China emerging market for semiconductor, electronics exports

BY MARICEL E. ESTAVILLO, BusinessWorld Reporter Electronics and semiconductor exports to China in 2005 reached a record high of $3.5 billion, a 70.4% increase from $2.1 billion in 2004. China has now become the third biggest destination for electronics and semiconductor exports, accounting for 13% share of total exports in 2005 at $27.3 billion, according to latest data from the National Statistics Office. Industry exports to China in 2005 even exceeded those to the United States -- now at fourth among the top exports markets -- at P3.3 billion, a 15% growth from $2.9 billion in 2004. The US had been the top destination of semiconductor and electronics exports for the longest time. For instance, in 2001, 26% of industry exports went to the US, 22% to Europe, 11% to Japan, 17% to ASEAN (Association of Southeast Asian Nations and 21% to other parts of Asia, including China. Now, Japan is at the top spot for a 17.8% share or $4.8 billion worth of exports. But total exports value to Japan in 2005 fell by almost 14% from $5.6 billion in 2004. Japan is followed by the Netherlands at 12.94% share or $4.8 billion, a 12% increase from 2004 and Hong Kong was fifth with 10.46% or $2.9 billion, a 7.19% increase from 2004. Aside from Japan, 12 countries in the top 20 destinations for semiconductor and electronics exports also posted year-on-year decline in exports value. Amid the market decline, the country still managed to post 2.1% growth in exports last year from $26.7 billion in 2004, an indication that the market might have shifted to China. "I did not see any dramatic change in our customers last year. What happened was that some of the exports to these markets that posted decline were transferred to China," Arthur J. Young, Jr., president of industry group Semiconductor and Electronics Industries in the Philippines, Inc., told BusinessWorld in an interview. In absolute figures, the 70% gain in exports to China is equivalent to $1.5 billion in fresh exports, while the 14% decline in Japan is equivalent to some $800 million in losses. Companies that set up plants in China are the same US or European companies that previously sourced industry materials from their headquarters or plants in other countries, but with the opening of their plants in China they started to source directly from China. Asked whether the trend is posing a threat in that multinational companies will eventually go to China, Mr. Young said, "China is positioned for high-volume production while the Philippines is good in processing complex manufacturing projects. I don’t see companies here closing shop in the semiconductor side, but on ’board stuffing’ there is a possibility [that this activity may transfer to China]." Board stuffing refers to general electronics manufacturing minus the production of semiconductor chips or chip production. Chip production accounts for some 49% of the industry’s exports last year. While China is now the world’s preferred site for manufacturing, Mr. Young said there are still some concerns in the Chinese investment environment. Mr. Young is also the chairman and chief executive of Nasdaq-listed semiconductor company PSi Technologies, Inc. Aside from its two manufacturing plants in Taguig City and Laguna, PSi is running a 3,809-square meter manufacturing plant in Chengdu City, one of China’s nine export processing zones. "Language is the primary issue in China. Because of the language barrier, it is very difficult for workers to immediately adapt to changes and for companies to start projects fast. Filipinos are more flexible," Mr. Young said. Work force turnover is also becoming an issue in China with an estimated 100 companies operating in the semiconductor and electronics sector alone.