October 11, 2018

China’s grip on electronics manufacturing will be hard to break

Featuring Gregory C. Allen

Source: The Economist

The first floor is all about components: every type of switch, every cable and every screw can be found here, often in bags of thousands. The second floor is filled with circuit boards and small gadgets, from video cameras to headsets. The higher you go, the bigger and more sophisticated the devices get: smartphones, drones, hoverboards. On the top floor, the tenth, a blinding cornucopia of LEDs of every shape and colour assails the eyes.

The SEG Electronics Market (pictured) and similar places in the Huaqiangbei district of Shenzhen, a fast-growing city in southern China, an hour’s drive north of Hong Kong, have been described as sweet shops for hardware geeks. But they are better understood as showcases and sales offices for the thousands of factories in the city’s hinterland and elsewhere in China. The people at the markets’ booths are happy to sell you items in ones or twos, but they prefer to talk to much bigger customers on the phone.

Huaqiangbei’s markets are also a perfect symbol of how dominant China has become in the electronics industry. The country is the core of the sector’s global supply chain. Chips and other components pour in, mostly from other Asian countries; they are assembled in China; the finished devices are then sent all over the world. China is home to more than half of the world’s manufacturing capacity for electronics, estimates Henry Yeung of the National University of Singapore.

More than half of the world’s mobile phones are made in China, along with almost all of the printed circuit boards, the guts of any device. Chinese factories install two-fifths of the world’s semiconductors. Of the production facilities operated by Apple’s top 200 suppliers, 357 are in China. Just 63 are in America.

This dominance has shot up the political agenda—in particular, in the United States. America’s trade deficit with China and unfair Chinese practices, such as the forced transfer of intellectual property and even outright theft, are the main reasons why President Donald Trump has raised tariffs on many Chinese products. But American officials have other reasons for wanting companies to re-route supply chains. Growing strategic rivalry is one worry. And on October 5th the Pentagon warned that not enough attention had been paid to the security of the electronics supply chain. The day before, Bloomberg BusinessWeek, a magazine, reported that Chinese agents had managed to implant spy chips on circuit boards used by 30 American firms, including Amazon and Apple. (Both companies have strongly denied the story, although some experts, such as Greg Allen of the Center for a New American Security, a think-tank, say the scenario is plausible.)

Read the full article and more at The Economist.

  • Gregory C. Allen

    Adjunct Fellow, Technology and National Security Program

    Gregory C. Allen is an Adjunct Fellow at the Center for a New American Security (CNAS) Technology and National Security Program. Mr. Allen focuses on the intersection of Artif...