locally. Let’s review how a search can be conducted.

    1. Pre-study in the market

    Identify your specific sourcing strategy as well as the regulatory requirements for the targeted products. Once the preconditions are determined, careful market research should be conducted. During the research, you need insights of the overall compatibility between technology and your production requirements, price levels, competition, and industrial clusters, for example. When searching for the right contract manufacturers, the following questions can be asked:

    • Where are the business facilities located?
    • What are the business’s processing and analytical capabilities?
    • Does the manufacturer have the required certifications and registrations in place to manufacture products for your intended market?
    • What experience does the business have manufacturing your types of products?
    • Is the business’s quality system ISO certified?
    • How does the business demonstrate financial stability?
    • What are the packaging options available for clients?
    • Do the business offer warehousing, fulfillment, and logistical services?
    • What is the business’s production capacity?
    • What is the business’s track record considering on-time deliveries?
    • How does the manufacturer manage business processes?
    • What does the client onboarding process look like?
    • How will the business protect your Intellectual Property?

    2. Implementation

    Contact a service provider with expertise in contract manufacturing

    Establishing relationships with high-quality suppliers and compliant factories is often the biggest challenge businesses face when starting to manufacture products in China. Asia Perspective is specialized in searching for suppliers, manage suppliers, and can help you create longstanding relationships with compliant factories. We connect you with businesses and factory facilities in China or even other supply chain locations across Asia.

    Preparations during pre-production

    Once a business has established a working relationship, it’s time to conduct pre-production inspections. From factory audits that account for production capacities, equipment condition and the quality of management practices to other inspections of processes, these preliminary measures are crucial for maintaining the highest standards.

    Following the approval of suppliers and factories, a business should arrange for in-process services. These inspections and quality control measures are essential when considering how to manufacture a product in China. The first article quality control, defect sorting services and pre-shipment checks are all helpful measures for getting the highest returns on investment.

    Protecting your IP

    According to the Patent Law of the People’s Republic of China, Article 19, foreigners, foreign enterprises, or other foreign organizations having no habitual residence or business office in China should entrust lawfully established patent agencies to apply for patents or settle other patent issues in China. In this context, we can help you identify the premium agencies and improve your communication with them to promote IP issues settlement quickly.

    3. Follow-up work

    CSR Audits

    In the subsequent management, you need to stay updated of the production status. On-site visits and audits are essential under such circumstances. However, due to the differences in culture and high costs, it can be wise to involve an experienced and objective third-party, to conduct CSR audits.

    To learn more about the topic, you can also read our separate article about CSR audits in China.

    Contract Manufacturers in China

    These days, under the background of rice in the manufacturing industry of Southeast Asia, Vietnam, Thailand, Malaysia, and Indonesia have emerged a lot of good potential contract manufacturers. However, China is still a stable country to produce relatively complex products due to its numerous efforts in manufacturing capabilities, especially when time-to-market is critical and when assembly requires a lot of labor.

    Electronics

    China is notably big for contract manufacturing of electronic products, below are a couple of examples of large contract manufacturers being present.

    Foxconn

    Foxconn is well-known as the top electronic contract manufacturing company in China. It is an internationally renowned electronic foundry company and the world’s largest electronics industry technology manufacturing service provider. It specializes in the R&D and manufacturing of 3C products such as computers, communications, and consumer electronics. It has a wide range of digital content, A high-tech enterprise in the development and application of automotive components, channels, cloud computing services, and new energy & new materials.

    BYD Electronics

    BYD Electronics was established in Shenzhen China in 1995 and listed in Hong Kong in 2007. It is the world’s leading platform-based high-end contract manufacturing company in China. Focus on business areas such as smartphones and laptops, new smart products, automotive smart systems, and medical health.

    Medical device

    China also has a large contract manufacturer base for medical device, where the two listed companies below are examples that operate in the industry.

    Seaskymedical

    Located in Guangdong province, Seaskymedical is one of China’s leading medical equipment manufacturers. In the medical sector, where hygiene is of the utmost importance, Seasky ensures that the items created exceed health standards. With the help of a medical device clean room, equipment is designed with utmost sanitization. Seaskymedical has a strict quality check procedure. All their products are ISO 13485:2016 certified.

    Shinva

    Shinva is located in Shandong province and specializes in medical instruments and equipment, pharmaceutical equipment, and medical medicine services. It offers CSSD, pharmaceutical equipment, radiotherapy solutions, digital operating rooms, dental equipment, and vitro diagnostic reagents and instruments to customers, gaining a reputation in China’s high-end market.

    Semiconductors

    China plays an important role in the semiconductor supply chain while many contract manufacturers are located here.

    SMICS

    SMICS is one of the leading foundries in the world and is the front runner in manufacturing capability, manufacturing scale, and comprehensive service in the Chinese Mainland. SMIC Group provides semiconductor foundry and technology services to global customers on 0.35 micron to FinFET process node technologies. Headquartered in Shanghai, China, SMIC Group has an international manufacturing and service base, with three 8-inch wafer fabrication facilities (fabs) and three 12-inch fabs in Shanghai, Beijing, Tianjin and Shenzhen, and four 12-inch fabs under construction in Shanghai, Beijing, Shenzhen and Tianjin.

    Huahong Group

    Huahong Group is an advanced manufacturer in 8+12-inch chip production. The Group’s business includes integrated circuit research, development, and manufacturing. Its factories are in Pudong Jinqiao, Zhangjiang, Kangqiao and Wuxi. Currently, it has three 8-inch wafer fabrication facilities (fabs) and three 12-inch fabs.

    Summary

    China has maintained its position as the world’s manufacturing hub for decades, allowing the country to build tight supply relationships with other countries. Companies can reduce production costs, gain high manufacturing capacities, and attain access to the potential China market through contract manufacturing here.  Regarding the corresponding risks in finding CMs in China, effective management can spread the risks.


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      Solar energy batteries are booming in China

      Solar farm in China

       

      The solar energy battery market has got much attention in China in recent years, being a fast-growing industry in renewable energy. In short, a solar energy battery is a semiconductor sheet that uses sunlight to instantly generate electricity, it is sometimes also referred to as “solar chip” or “photovoltaic cells”. The batteries can instantly generate electricity when illuminated under certain conditions.

      Following the focus on environmental protection and execution of the dual carbon goals policies, China’s State Council, the National Development and Reform Commission, Energy Bureau, and other related departments have issued policies to support the development of the solar energy battery industry.

      In this article, we go into greater detail and review why the solar energy battery market is exploding in China, and what opportunities this brings.

      Increasing Demand for Solar Energy Batteries in Europe

      Europe has grappled with energy problems and is eager to expand its solar energy capacity. This was particularly noticed during the energy crisis in 2022. Renewable energy sources such as nuclear and hydropower accounted for over 40% of Europe’s total energy supply in 2021. Yet deterioration of wind conditions coupled with weather anomalies such as drought all drove the demand for traditional energy sources like natural gas and coal.

      With the termination of Russia’s natural gas supply and the gradual implementation of various environmental policies, Europe is in dire search of a sustainable energy solution.

      Higher electricity costs

      Since Russia’s natural gas supply was cut to Europe, electricity prices have broken new records as days go by. European governments began taking drastic measures to limit energy consumption, such as Germany’s efforts to ban outdoor lighting in buildings and reduce indoor heating temperatures, and the UK regulators raised the energy price cap by 80% in early October.

      Soaring energy prices have also resulted in surging food prices, supply bottlenecks, and post-pandemic recovery efforts, which all led to expanded price pressures and inflation in recent months.

      Below you can find a graph that shows the electricity price increase in Europe until September 2022.

      Graph showing European wholesale electricity prices

      Increased demand for renewable products in factories

      Despite tax rates and additional costs arising from overseas sales channels, demands for renewable energy products such as photovoltaic products have remained hot in Europe. Solar Energy reported that more than 3,000 households had rooftop photovoltaic installed each week by the end of August 2022, three-folding what was three years ago.

      Chinese photovoltaic exports have reached new heights, where the country’s exports for the first eight months of 2022 already exceeded the previous year’s volume of 35.77 billion USD. It is estimated that Europe will take up to 50% of China’s total photovoltaic exports in 2022, a percentage previously dominated by Asia & Pacific countries.

      “It is currently the “cheapest way to generate electricity”, said Mr. Zhang, a director of a leading photovoltaic firm in China, “as the European market has become increasingly sensitive to price changes”.

      Price fluctuations

      Graph showing weekday hourly electricity prices

      As Europe is coping with electricity price fluctuations, differences in electricity prices at various hours of the day also took a toll on many households. Mornings and evenings of the weekdays, between the hours 7:00 – 9:00 and 17:00 – 20:00, are among the periods with the most energy consumption, where electricity rates during those hours would record an increase of 100% compared to hours with minimum energy consumption.

      Strong Chinese Supply Chain Eco-System

      China’s photovoltaic industry started around 2005, driven by European market demand. The industry has developed rapidly, where explosive industry growth has been demonstrated since 2013 following the rigorous introduction of national and regional to boost the photovoltaic industry.

      China’s photovoltaic industry has already surpassed the growth stage – subsidy policies have exited, and industrial growths have matured from a policy-driven to a market-driven stage. China’s photovoltaic production accounted for over 3/4 of the global photovoltaic module output in 2022’s first half.

      Graph showing China solar cell production

      Rapid Development of Solar Energy Battery Supply Chains

      A series of supportive policies launched by the Chinese government has made the solar energy battery industry a fast-growing industry in the new energy sector. In 2009, China implemented investment subsidies to conduct bidding for large-scale photovoltaic power plants. In 2016, the central government issued the “Thirteenth Five-Year Plan for the Development of Solar Power Generation”, setting a target that the installed capacity of solar power generation to reach more than 110 million kilowatts in 2020. To add further catalyst to the industry, the government has actively encouraged rooftop photovoltaic products for self-generation, self-use, and large-scale power stations.

      As the world’s largest solar power industry chain cluster and product exporter, China has a rich application market, a good investment environment, and the most photovoltaic patents. China’s photovoltaic industry has a complete industrial chain from upstream crystalline silicon production to midstream high-efficiency solar cell production to downstream solar photovoltaic power station construction and application.

      The market concentration of industry suppliers for the photovoltaic industry is high in China, where dozens of large-scale photovoltaic industrial parks are mostly found in Jiangsu, Hebei, Shandong, Zhejiang, and Anhui provinces. Listed companies include Tongwei, LONGi, Zhongli Group, and JA Technology are among the top photovoltaic producers in China.

      Summary

      With the gradual advancement of China’s “carbon neutral” and “carbon peak” plans, China’s solar energy battery industry will experience rapid development in 2022. Chinese suppliers must continue to reduce costs and increase efficiency and optimize their profit structure further. It is necessary to increase investment in technological innovation and enhance core competitiveness to ensure the supply of domestic and international markets.

      Many opportunities are also presented in China’s solar energy battery industry. With promising factors such as positive policy programs, strong market response, and an increase in demand for solar energy batteries from the European market, there is a foreseeable trend that solar energy battery technologies will gradually replace shares of energy production from traditional power generation methods.


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        China’s Semiconductor Industry: Current Development and Complications

        Circuit board with semiconductor

         

        In 2022, the global semiconductor industry suffered greatly, following shortages in 2021. While the technology sector stocks lost over 30% year-to-year, semiconductor stocks have seen a decline of more than 40%. At the same time, leading chip manufacturers such as Intel, SK, and Samsung, announced production reduction plans for the products.

        The global semiconductor industry is indeed an interesting topic and where China plays an important role. In this article, we take a greater look at the Chinese semiconductor market and what we can expect.

        The Segments of the Semiconductor Supply Chain

        The semiconductor supply chain includes the supply of upstream semiconductor raw materials and equipment, the manufacturing of midstream semiconductor products, and downstream applications.

        A wide range of materials included in the manufacturing process can be divided into front-end manufacturing and back-end packaging materials. In thousands of chip processing procedures, the main types of equipment used are lithography machines, etching machines, film deposition equipment, ion implantation machines, testing machines, sorting machines, and probe stations. Downstream applications of the semiconductor industry include network communications, computers, consumer electronics, industrial control, automotive electronics, and so on.

        The below chart gives a better overview of the semiconductor supply chain.

        Chart showing semiconductor supply chain structure

        The Competitive Landscape in the Global Semiconductor Industry

        Thanks to strong research and innovation capabilities, the US maintains a strong competitive advantage in the semiconductor industry globally, especially in electronics automation design, core intellectual property, logic devices, and manufacturing equipment. Noticeably, however, its absolute competitiveness has weakened while other countries’ semiconductor industries are experiencing continuous upgrades. From 2013 to 2021, local US companies’ market shares fell from 56.7% to 43.2%, as exports from other countries squeezed sales.

        It’s worth noting that the entire East Asian region accounts for 73% of the world’s semiconductor capacity, corresponding to 83.85% of the global chipmaking semiconductor equipment demand. China mainland’s comparative strengths are in packaging testing, wafer manufacturing, and raw materials. South Korea, Japan, and Taiwan region are dominant in raw materials, memory chips, and wafer manufacturing. Currently, China mainland and Taiwan together account for 37 % of global chip production capacity while South Korea 21 %, and Japan 18% respectively.

        In each segmented semiconductor area, the core technology is often mastered by enterprises with oligopolies. In the silicon wafer and electronic technology market, the former is mainly occupied by Shin Etsu Chemical (Japan), Global Wafer (Taiwan), Stiebel Eltron (Germany), and SK (Korea), while the latter is led by the APD (US), Air Liquide (France), Dayolic (Japan), and Linde (Germany). Among semiconductor photoresist suppliers, Japanese companies dominate with 72% of the global market share. The same goes for the lithography equipment supply status where ASML, the Dutch giant, has a market monopoly with 83.3% of the high-end global lithography equipment market.

        Export Restrictions and the Impact on China’s Semiconductor Market

        On October 7th, 2022, the Department of Commerce Bureau of Industry and Security (BIS) released the Imposition of New Export Controls on Advanced Computing and Semiconductor Manufacturing Items Exported to China, significantly escalating US sanctions on China’s semiconductor industry since 2018. In the new export control rules, BIS added restrictions on the export of chips and related production tools to China for national security issues:

        1.  Restrict Chinese companies’ access to high-performance chips and advanced computers.
        2.  Restrict U.S. support for specific semiconductor activities that involve China.
        3.  Restrict China’s access to advanced semiconductor manufacturing items and equipment.
        4.  31 more Chinese entities and research institutions were added to the UVL list.

        Challenges for China’s Semiconductor Industry

        The restriction of US high-performance chip exports may directly hinder the development of AI technology and the IT industry in China. Chip designers and fabs that design supercomputing chips in mainland China, as well as overseas fabs that use US technology to make chips for Chinese supercomputing chip designers, will all be subject to US export controls.

        In addition, the US has extended restrictions on 28 entities and artificial intelligence technologies related to high-performance computing, including Haiguang, Jingjiawei, and Chinese supercomputing centers. As a result, the manufacturing of high-performance CPUs, GPUs, and AI chip in China will be blocked. Meanwhile, many foundries such as TSMC, Samsung, Intel, UMC, and Global Foundries will no longer be able to contract manufacture chips for such Chinese chip designers.

        The ban also included certain semiconductor manufacturing equipment and related items, which can be used in advanced chip manufacturing, into the Commercial Control List (CCL). All mainland Chinese chipmakers are subject to the restrictions, which have gone straight from “focused crackdown” to “full crackdown”. The scope of the restrictions has been expanded from 10nm to 16nm chips, targeting China’s domestic memory chip manufacturing industry. Export bans on 18 nm chips, used for the smaller DRAM memory chips, and on more than 128 layer NAND flash memory chips, used for semiconductor manufacturing equipment and storage, will significantly impact mainland China’s manufacturing industry and impede subsequent technology development.

        A new license is now required for exports of assembly components of semiconductor equipment by the Chinese mainland. That is to say, semiconductor equipment manufacturers in mainland China will be greatly hampered in making their own equipment.

        Europe’s Response to US Restrictions

        China’s market is especially important for the development of the global semiconductor industry. In recent years, China has increased investment in the semiconductor industry, especially in the rapid development of the semiconductor manufacturing industry, and has purchased a large amount of high-tech equipment. As a result, the revenue of foreign semiconductor factories from China continued to increase, climbing up to around 30% of their total revenue.

        In 2021, according to its financial reports, Pan Lin Group’s revenue from the Chinese mainland reached 33% of its total revenue, while Kolei generated 27%. European firms such as STMicroelectronics, Infineon, and NXP also rely heavily on Chinese buyers.

        Many companies have stated that they do not want to give up sales in China for political reasons. The Dutch government has, of the date we are writing this article, not agreed to impose any additional restrictions on ASML’s DUV equipment, essential production equipment in chips, exports to China, arguing that the measures could damage its normal trade relationship with China.

        Making China’s Semiconductor Industry Less Reliant on the US

        Among four major aspects of semiconductor manufacturing, including design, manufacturing, packaging, and testing, manufacturing is the bottleneck of China’s semiconductor industry. China also experiences a large technology gap in equipment production.

        Although China’s R&D is continuously developing, there is no doubt that a great mass of time and capital investments will be needed for development in the semiconductor industry. China may proactively seek cooperation with Dutch, Japanese, Korean, and other manufacturers to secure the Chinese semiconductor supply chain.

        Summary

        The semiconductor industry is of strategic importance to China, especially in the context of the international competitive environment. At present, the development of the global semiconductor industry depends on efforts and resources from all over the world. Due to the high technical entry barriers and uneven patent distribution around the world, a stable supply chain requires sound business relationships among all countries.

        China now has faced unprecedented challenges in its semiconductor market growth as US restrictions on China’s semiconductor industry have deepened into an all-around block. According to China officials, China will continue expanding its industry.


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          CSR Audits in China: Complete Guide

          Workers conducting a CSR audit

           

          CSR has received increasing attention among companies with manufacturing in China in recent years. As a result of new government regulations and higher expectations from end consumers, companies are increasing their efforts to take CSR more seriously.

          In this article, we review CSR in China and what changes we can expect in the coming years.

          The Increased Importance of CSR in China

          Recently, ESG (Environmental, Social and Governance), an evolved CSR concept and framework, has gained popularity and become the subject of much discussion. In 2021, 1,366 out of 4,643 A-share listed companies in China disclosed ESG or CSR reports, accounting for 29.42% of all listed companies, a significant increase compared to the previous decade.

          However, compared to developed countries, China’s CSR standards are still relatively low when considering both awareness and implementation. Yet, many large Chinese companies have started to pay more attention to other stakeholders rather than only focusing on philanthropic work domestically, like in the early days.

          Instead of just highlighting donations to build new schools in rural areas, companies now express care for employees, community, environment, and sustainability in yearly CSR/ESG reports.

          China’s CSR Regulations

          Due to the lack of universal standards and guidelines, as well as different perceptions of what CSR entails, no unified CSR audit scope exist today.

          In 2013, a third-party business consultancy firm in China released a set of so-called DZCSR30000 standards, China’s equivalent to ISO standards, like ISO26000 and SA8000. The standards were endorsed by the Ministry of Industry and Information Technology, the Chinese Academy of Social Sciences, the China Enterprise Confederation, and other organizations. With that said, the standards have not been widely implemented. Different companies in different industries now adopt different standards such as AA1000, SA8000, ISO26000, BSCI, or their own code of conduct.

          Today, CSR is usually evaluated based on two main areas, with associated frameworks such as SA8000 and ISO26000: labor and EHS (Environment, Health and Safety). In a more detailed way, it would probably cover areas such as child labour, forced labour, discrimination, freedom of association, health and safety, working conditions, the environment, and business ethics.

          Differences Between Internal and External CSR Audits

          CSR audits are crucial to find non-conformities and enhance CSR performance. The audits are used to evaluate, measure, and track the CSR performance of suppliers, to see if the suppliers live up to pre-set requirements. Furthermore, from the perspective of risk management, the audits are also conducted to prevent the purchasing of conflict minerals, and child labour activities, for example.

          The scope and focus of audits often vary based on industry, considering audit strategies and practices. Take the example of a company that purchases textiles, which is labour intensive and where workers might be exposed to chemicals and acid mist. The auditor might then have to pay more attention to whether the workers use sufficient Personal Protective Equipment (PPE) such as protective clothing, helmets, and goggles.

          In a highly automated plant that produce automotive parts, on the other hand, there might be stronger emphasis on salaries, contracts, and work hours.

          Many large foreign companies in China have internal audit teams and conduct audits of their suppliers at least once a year. The auditors are commonly in-house experts with abundant experience in product quality control or supply chain management.

          Small and medium size companies may use external auditors as they lack resources or might not have a physical presence in the Chinese market. However, large foreign companies may also use external audit teams as they are more familiar with the working procedure. In addition, their independence will lead to higher credibility and more objective and unbiased results.

          Process when Conducting CSR Audits

          The CSR audit usually starts with the selection of a set of guidelines, for example, the company’s own Code of Conduct. The auditors would then use a comprehensive checklist, either provided by the client company, or use their own document based on certain requirements and standards such as SA8000 or ISO26000.

          After an introductory meeting between the three parties (the client, auditor, and supplier), the auditor(s) will conduct onsite audits, including document checks, site tours and interviews with workers. This will be followed by internal meetings with the auditors, and a closing meeting with the supplier. Under normal conditions, a comprehensive audit report will be delivered to the company two weeks after the audit.

          Below you can find a chart including the different steps and where the client is referred to as the audit consigner, the service provider as the auditor, and the supplier as auditee.

          China CSR audit process

          Audit Scope, Depth and Length

          The scope and depth of the audit depends on the client’s specific requirements and the chosen criteria. The time required for the audit depends on the size of the plant and the number of employees, as well as the complexity of the production process. An audit of a factory with about 100 employees usually takes at least 2 to 3 man-days.

          The Importance of Meeting Suppliers

          Foreign companies’ CSR work for suppliers in developing countries is generally achieved based on openness, mutual-trust, and collaboration. However, differences in language, culture, social environment, and economic development sometimes causes confusion and misunderstanding between auditors from developed countries and Chinese suppliers, especially those in less developed areas.

          For example, Chinese factories and workers can reach a consensus to not buy social insurances, which would be a CSR non-conformance for foreign auditors. However, Chinese workers may choose to not buy social insurances due to pre-existing insurances with the Chinese Hukou system (residence registration) to avoid paying extra money.

          Other times, workers prefer to not sign a labor contract to gain more freedom over their working hours. Local auditors in China, on the other hand, usually show a deeper understanding for these phenomena and its importance.

          Nevertheless, regardless of the auditor’s origin, it is important to visit the factory to perform onsite audits and meet with suppliers. Communicating with suppliers in person gives the auditor a deeper understanding of the underlying reasons behind non-conformances.

          Differences in Performance Between Industries

          Since there’s a strong focus on the workers in CSR audits, labor-intensive and less profitable industries usually mean higher CSR risks. In fully automated factories such as the automotive industry, workers generally operate in a less risky environment, whereas in the wig and hair-extension industry, for example, much of the production rely on manual labor.

          In addition, hazardous chemicals that are used in the production process also increases the likelihood of workers being in more hazardous work environments. Workers might then need more protection gear, training for work safety, and occasional health checks need to be provided.

          Post-Audit Improvement

          If you are unsatisfied with the CSR performance of a supplier, post-audit improvement actions are often needed. However, this also puts an increased importance on mutual trust and interdependence between you and the supplier. Usually, at the request of more important customers, suppliers will be more cooperative to improve but the time to complete the improvement can vary. Occupational risk assessments for employees in hazardous positions or providing social insurance for all employees will obviously take longer time than replacing expired fire extinguishers and purchasing appropriate personal protective equipment.

          You may also decide whether to continue its relationship with suppliers that fail to meet its targets, depending on the circumstances. For example, a company might stop the cooperation with a supplier that after an audit, is unwilling to improve their pay structure to align with local lowest wage standards.

          Tighter Supply Chain Regulations in Europe

          On February 23, 2022, the EU Commission adopted a resolution of a draft for EU Due Diligence Act. With a focus on human rights, the law aims to establish standards in the fields of occupational health and safety and environmental protection. It also aims to establish sanctions under public law and complaint procedures for affected parties.

          In Germany, the new Supply Chain Act (Lieferkettengesetz), also known as the Duty of Care Act, was passed and adopted into law in July 2021.

          With calls for tighter supply chain regulations throughout Europe, European companies with operations in China and/or other developing countries should have a robust plan in place for CSR audits and following improvements to prevent unnecessary risks.


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            China’s Catering Industry Bouncing Back After COVID-19 Lockdowns

            Eating hotpot in a Chinese restaurant

             

            As Beijing and Shanghai have recently resumed outdoor activities after months of lockdowns and tight restrictions, China’s catering industry, including the restaurant sector and bar sector, is roaring back to life.

            Dine-in Curbs Ease

            Unlike neighboring countries, China committed to a Zero-Covid strategy with strict movement restrictions to curb the outbreaks. Its capital city Beijing imposed travel controls and shut down various public facilities, including dining-in restaurants, gyms, and cinemas. Chinese citizens in Shanghai faced an even more severe situation with lockdowns that lasted for a few months.

            At the beginning of June 2022, the restrictions have been loosened in both cities, paving the way for the increase of domestic food consumption as well as for food services operators to revive their sales. Indoor dining is now allowed, however with a cap of 75% of restaurants’ capacity as set by authorities. Customers are expected to be back in flocks, especially in hotpot restaurants which are not a convenient takeaway option.

            The Catering Industry

            Following the easing of dine-in curbs is a long line of customers eager to experience diversified restaurant experiences. In fact, the trend started even before the restrictions, greatly fueled by the growth of China’s middle class.

            According to China’s National Bureau of Statistics, China’s food and beverage industry bounced back in 2021 from the initial hit of the pandemic in 2020, with a revenue of 704.83 billion USD, an increase of 18.6 % compared to a year earlier. The sector accounted for 10.6% of the total retail sales of consumer goods in the same year. It is a significant improvement from the year 2020, in which the revenue of China’s food and beverage industry was down 15.4% compared to 2019 due to the impact of the global pandemic. A report from Research & Markets estimated a 7.9% CAGR for the Chinese food services market during the 2021-2027 period.

            Due to recent lockdowns and restrictions in Beijing, the total consumption of the catering sector in one of the biggest metropolises in China decreased by 1.2% (YoY) in the first quarter of 2022. However, experts are still optimistic about the growth of this sector.

            One of the growth drivers is stable consumer demand. In a recent survey conducted prior to the major lockdowns, 84% of Chinese catering customers responded that they would maintain or increase their consumption frequency in 2022. The overall market demand is relatively strong.

            Demographics and income levels are closely related to food and beverage demand. In general, citizens from megacities spend more on dine-in services. For example, the consumption capability of Shanghai has seen rapid growth year-on-year, with its expenditures per capita up 14.91% from 2020. The growing middle class in China is seeking a healthy and high-quality eating culture as well as more diverse dining experiences.

            Chart showing Chinese consumers' consumption frequency

            Another growth factor is the increase in quantity and size of Chinese food and beverage operators. The number of restaurants in China reached 9.3 million in 2021, of which 41,641 are chain restaurants. In 2022, the number of outlets in the catering market is expected to continue to increase with a 10% average growth in every sub-sector, compared to 2017 data. Among all the sub-sectors, full-services restaurants will continue to be the biggest contributor, accounting for around 70% of the total outlets this year.

            Graph showing number of catering outlets in the Chinese market

            Large food and beverage services groups have kept expanding their market presence. Notably, Haidilao, a chain of hot pot restaurants known for its service and innovative marketing methods, emerged as one of the most lucrative hot pot enterprises in China, with a 43.7% revenue growth in 2021. Additionally, there is a growing interest in fast food from residents, especially the young generations, leading to the increasing market share of key players.

            The international reputation of Chinese restaurants is also growing, as four restaurants in China made it onto Asia’s 50 Best Restaurant 2022 list, a renowned global ranking that began nearly a decade ago. This marked the biggest number of Chinese entries ever, and experts believed that even more Chinese restaurants can be expected to make it on the list as China starts to open its borders to international travelers.

            Moving Forward

            After a temporary halt due to lockdowns and the pandemic, the resumption of outdoor activities and dine-in services in Beijing and Shanghai buoyed hope for catering businesses in the world’s biggest consumer market. The comeback in full swing of catering services is expected to happen very soon in China’s megacities. Subsequently, the development of other supporting industries, including food processing and transportation, will be greatly stimulated as well.

            With the growth of the Chinese economy, the pursuit of a more healthy and cultured eating experience for Chinese citizens, and the governmental focus on the food and beverage industry as one critical economic engine, China’s catering industry is one of the ideal investment targets for both local and foreign investors. To reap the advantages of the sector, businesses are recommended to watch out for the latest local movement regulations and prepare contingency plans to adapt their operations to the everchanging COVID-19 restrictions in the country.


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              Moving Manufacturing from China to Southeast Asia: An Introduction

              Factory workers in Indonesia

               

              Foreign companies have used low-cost country sourcing strategies for decades with a strong focus on China. In the past years, we’ve seen a new trend where increasingly more companies look for alternative sourcing markets in Asia.

              In this article, we explore why this move is happening, specific brands that already moved parts of their production to Southeast Asia, what should you pay attention to if you are a manufacturer, and which countries are on the rise as alternatives to China.

              Why are companies moving manufacturing from China?

              Increasingly more companies have understood the importance of diversifying their supply chains from China, a trend that was accelerated during the pandemic.

              The increasing labor costs is a major concern, which are around three times higher in China compared to Vietnam, and five times higher than Indonesia on average. Between 2009 and 2014, the Chinese minimum wage almost doubled, resulting in slimmer margins for foreign companies.

              Another reason is the supply chain disruptions caused by the pandemic that sent shockwaves to global manufacturers, urging businesses to rethink their procurement strategies. Some companies have decided to move their production to other countries completely, while many adopt so-called “China plus one” strategies. This means that production is kept in China, while parts of the production is allocated to other countries.

              The increasing import duties due to the ongoing trade war has also aggravated the struggles of businesses that are manufacturing in China. As China faces these and many other problems, Southeast Asia simultaneously rise fast and gain attention as an alternative market to China.

              Companies Moving Out of China

              Let’s review some notable companies that have moved parts of or all their production from China, and their future plans for the new manufacturing destinations.

              Apple

              Under the trade war pressure, Apple has been encouraging its suppliers to move production out of China. Parts of the iPhone’s production lines have been moved to India, some MacBooks are now assembled in the U.S, and Vietnam has been rising as an essential hub to produce Air Pods.

              It plans to have 30% of its classic Air Pods produced in Vietnam instead of China. Foxconn for instance, the major supplier of Apple, invested 270 million USD in a plant to manufacture laptops and tablets in Vietnam in 2020. In fact, Apple tried to move more production to Vietnam in 2021, but the plan was postponed due to the pandemic, but the plan was resumed in 2022.

              Samsung Electronics

              Samsung stopped its smartphone manufacturing in China in 2019, and its TV and PC factory in 2020. Its global production is now based in Vietnam. The revenue of Samsung Vietnam is equivalent to roughly 20% – 25% of Vietnam’s total GDP in 2021 and the company is also a main contributor of FDI flows from South Korea.

              Nike

              Nike’s suppliers have been relocating production to Southeast Asia and Africa for a few years. The brand used to have much production in China with an estimation of 35% in 2006 but the brand has reduced its dependence on Chinese suppliers. In 2021, 51% of Nike’s shoes were made in Vietnam while only 21% were made in China.

              Adidas

              Nike is not the only apparel and footwear giant to shift its production location. About 25% of manufacturers for Adidas in China were shut down as foreign businesses stopped their partnerships with Chinese factories. The reason behind this was the penalty tariffs due to the trade war. Opportunities, therefore, open for counterparts in Vietnam, Thailand, Bangladesh, and Indonesia thanks to low-cost benefits.

              HP

              HP, Dell, and other tech firms planned to reallocate up to 30% of their notebook production out of China. HP has reportedly planned to shift 20%-30% of its Chinese production to Taiwan and Thailand to mitigate the risks of rising costs and disruptions, the US tariffs on tech products also reduced profits.

              Considerations before moving manufacturing from China

              It’s undeniable that China is still crucial for the global value chain, and the country has significant advantages that makes it competitive for manufacturing. Let’s review some important items to consider before relocating manufacturing from China to Southeast Asia.

              Manufacturing capabilities

              It’s easier to say what products cannot be manufactured in China than the other way around. Anything from clothing, machinery, electronics, telecommunication equipment, vehicles, and chemicals are produced here. Not only can you find products that require labor-intensive manufacturing at low costs, but also advanced manufacturing.

              Manufacturing is also concentrated to different regions such as Guangdong province being particularly strong in electronics manufacturing, just to give an example.

              Experience with foreign companies

              Chinese suppliers are flexible and generally more experienced in working with foreign customers. They are nimble, fast, and understand Western standards well. The availability of skilled labor in China still also outweighs other Southeast Asian countries. It’s easy to come across suppliers who happily provide both OEM and ODM products, according to customers’ specifications.

              The business ecosystem and mature supply chain

              The supply chain in China has developed for decades. Foreign companies rely much on Chinese suppliers that are located. Therefore, moving out of China means moving the entire manufacturing and network from the country, which takes a great deal of effort, time, and money. Moreover, manufacturers around the world still depend a lot on Chinese raw materials and semi-final products. For example, clothing producers from Vietnam and Bangladesh must import most of their fabrics and threads from China; European manufacturers of cars must import wiring from China. This ecosystem makes China dominant in global manufacturing.

              Relocation costs

              With the strong concentration of manufacturing in China, relocations to other countries requires much capital and resources. Simply speaking, if you have your factory set up in China and want to shift to Vietnam, much capital is needed to set up a new factory, recruit workers, train the workers, send specialists to Vietnam for quality controls and inspections. You also have to add the work needed to deal with local authorities to get approvals and relevant certificates prior to operations.

              China’s consumer market

              Some enterprises hesitate to move from China due to its large consumer base. With a population of 1.4 billion, China remains the biggest consumer market for many products. If a company already has manufacturing in China, it is also easier getting access to the domestic market and to distribute products locally.

              Otherwise, you would need to export the products to China, which comes with tariffs, customs clearances, additional shipping costs, and more.

              What countries are companies moving to in Asia?

              While China will remain an important manufacturing destination, there are a handful of countries in South and Southeast Asia that gain much attention. Let’s review the most notable ones.

              Vietnam

              Vietnam has traditionally attracted companies in furniture and textile production. Nowadays, multinationals set up production for more advanced products, including electronics, telecommunication equipment, and machinery. The benefits of choosing Vietnam as a manufacturing destination include its low labor costs, many trade agreements, enhanced manufacturing capabilities, and large labor pool. Even if Vietnam won’t replace China as a global manufacturing hub, it gains significantly as companies seek to diversify and set up manufacturing operations here.

              Indonesia

              With a population of 275 million, Indonesia is the most populous country in Southeast Asia and with a workforce of around 135 million. With rapid urbanization and a median age of 29.7, the country is set to become a leading manufacturing hub in Asia.

              Its domestic market is expected to see great growth as disposable incomes increase and more people get access to smartphones, the internet, and modern financing options. At the same time, the country struggles with infrastructure issues, red tape, and regulations that tend to be unclear and change frequently.

              India

              The manufacturing industry is India’s most important. ‘Make in India’ is a program to put India on the map as a manufacturing hub and attract more businesses and investors. India’s main products includes automobiles, chemicals, clothing, consumer electronics, electrical equipment, furniture, heavy machinery, refined petroleum products, and ship building.

              Notably, India has lower labor cost compared to China, yet you will have to deal with a weaker infrastructure, inefficient transport system, and lower domestic consumption.

              Summary

              In general, companies are moving from China due to the increased labor costs, supply chain disruptions, and trade war. At the same time China faces these issues, other countries like Vietnam, Indonesia, and India become more interesting and capable.

              If you are considering a relocation from China, you should consider relocation costs and inefficiencies in new markets, not only looking at labor costs. China also possesses a business eco-system that cannot be replicated in the short-term.

              Southeast Asian suppliers highly rely on imports from China, which drives logistics costs and final prices, so these rising countries can be one of the sourcing bases but cannot completely replace China.


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                Electronics Manufacturing & Sourcing in China: An Introduction

                Assembling electronics in a Chinese factory

                 

                China has dominated electronics manufacturing for decades. Despite the recent trade with the US and Covid restrictions, China remains a crucial manufacturing destination for electronics. It exports almost half of the cellphones and laptops globally and produces many of the subcomponents used for manufacturing elsewhere. In this article, we review China’s electronics manufacturing industry, what the benefits are of sourcing electronics here, and what other alternatives you have.

                China’s Electronics Manufacturing Industry

                China is the biggest manufacturing hub of electronics globally with much of the production centralized to the Southern region.

                It all started around three decades ago when the government took the advantage of its large labor pool and low labor costs. As automation is applied in most cutting-edge production facilities, the manufacturers also benefit from China’s rapid development in infrastructure and innovation. It remains a key trade partner to all developed economies and is the biggest exporter of electronics to the US, accounting for more than one-third of US’s imports.

                Another reason that helps China to maintain its position in the electronics manufacturing sector is the availability of sub-components. Manufacturers save much on sourcing components locally as these can be supplied domestically. As a result, foreign companies find it difficult to relocating production overseas as they will lose access to these suppliers and face additional logistics costs.

                What electronic products are made in China?

                China produces a large variety of electronics products, it’s easier to explain what electronics that cannot be found here. This ranges from consumer products to industrial components. Factories are primarily located in cities such as Shenzhen and Dongguan in the South, but also in Chongqing and Shanghai. Below you can find examples of electronic products that are widely produced in China.

                Cellphones

                Many global mobile phone brands such as Huawei, Xiaomi, and TCL are originally from China. These brands established strong manufacturing capabilities locally, before expanding sales and manufacturing activities overseas. Naturally, this has benefitted local suppliers of related components, including chips and transistors.

                In addition, China is well-known for having a large rare earth elements reserve (44 million tons out of the global reserve of 120 million tons). These are crucial to produce electronic components, particularly cellphones. The availability of the materials ensures that domestic Chinese manufacturers enjoy a relative advantage over foreign manufacturers.

                Computers, laptops, and accessories

                It’s estimated that China manufactures 90% of the laptops globally and where domestic businesses are capable of supplying most of the components. At the same time, there has been an effort from the government to close the technology gap from foreign manufacturers, especially for semiconductors.

                Despite the reliance on imported semiconductors, China is still an attractive option for world-class laptop brands to set up production. Chongqing and Kunshan are known as the two largest clusters of laptop production, in addition to other well-known electronic manufacturing hubs, such as Shenzhen and Dongguan. Not only laptops, but also components and accessories can be sourced in these areas.

                Much of the electronics production is concentrated which eases the sourcing process and creates synergies.

                Benefits of Sourcing Electronics in China

                We have touched on China’s electronics industry and what kinds of products are manufactured here. Let’s review the underlying reasons behind this.

                Low labor costs and large labor pool

                Despite its increasing wages, China is still considered a low-cost country for sourcing. With wages that are around three times higher than Vietnam on average, companies still see China as a crucial for manufacturing, thanks to its developed supply chains and infrastructure. Relocating production is easier said than done and sometimes not feasible due to other challenges.

                Wages are obviously higher in and around the larger cities like Beijing and Shanghai along the East coast. Some manufacturers therefore target cities and provinces in the central areas, as well as in the South.

                Skilled workforce

                Given the well-established foundation of the manufacturing industry, foreign manufacturers believe that Chinese workers are more skilled compared to competing countries, like Vietnam or Indonesia. With a population of more than 1.4 billion people, 14% are considered skilled workers (approximately 200 million people) 3.6% highly skilled (approximately 50 million people.

                Large reserves of rare earth elements (REE)

                As mentioned, China has the largest reserve of RRE in the world. Although China accounts for roughly 37materials, These elements are important to produce electronic products, rather and wideused in components such as computer hard drives, flat-screen monitors, electronic displays, and more.

                Developed supply chain

                China has built a business eco-system that cannot be found elsewhere in Asia. Its developed supply chain benefits manufacturers in both procurement and distribution processes.

                As mentioned, domestic Chinese companies can provide most of the components used in electronics, which helps manufacturers to lower logistics costs. Apart from savings in logistics costs, the shorter lead times lower the required working capital, which relieves the financial burden for businesses.

                Besides, the transportation infrastructure is comparably high to Southeast Asia. To give an example, four of the five largest seaports in the world can be found in China. In 2019, China handled more goods volumes than all other East Asian and Pacific countries combined. Shanghai port is the only one that can manage volumes of more than 40 million TEUs a year since 2018.

                The many large seaports are located alongside the coastal line, making it easy for domestic and foreign manufacturers to reach global ocean shipping lanes.

                What are the disadvantages of sourcing electronics in China?

                Despite the many advantages of sourcing electronics in China, there are some drawbacks you should be aware of. Manufacturers of electronic goods should understand the following disadvantages.

                Communication issues

                Foreign companies often encounter communication issues when working with Chinese suppliers. This is a reason why many companies set up local organizations with staff that can reduce the risks for miscommunication.

                With that said, China has improved from having “low efficiency” to a “moderate efficiency” in the English language recently, which is a positive sign in the favor of the global companies. However, the business culture is still largely different from Western ones.

                It’s important to employ local persons who understand the Chinese business culture and that can communicate swiftly.

                Perception of Chinese quality

                Chinese brands still face a stigma regarding product quality, even if this has changed much in recent years. Huawei is one example where the product quality is almost on par with that of Apple yet being offered at significantly lower prices.

                We see more Chinese brands entering the global market and that receive positive feedback from foreign consumers. Examples include Xiaomi, OPPO, Huawei, and Lenovo that sell everything from cellphones, laptops, and robot vacuums.

                Shipping costs and lead times

                We’ve seen major supply chain disruptions in recent years, primarily due to the container shortages and Covid outbreak in China. The shipping rates for containers from China increased by ten times compared to pre-Covid levels. This has resulted in near sourcing and diversification trends where increasingly more companies seek to relocate production to Eastern Europe or Mexico, or Southeast Asia.

                In addition to the skyrocketing prices, have also affected companies’ future procurement strategies. Before the pandemic, it took roughly forty days to ship goods from China to the US. In the first half of 2022, this figure reached seventy to eighty days.

                Alternative Markets to Source Electronics in Asia

                Due to increased wages and supply chain disruptions, increasingly more companies seek to diversify manufacturing to Southeast Asia. Below you can find alternative markets in Southeast Asia that should be of interest when sourcing electronics in Asia, and what the benefits are.

                Malaysia

                Electronics manufacturing contribute much to the exports of Malaysia. Particularly global brands from countries like Germany, Japan, and South Korea have manufacturing activities here. Examples of products produced include computers, semiconductors, and cameras where its semiconductor production gets much attention.

                Surprisingly, labor costs are lower in Malaysia on average and blue-collar workers earn around 500 – 800 USD per month. In China, on the other hand, the average salary is more than 1,000 USD per month. Hence, Malaysia’s competitive labor costs, at least when compared to China’s, is something that should be considered.

                India

                Another interesting market for electronics manufacturing is India. Factory workers earn roughly 300 USD per month, which is 3-5 times lower compared to China. India also has a labor pool of 500 million people, which is competitive. Yet, a disadvantage is the significantly low participation of women in its labor force, which is one of the lowest in the world.

                More companies have moved manufacturing to India in the last years, the government also shows an aggressive approach to promote the country as an alternative market to China. The Production Linked Incentive (PLI) schemes launched in early 2020 allows manufacturers to receive cashbacks if products sold are locally produced. The electronic sector is one of the key focuses, with an incentive of up to 5% of the sales of goods that is manufactured in India.

                As a result, dozens of companies pledged to set up mobile phone manufacturing facilities in India, with investments totaling around 1.5 billion USD. Global electronic giants are also showing their long-term commitment to India. Samsung completed the establishment of their display manufacturing factory in India in 2021. Nokia started to produce 5G equipment in India in late 2020. Foxconn, a Taiwanese contract manufacturer, plans to invest 1 billion USD to upgrade and expand its factory in Tamil Nadu. This is one of the two plants of Foxconn that assembles products for Apple and Xiaomi.

                Conclusion

                Even if China is still a major producer of electronics, it sees increasingly more competition from other Asian countries. It’s crucial for electronic companies to review their current reliance on China, global trends, establishing a long-term vision to produce electronics.

                India and Southeast Asian countries are growing as alternatives to China. India, Malaysia, and Indonesia are all promoting attractive investment schemes to attract foreign manufacturers that shift production from China. Apart from the general strengths of each country, the manufacturers are also suggested to consider the tariff for products imported to overseas markets.

                Vietnam, for example, has a free-trade agreement with the EU, and a bilateral trade agreement with the US. At the same time, trade agreements are being discussed between the EU and Indonesia and the Philippines.


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                  Clothing Manufacturing in China: An Introduction

                  Worker in a Chinese clothing factory

                   

                  China is the world’s biggest supply market and the first country that comes to people’s minds when discussing manufacturing. Clothing is one of the main strengths of China, with the main export market for Chinese clothing products being the U.S, EU, and Southeast Asia.

                  In this article, we give you an overview and trends in the clothing manufacturing industry in China and review the clothing products and the regions in which they are produced the most. We will also tap into the advantages and disadvantages of sourcing apparel in China.

                  We finalize the article by suggesting some alternative destinations in Asia for clothing products.

                  China’s Clothing Manufacturing Industry

                  As the world’s largest clothing manufacturer for more than a decade, China accounted for more than half of the global apparel production.  The country has a revenue of 303 billion USD in 2021 from the apparel market.

                  Guangdong province is the hub of clothing production, with more than 28 000 exporting enterprises located here. In solely the first quarter of 2022, the province’s clothing manufacturing already contributed 6.3 billion USD value of export.

                  However, since 2015, the clothing sector of China started to show a more sustainable trend, slowing down its expansion on the scale and focusing more on technology to raise productivity. The main motive behind this shift is the rising labor cost, which forces businesses to transform from labor-intensive practices to better-automated ones.

                  Another significant trend in China’s clothing industry is the growth of domestic demand. Thanks to rising income, Chinese consumers are now more willing to spend more on clothes and to buy from local brands. Therefore, the Chinese clothing manufacturers are also seeking more opportunities in the domestic market rather than depending on exporting.

                  Cities and Regions with Clothing Manufacturing in China

                  It’s not an exaggeration to say that almost all clothing products are made in China. There are around 50 textile clusters in China. Guangdong, Shandong, Zhejiang, Fujian, and Jiangsu are the 5 provinces that account for 70% of the country’s total textile production. In this article, we will list out the main manufacturing regions for clothing and the most produced products in those regions so that you can save time when searching for suitable suppliers in China.

                  Guangzhou

                  Guangzhou is a city in Guangdong province. The city has had its reputation for apparel for a long time with a large fabric market – The Guangzhou International Textile City. In Guangzhou, you can find suppliers for men’s, women’s, and children’s apparel, trousers, sportswear, and even replica clothing. In adjacent to Guangdong, Nanyou also possesses a wholesale clothing market for high-end ladies’ clothing.

                  Xintangzhen

                  Xintangzhen is a town in Guangdong province where you can find a great number of suppliers for jeans wear. More than 5,000 denim clothing enterprises and factories are located here. It is estimated that the daily output of the town is 2.5 million pieces of jeans wear. This number is equivalent to 60% of the whole country’s denim production capacity. Products from Xintangzhen are exported to the U.S, E.U, Russia, and many other countries.

                  Dalangzhen

                  As mentioned, Guangdong province is a big hub for apparel, and Dalangzhen is another town in Guangdong with a reputation for clothing. The specialization of the town is knitwear. The largest wool wholesale market in China is in Dalangzhen, with more than 17 000 wool market entities operating in the town. One in every 6 sweaters in the world comes from Dalang, so if you are looking for a good factory that can provide sweaters, cardigans, socks, or woolen mufflers, Dalang is the right place to start.

                  Huzhou

                  Huzhou city is in Zhejiang province. Zhili town in Huzhou is home to the largest children’s wear industrial zone in China. The town currently has more than 14,000 children’s wear companies. In 2020, the annual output of children’s clothing in the town exceeded 1.45 billion sets, generating about 10 billion USD in sales revenue. Generally, the children’s clothing of Zhili focuses on low and middle-income households, but it is also not hard to find high-end children’s clothing manufacturers here.

                  Suzhou

                  Suzhou is a city in Jiangsu province, and the Huqiu district in Suzhou is famous for making wedding dresses. Roughly 90% of wedding dresses exported from China are from this district. There is A Wedding Dress Market here, with good quality products and diverse designs for any brides to choose from. Experience shows that it is cheaper to come and buy directly in the district than to shop online. Besides Suzhou, Xiangcheng and Jinchang city also provide wedding clothes.

                  There are other cities in China that you can also refer to when looking for clothing producers, such as Hangzhou (in Zhejiang province), Humen (in Guangdong province), and Shishi (in Fujian province). They are mostly located in the East coast regions of China.

                  Benefits of Sourcing Clothing Products in China

                  Sourcing clothes from China gives businesses multiple advantages. We will explain some of the main reasons to find your suppliers in this big market: good experience and capacity, customization ability of suppliers, and an established business eco-system.

                  Experience and Capacity

                  Chinese clothing producers, with often 10-15 years in the industry, are very experienced in both manufacturing and exporting. You will not find difficulties in looking for a well-built factory with an understanding of the U.S and EU markets’ standards and certifications, as these two markets have long been the main markets of Chinese clothing products. The factories are mostly built for scale with good equipment, and the capacity for large orders.

                  Customization

                  If you do not specialize in designing, it’s important to find a supplier that can customize their products based on your rough ideas, or you might waste a lot of time and money explaining back and forth with the traders and the traders may misunderstand and deliver a different idea to the factories they find. Wholesale clothing manufacturers in China usually own a professional research and development team. Therefore, you can discuss your product concepts with them directly and it is much easier to work on adjustments later. The ODM and OEM services are available in most Chinese factories.

                  Mature Supply Chain and Business Eco-System

                  As a result of its long clothing manufacturing history, China has an ecosystem of businesses. If a manufacturer needs to import or source its raw materials and machinery from far away suppliers, the shipping cost will add up significantly to the final product’s price. Moreover, the lead time will be longer with the risk of disruption in the supply base. Factories within one industry are often placed close to each other. Therefore, it’s undeniable that the availability of components, the supporting systems, and the maturity of the supply chain are the advantages that no other country can compete with China.

                  What are the disadvantages?

                  In recent years, wages are higher in China and increase at a faster pace than in its Asian peers. In Vietnam, salaries are around a third on average compared to China and increase slower.

                  A second issue is a long transportation lead time to Europe and the US, and the currently high freight costs. Due to recent supply chain disruptions and the COVID pandemic, some companies find it unbearable to produce in Asia, turning to nearshoring, at least partly.

                  The ongoing trade war with the US has hurt both countries. Imposed tariffs have encouraged foreign companies to look for alternative markets, and to outsource at least parts of their production.

                  Alternative Markets for Clothing Manufacturing in Asia

                  With those concerns over sourcing in China, many enterprises now consider moving their production facilities or changing to suppliers in other countries in Asia. With clothing products, the most suitable alternatives are Vietnam, India, and Bangladesh.

                  Vietnam

                  Vietnam hosts the facilities of Nike, Adidas, and The North Face; a large percentage of Mango, G.A.P, H&M, and Zara clothes are also made in Vietnam. The country has the advantage of low labor costs, proximity to China for raw materials, favorable geographic position for shipping, and multiple free trade agreements for tariff exemption.

                  India

                  India, with a population of 1.3 billion, has a massive pool of workforce to support manufacturing industries. The country is also big in raw material production as the second-largest player in the world cotton trade.

                  Bangladesh

                  Bangladesh has the lowest wages of these 3 countries. Workers are experts in processing bulk orders and fast delivery, explaining why fast fashion brands like Zara prefer Bangladesh. The industry benefits from the domestic supply of cotton.

                  Summary

                  China has maintained its position as the world’s manufacturing hub of clothes for decades. This has allowed the country to build up superior supply chains and a business eco-system that is hard to relocate elsewhere.

                  Different regions of China specialize in different clothing products, so knowing the right regions will save you a lot of time and effort when searching for suppliers.

                  The manufacturers are moving towards more automated manufacturing and focusing more on domestic markets, yet there is still ample room for exports.

                  If you consider diversifying your supply base and being less dependent on China producers, we recommend considering Vietnam, India, and Bangladesh for clothing products.


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                    by Asia Perspective Asia Perspective No Comments

                    The Cement Industry in Asia: Major Producers & Trends

                    Cement factory in Thailand

                     

                    The cement industry plays a vital role in infrastructure development and urbanization drives the demand for cement greatly. Concrete is currently the second-most used substance on the planet after water, which explains its importance.

                    In this article, we review the cement industry in Asia and what countries account for much of the exports and the consumption. We will also explain current issues that governments work actively trying to resolve, and how these affect the markets.

                    The Cement Industry in Asia

                    Production and consumption of cement are largely concentrated in Asia, accounting for 73% of the output globally and a consumption of 81%. Yet, the cement production industry is also facing a capacity surplus due to lower demand from the construction industries.

                    The largest producers of cement include China, Vietnam, India, and Indonesia where China produces and consumes the most by a big margin. In Southeast Asia, there is a large gap between Vietnam and the second-largest cement-producing country, Indonesia, which has 15 integrated plants and 66 million metric tons of production per year.

                    Thailand, the Philippines, and Malaysia all also possess large cement markets, despite not being as big as the above-mentioned countries.

                    The EU imports the most cement from China, Thailand, and the Philippines, while Vietnam is in the top 5 exporters of cement and clinker to the US. Having said that, both the EU and the US aren’t dependent on cement from Asia as most of their cement producers operate on a global scale and can provide enough for the domestic markets.

                    Worth highlighting is also the close ties between the US, Mexico, and Brazil, where the latter have large-scale cement manufacturing.

                    In recent years, China has tried to cut down on cement production due to environmental issues. It’s said that if the cement industry was a country, it would be the third-biggest polluter in the world, after the US and China. The governments of Vietnam and Indonesia have also implemented measures to counter the surplus of cement capacity with new regulations that limit new cement investment projects. The new regulations and limits will also help to reduce the cement output, preventing oversupply and increased competition among suppliers.

                    What countries are the biggest cement producers in Asia?

                    Four of the ten biggest producers of cement globally can be found in Asia, as well as the world’s biggest exporter of cement. Keep in mind that we must make a distinction between “producers” and “exporters” as countries like China consume much of their locally produced cement.

                    Vietnam

                    Vietnam is the biggest exporter of cement globally with an export value of 1.4 billion USD in 2020, equaling 12.5% of the global cement exports. Clinker is a nodular material used as a binder in cement products, and Vietnam also exports this product in large quantities.

                    Vietnam exports around 10% to 15% of its cement, having China, the Philippines, and Bangladesh as its biggest trading partners. China doesn’t have a shortage of cement, yet the cost for Chinese producers to transport products to the coastal region is higher than importing from Vietnam. This explains why China remains the biggest importer of Vietnam’s cement and clinker for many years, accounting for 57% of the total export volume.

                    At the moment, Vietnam faces an oversupply of cement. While the current domestic demand is around 65 million tons, the industry’s capacity has reached nearly 107 million tons. The situation is particularly serious in the North of Vietnam, which will increase its dependence on the export market.

                    China

                    China is the biggest cement producer, consumer, and importer in the world. It produces almost 60% of the world’s cement and accounts for most of the colossal carbon footprint of the industry. In 2020, the production volume reached almost 2.4 billion metric tons. To match China’s urbanization need, the domestic production of cement grew rapidly between 2002 and 2014.

                    However, the demand for cement is expected to decline due to the shift from mass urbanization to more sustainable infrastructure, along with the slowdown in the Chinese real estate market. Therefore, the country is reportedly trying to limit cement imports.

                    In addition to restricting imports, China has a plan to cut down on cement production as the manufacturing process requires much coal, which emits CO2 and dust. This causes a negative and long-lasting impact on the environment. This is part of its five-year plan to reach the CO2 emission reduction goal.

                    India

                    Being the second-largest cement producer with 7% of the global installed capacity, India has a positive outlook on its cement industry. Until February 2021, India’s overall cement production reached 262 million metric tons in 2021, which is around 10% of China’s.

                    The demand for housing in rural areas and the Indian government’s strong focus on infrastructure development will drive the cement production to double-digit growth. Examples of infrastructure development projects include the goal of creating 100 smart cities, expanding the capacity of railways, and adding 125,000 km of roads in the coming five years. We will also see an increase in storage and handling facilities to reduce transportation costs. The demand for cement will remain high for at least until 2030.

                    South India is the main hub for cement production that has several big producers, accounting for 33% of India’s total output. On the international trade aspect, India exports mostly to Bangladesh, Sri Lanka, and Nepal, while it imports much clinker from Vietnam.

                    Indonesia

                    Indonesia is an emerging exporter of cement, having a production volume of around 66 million metric tons of cement in 2021. It’s rapidly increasing exports of cement and clinker where Bangladesh and the Philippines are major importers of clinker, and Mauritius and the Maldives are the biggest importers of its cement.

                    The cement industry is dominated by four major producers, including the state-owned Semen Indonesia, which has a 44% market share. The other major producers include Indocement Tunggal Prakarsa, Holcim Indonesia, and Semen Baturaja.

                    Like Vietnam, Indonesia also struggles with an oversupply as domestic consumption only accounts for 60% of its production capability. Despite the massive infrastructure projects across the country, the low utilization rate results in inefficiencies that have hurt many cement producers.

                    Summary

                    Asia has four of the ten biggest cement producers globally, including China, Vietnam, India, and Indonesia. While Vietnam exports much of its cement, China consumes much of its locally produced cement and where most of the supply is allocated to the construction industry. Worth highlighting is also the overcapacity that countries struggle with, including Vietnam, which will result in the need for more exports.

                    At the same time, Europe is facing a crisis due to a shortage of building materials, which is partly related to the increased energy costs. Turkey and China have traditionally been interesting supply markets for such products, but we might well see Southeast Asian countries becoming new options for foreign companies.


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