Transcript Diapositive 1

Offshoring Patterns to China:
Evidence from the Electronics
Industry
Ari Van Assche
Department of International Business
HEC Montréal
Fear of China Inc.
Goal of Presentation
• Is China merely a low-tech assembler or
is it turning into a high-tech competitor?
• Evidence from the electronics industry
will be used to answer this question.
• Implications for North American
electronics firms will be discussed.
Evidence for high-tech competitor
hypothesis
• Schott (2005): « China’s export bundle
increasingly overlaps with that of more
developed countries, rendering it more
“sophisticated” than countries with
similar relative endowments. »
• Rodrik (2006): «China has somehow
managed to latch on to advanced, highproductivity products that one would not
normally expect a poor, labor abundant
country like China to produce, let alone
export.»
Rodrik (2006)
• Created indicator EXPY that measures
income level associated with a country’s
export basket.
– Identification of income level associated
with each product.
• Tropical agricultural goods poor
• Complex manufacturing goods rich
– EXPY is weighted average of these
values for each country.
China’s export bundle is that of a country with an
income-per-capita 3 times higher than China’s
Source: Rodrik (2006)
CAGR 1980-2000 of China’s electronics
export 2.5 times higher than world
50
45
40
35
30
25
20
15
10
5
0
World
China
China’s share in world electronics exports rising
Electronics trade significant
portion of China’s total trade
30
25
20
15
10
5
0
Electronics exports Electronics imports
as share of total
as share of total
exports
imports
BUT: Evidence not inconsistent
with low-tech assembler hypothesis
Suppose that China:
(i) imports «rich» components from
more developed countries.
(ii) uses cheap labor to assemble
«rich» final goods for exports.
Can explain why China’s exports
seem sophisticated even though
their production techniques might
not be.
Low Chinese value added
• Chinese value added accounts for only
15% of the value of exported electronics
products (Lardy, 2005).
• The rest is import content.
Data and Methods
• To further explore this hypothesis, I have
extracted Chinese electronics trade data
(SITC 75, 76 and 77) from Feenstra’s
world trade database:
• Data divided into:
– Trade in electronics components
– Trade in electronics final goods
Trade balance = Exports - Imports
Trade balance = Exports - Imports
Taiwan Inc., not China Inc.
• In 2003, foreign invested enterprises
accounted for:
– 92% of China’s exports of computers,
components and peripherals
– 74% of exports of electronics and
telecom equipment.
– 64% of China’s processing exports
• Taiwanese companies responsible for
60% of China’s electronics exports
(Economist.com, January 13, 2005).
More than 80% of high-tech exports in 2003
clustered in Yangzi and Pearl River Delta
Pearl River Delta
GDP Per Capita 4.2x national average.
Yangzi River Delta
GDP Per Capita 2.8x national average.
In brief
• China’s coastal area has become a leading
location for the assembly of electronics,
mostly by Taiwanese firms that have
relocated their assembly activities to
China.
• These firms use China as an export
platform to the US, Canada and Europe.
Implications for China
• China’s electronics sector is a lot less
high-tech than it looks. Most Chinese
electronics exports just assembly jobs.
• China’s industrial upgrading not
necessarily faster than other countries
with similar endowments.
Taiwan Inc.: Friend or Foe?
• In 1990s, North American electronics
firms have en masse outsourced their low
margin manufacturing capacity to
specialized contract manufacturing firms.
– Between 1990 and 2000, the share of CM
in electronics manufacturing has risen
from 0% to 13%.
• Who did they outsource to?
Taiwan Inc. as middlemen
• Circuit boards and final product assembly
outsourced to North American CMs
• Assembly of notebook computers
outsourced to Taiwanese companies such
as Quanta, Compal, Inventec, Hon Hai
and Acer.
Implications for North American
firms
• Strong division of labor and partnership
between North American, Chinese and
Taiwanese firms:
– U.S. Inc.
– Taiwan Inc.
– China Inc.
Architects
Middlemen
Assemblers
Source: UNCTAD
Implications for North American
businesses and consumers
• Offshoring of electronics manufacturing
to China has played important role in the
creation of the « New Economy » in the
second half of the 1990s.
• Feenstra et al. (2005) find that the trends
in electronics trade prices can explain part
of the perceived productivity growth
acceleration in the second half of the
1990s.