The Chinese electronic information industry under the global financial crisis

The Chinese electronic information industry under the global financial crisis

 

Released on 2008-11-18            Edited by CCOIC             Source:

 

The global financial crisis triggered by the declining American real estate market is sweeping the whole world and begins to exert influences on the Chinese economy. The conductive effect of the American financial crisis on the foreign trade and export of China is detectable now.

According to the latest data released by the National Bureau of Statistics of China, the GDP of China in the first three quarters of 2008 grew by 9.9%, representing a decrease of 2.3% than the corresponding period in the last year. It was the first time that the economic growth of China dropped to a one-digit number since 2006.

The shrinking overseas market demand is the primary impact on the macro-economy of China. The data of the National Bureau of Statistics of China also shows that the export growth dropped. The total import and export volume in the first three quarters amounted to 1.9671 trillion U.S. dollars, representing an increase of 25.2% than the corresponding period in the last year. The growth rate was 1.7%. among which, the export volume amounted to 1.0741 trillion U.S. dollars, representing an increase of 22.3% and falling back by 4.8%; the import volume amounted to 893.1 billion U.S. dollars, representing a growth of 29.0% and the growth rate increased by 9.9%; the trade surplus amounted to 181 billion U.S. dollars, representing a decrease of 4.7 billion U.S. dollars than the corresponding period in the last year.

According to the latest PMI in September, the export order index dropped to a decline section (48.8%); in the survey on 5,000 enterprises conducted by People’s Bank of China in the third quarter, the export orders fell back continuously as well, which dropped to the lowest since the exchange rate reform in Jul, 2005.

In terms of the external environment, the growth of the electronic and information industry is mainly boosted by foreign investment and export. Affected by the appreciation of the RMB and policies such as the two-tax integration, the development of foreign invested enterprises has apparently slowed down this year, playing a weaker role in boosting the development of electronic information industry. Besides, the labor cost is also rising, resulting in restrictions on the development of the electronic and information industry.

According to The Bulletin of the Electronic and Information Industry in China in Q3, 2008 released by the Ministry of Industry and Information Technology, the income from main businesses of large-scaled electronic information industrial players amounted to 410 million CNY, representing an increase of 20.5% than the corresponding period in the last year; the growth rate of value added increased by 21.9% than the corresponding period in the last year.

The main characteristics of the electronic information industry in Q3 are as follows:

I.        The growth of the whole industry has slowed down. Since last year, the growth rate of the electronic information industry has been slower than the average national industrial growth level. Although it bounced back slightly in the first half of the year, it dropped again in Q3. In September, the growth rate dropped by 1% than the corresponding period in the last year and 1.8% than that of the last year. In terms of different sections, the growth rate of the communication section was 8.4% lower than the whole industry, and the computer section is 5.2% lower than the national level. The falling of the growth rate is mainly caused by the global economic depression, the reform of the telecom section, and the slowing-down of the investment by domestic telecom operators. Both the domestic and overseas markets of the telecom section have apparently been in recession.

II.      The structural readjustment continues to be optimized. The growth of products with HD technology and high added values are still strong. The growth rate of laptop computers reached 31.3%, accounting for 27.3%, representing an increase of 5.7% than the corresponding period in the last year; the LCD grew by 10.8%, accounting for 39.9% among displayers, representing an increase of 10.4%.

III.    The economic benefits had a slight drop. The paid tax grew by 22.9% than the corresponding period in the last year, representing a decrease of 3.8%; among which, the growth rate of computer section was more than 10% lower than the average.

The main problems in Q3 are as follows:

I.        The external environment is playing a more important role in the development of the industry. The growth of the global economy is slowing down, resulting from the turbulent global financial market triggered by the subprime crisis in the U.S., and the sharp fluctuations of prices such as energy and raw materials. The growth of the export of electronic and communication products has declined in recent years. The growth rate has decreased from 40% to the current 20%, and the proportion in the export volume dropped from 38% in the year before last to 36%.

II.      The domestic labor cost has risen; the prices of energy and raw materials are fluctuating sharply; the comparative advantage of domestic investment is weakening; foreign investments are reducing, whose growth rate is apparently lower than domestic enterprises. From January to September, the growth of foreign invested enterprises was negative. The growth rate was 3% lower than that of the whole industry. Since the growth of the electronic and information industry mainly relies on foreign investment and labor export, the continuous decrease of these two sections has resulted in the lack of stamina of the development of the whole industry.

III.    The processing and trading enterprises are experiencing more difficulties. Affected by the external environment and the domestic macroeconomic control, the profit capability of electronic processing and trading enterprises are diminishing evidently. There is more pressure on survival. The main reasons are as follows: 1. The appreciation of the RMB, the tax reform, the implementation of the new Labor Law, the high prices of means of production in the first half of the year, and the fast increasing of production costs. For instance, due to the implementation of the new Labor Law, the labor cost of electronic producers is increased by 10%. 2. The prices of electronic products remain low. The income is not increased although the production volume is enlarged. For instance, the average sales price of cell phones decreased by more than 30% than that at the beginning of the year. The sales profit margin was only 3.1% among all the foreign funded enterprises from January to September, representing a decrease of 0.5% than the corresponding period in the last year, which is 1.9% lower than that of domestic funded enterprises. 3. There are more economic risks in the world; it is exceptionally difficult to explore the international market; there are less processing orders; export of products made of materials supplied by foreign firms has decreased by 30%.

Meanwhile, the conflicts in the structural adjustment in the electronic information industry are more prominent. On one hand, the technology in emerging industries such as IC and key components is under-developed. The development mode is that the raw materials are from abroad, and the products are sold abroad. The production mainly relies on import. In 2007, the deficit in only IC reached 104.2 billion U.S. dollars. On the other hand, since the upstream core technology is not competitive, the price competition is deteriorating, and the market share of domestic funded enterprises are shrinking hugely, which decreased from 68% to the current less than 30%, the growth of the income and efficiency of the cell phone industry is negative.

According to the reports of Southcn.COM, in Dongguan International Computer and Information Products Expo held on Oct 20, all the participants were not optimistic about the international demand of electronic products. Geng Nailiang, the Director of Office of General Affairs of the Neighboring Area Division of LiteOn Technology Corporation which has factories in Chang’an, Qingxi and Shijie, was not optimistic about the economy in the near future and was ready to cope with it via the cutting of employees and costs. It is estimated that the company will cut 20%-25% of employees, which is consistent with the reduction of company orders. It is also an epitome of the electronic processing industry in south China.

Large-scaled investment banks and insurance company spend hundred billions of dollars in upgrading equipment and network maintenance every year. IT industry has benefited a lot from it. However, according to surveys, 43% of enterprises in the world have planned to cut the IT expenditure in the latter half of 2008. 49% of IT departments in the finance section have planned to cut budgets. The global economic recession triggered by the financial storm has resulted in massive decline of profits, and salary and job cut in the IT section. 

According to a report released by the American government at the beginning of October, the number of employees in information industry in the U.S. in the past three months dropped after an increase of half a year. The number of employees in IT section in Q3 has dropped from 4.1 million to 4 million. The posts cut are mainly computer scientists, system analysts, support executives and software engineers, since the turbulent financial enterprises are the main market of IT section.

In October, Legend Group launched its fourth global job-cut plan since its acquisition of IBM. About 50 employees were fired in the global headquarter of North Carolina, the U.S. the global job-cut plan is not publicized yet. Its global speaks person said that the job-cut was related to the global economic recession. The plan shall be made in accordance with the regional economy. Prior to this, HP has declared that 24,600 employees are going to be fired in the future three years, accounting for 8% of the total staff number, which is mainly related to the acquisition of EDS. DELL announced its plan of 8,800 job cuts in June, last year. It announced to fire 1,200 staffs in February, this year, mainly the staffs in sales and support departments. ASUS announced recently that it would cut 5%-10% of employees in the first half of next year. YAHOO announced to cut 1,500 employees after releasing its undesirable performance report on Oct 22. Other IT giants are also announcing their job-cut plans, including GOOGLE, NVIDIA, and ebay.

According to the statistics of China Customs, the export of computers and telecom products amounted to 187,197 million U.S. dollars from January to September of 2008, representing an increase of 13.8% than the corresponding period in the last year; the growth rate declined compared with that of the last year, which was 24%. The export volume in September was 23,971 million U.S. dollars, representing an increase of 9.2%.

The export to the U.S. amounted to 40.98 billion U.S. dollars from January to September, representing an increase of 0.9% than the corresponding period in the last year, lower than the average growth. The export volume of September decreased 5.6% than the corresponding period in the last year. The growth of the export to other developed countries also declined, including the Netherland, Germany, Singapore, the UK and France.

It is evident from the above diagram that the growth rate is slowing down although the export volume of information products keeps growing. The growth rate of the quarterly export volume has declined from 30% in 2005 to the current 15%.

As to the impact of the global financial turbulence and unclear economic prospect on the demand of information products, research institutions generally hold the view that the demand shall be slowing down or the growth rate shall be slowing down at least.

Take the cell phone market as an example, Gartner estimates that the growth of the global cell phone market in 2008 will be 8%, only half of that of the last year; the sales of cell phones in the world in 2007 was 16%, about 1.15 billion. Gartner holds the view that since the sales volume of cell phones in Q3 was less than expected, the sales volume in Q4 will not be better. According to the Q3 report of Nokia, the biggest market share holder, the 117.8 million cell phones were shipped out in Q3, representing an increase of 5% than the corresponding period in the last year. However, it declined by 3% than that in Q2. The sales volume of cell phones of Sony Ericsson in Q3 dropped from 25.9 million in the corresponding period last year to 25.7 million. The quarterly net loss amounted to 25 million Euroes. As to Motorola, there was already a loss of 346 million U.S. dollars in Q2. It is estimated that it will not be better in Q3. The depression of these European and American cell phone giants is an epitome of the negative growth of the market. The sales volume of Nokia in Europe and North America in Q3 were 27.4 and 4.5 million respectively, representing decreases of 5.5% and 16.7% than the corresponding period in the last year, which were 29 and 54 million respectively. Although the sales volume in Asia Pacific, the Middle East, Africa and Latin America grew, it cannot offset the declined growth brought about by the European and American market. 

The Ministry of Industry and Information Technology estimates that the export prospect is not optimistic. The economic growth is uncertain due to the global financial crisis, the demand for IT goods in the global market is declining, and new trade protection and technical barriers shall grow, which will exerting more negative influences on the export.

Since the electronic information industry in China relies heavily on foreign trade and foreign invested enterprises account for a large proportion, special attention is needed in the influence of the declining global economy on the electronic and information industry.

Firstly, the export market should be diversified. Since the financial crisis triggered by the subprime mortgage crisis in the U.S. has mainly affected the financial system of developed countries and the overall market demand, there is still great potential in emerging countries, such as India, East Europe, Latin America and Africa. The domestic enterprises should be steered to explore these emerging markets through various means such as market research and taking part in local expos.

Secondly, in terms of domestic consumption, there are more opportunities than challenges. As a section relying heavily on foreign trade, the domestic demand of the electronic information industry needs to be enlarged. The “excessive” production capacity needs to be digested by domestic consumption. Enterprises should grasp the opportunity of Informationization and explore the domestic market to boost a steady growth of the electronic information industry. The Central Government has raised a new measure—the integration of industrialization and informationization, which will facilitate the reform of traditional industries and enable a new space for the industrial development. Meanwhile, the informationization in the countryside is being promoted. The Central Government is providing more support to boost the purchasing power of low-income population. According to the promotion plan of Household Appliances to the Countryside launched by the Ministry of Commerce and Ministry of Finance, tax refund shall be exercised in the rural households of three pilot provinces in Shandong (including Qingdao), Henan, and Sichuan for the purchase of four categories of products, namely, color TV, refrigerators (including ice box), cell phones and washing machines (the ceilings are 2,000, 2,500, 1,000, and 2,000 respectively). The tax refund shall be implemented in accordance with the export rebate of the products. The central finance shall shoulder 80% of the subsidy and the local finance shall shoulder the rest 20%. Household Appliances to the Countryside shall be launched in Inner Mongolia, Liaoning (including Dalian), Heilongjiang, Anhui, Hubei, Hunan, Guangxi, Chongqing and Shaanxi from Dec 11, 2008 to the end of Nov, 2012.

It is estimated that the policy of Household Appliances to the Countryside will boost the consumption of household appliances in the countryside. Meanwhile, we suggest that the personal computers should be included in the scope of Household Appliances to the Countryside as well. As an information tool rather than pure electronic goods, computers can enhance the interaction between people and computers. The former can release news on the internet and acquire purchase information, which will not only enhance the direct connection between the rural area and the outside world, but also facilitate the IT education of children. The financial subsidy is appropriate for the rural area since the availability of computers in the rural area is limited. Meanwhile, it is suggested that the government should provide more financial support to promote the informationization in the rural area, including subsidies on the internet services or even free internet services. The enterprises should develop more low-price computers customized for the rural area.

Thirdly, there are more new issues involved with the industrial management. The boundaries of industries are getting more obscure and information technology is gradually integrated into other sections. Meanwhile, the rapid IT development has enabled faster changes of roles in the industry chain, the upgrading of technologies and products and the washing out of enterprises are more frequent, which have raised higher requirement on the standardization and administration of these sections. For instance, the development of mimic cell phones is not neglectable in the cell phone section. The administration of the industry is facing new issues and how to regulate and steer the industry has become an important task. It is suggested that the impact of mimic cell phones on the economic security of the whole industry should be determined through researches to decide whether policy control should be implemented to maintain the normal development order of the industry.

(The source: China Chamber of Commerce for import and Export of Machinery and Electronic Products)