A Giant Comes to Life

Electronic News, August 13, 2001 by Rob Spiegel

Is China's fortune to become the dominant Asian player in distribution?

While most distribution industry experts agree that China will be the fastest growing market over the next five years, some believe it will even come to overshadow Japan.

There are a number of reasons China is expected to grow at a fast pace over the next few years. For one, the country is home to a quarter of the world's population. Secondly, it has become an inexpensive location for manufacturing. And, thirdly, the government is becoming more and more accommodating to global business. One distribution chief executive even stated that China will eventually come to dominate the world in electronics manufacturing.

"China is all of Europe and the United States put together times two," Angus Fraser, CEO of Farnell, said in a phone interview last week from a hotel room in Shanghai. Farnell is part of the Wetherby, England-based Premier Farnell. He added, "China is going to be an unbelievably important market."

Though some view China's government as problematic, it has become more open to development by global companies than its counterpart in Japan.

"China will become more accommodating to U.S. businesses than Japan has been," said distribution analyst George Perris, founder and president of Sierra Marketing of Rocklin, Calif. "Once you get a change of government in China, there will be a big change in doing business."

With Japan's reluctance to import foreign goods, many believe China will eclipse Japan as the dominant Asian market.

"China is as important, if not more important, than Japan," PerRIS said. "There's no question China will dominate Asia. Japan will someday look over its shoulder and see China gobbling up all of Asia's resources."

Other industry observers agreed that China is headed toward becoming the largest market in Asia. "Unquestionably China will become the dominate market in Asia," said Scott Leichtling, vice president of national and global accounts at Chicago based Newardk Electronics, a Premier Farnell company. "The labor source alone is mind-boggling. I do think it will surpass Japan."

A Cheap Source for High-Quality Labor

Part of the rational for viewing China as an important market is that it has become the next major production location in the evolution of electronics manufacturing in Asia. "Japan was a low-cost producer 20 or 30 years ago," Fraser explained. "Then Taiwan became the location of high-quality, low-cost production, then Malaysia. Now manufacturers are targeting China in their relentless pursuit of the lowest-cost country. I've just been to the Motorola factory outside Beijing that cost $1.5 billion to build."

Distributors have responded to China's growing potential by opening offices and investing in Chinese companies. "With Avnet's purchase of Sunrise (Electronics) and Arrow's moves, it's clear they see it as an important market," said Rob Damron, analyst at Tucker Anthony Sutro Capital Markets in Milwaukee. "They'll continue to look for acquisitions or partnerships in order to gain market share in China."

Premier Farnell is also moving more into China with R&D and MRO goods from both Farnell and Newark Electronics. "Premier Farnell has formed some close relationships with global companies, and we're constantly looking at where they are going to manufacture their products," Leichtling said. "A number of them are building their plants in China."

In the past, companies worried about the human rights issues in China. Now executives express confidence that China is overcoming its troubling past. "There are a lot of stabilizing influences in China," Fraser said. "Economically, they don't want to gamble. Working with the prosperity of the West will give benefits to China." Fraser noted he can already see the benefits from the growth of global manufacturing in China. "The average person is already benefiting. China is nothing like what you see in the media. It's stunning. I just flew into Shanghai this evening, and it's as if you're in downtown Los Angeles."

Leichtling pointed to two paths of development in China: one domestic and the other coming from companies outside China. "There are Chinese companies in manufacturing that we're becoming aware of, but just as importantly, U.S. and European companies have opened up manufacturing in China. And as they open their plants, distribution will follow."

Even though China is bustling with manufacturing development, Leichtling noted the country hasn't fully developed its infrastructure, which has become a challenge to distributors. "In terms of infrastructure, China is probably behind Mexico and Brazil. Getting products to their plants is critical, but they just don't have Fed Ex on 185. Many of their manufacturing plants are on dirt roads."

However, Fraser expressed optimism at China's ability to put infrastructure in place quickly. "The government is totally behind building. They're putting $2 billion into a new railway system and $2 billion into a new road system. They're driven."