China's slowing growth to hit IT manufacturing hardest

China's slowing growth to hit IT manufacturing hardest

Summary: Fall in industrial and investment output will affect IT firms which base their manufacturing in the emerging superpower, as government stimulus can lead to higher costs.

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As China's industrial production growth and domestic investments fall, IT companies with production bases in China will be most vulnerable, because stimulus measures could spur inflation and lead to higher labor costs.

Figures from China's National Bureau of Statistics on Sunday revealed China's sliding factory output and investment indicated slowing activity in its economy.

According to the data, China's value-added industrial output expanded 8.9 percent year-on-year in August, down from the 9.2 percent in July, its slowest rate of growth since May 2009. Investment in fixed assets also slowed, increasing 18.8 percent last month from a year ago, compared with the 20.4 percent growth in July.

The world's economic depression has cut back China's exports, and any stimulus measures by the Chinese government could spur higher inflation and labor costs, Kuninori So, partner and vice president of Japan at ROA Holdings, a research and consulting firm, noted.

Among Asian technology companies, those with manufacturing arms in China, will be the most drastically impacted, Bryan Wang, vice president and principal analyst at Forrester Research, noted.

A consumer electronics firm, whose flat panel display (FPD) comes from factories in China, may find its manufacturing costs increase due to the higher inflation and labor costs, he said.

However, So noted the impact on this sector may not be as adverse as expected. Major global IT makers today have their original equipment makers (OEMs) factories in Taiwan or Taiwanese companies, instead of Chinese ones.

The companies whose OEMs reside in Chinese factories, should of course watch out for the impact of inflation or elevated labor costs by any of the government's stimulus measures, So advised. The slowdown in China was caused not only by the depression of the world's financial markets but also its government's tight monetary policy, he added.

Shift production out, or change target customers
Companies should prepare themselves for the scenario where stimulus measure do kick in, So remarked.

IT companies whose factories are in China should consider leaving the mainland for alternative bases in the region to lower production costs, So advised.

Foxconn for instance, which has mainly located its facilities in China, is considering setting up a new base in Indonesia due to the country's low labor and operating costs compared to other nations, he said.

If slow growth in China persists, vendors should brace for this until early 2013, and reduce their dependence on the Chinese market and diversify their customer base further, Wang noted.

The Forrester analyst pointed out that under that a few Chinese cities have already embarked on massive stimulus measures. The city of Tianjin for instance announced a four-year, 1.5 trillion yuan (US$236 billion) investment in 10 industries including aerospace and biotechnology, while Chongqing announced it will invest the same amount in 7 industries such as automobiles, energy and advanced equipment, he said.

IT vendors can target these industries, which could benefit from the economic incentive projects, Wang added.

Topics: Tech Industry, Government Asia, China

Ellyne Phneah

About Ellyne Phneah

Elly grew up on the adrenaline of crime fiction and it spurred her interest in cybercrime, privacy and the terror on the dark side of IT. At ZDNet Asia, she has made it her mission to warn readers of upcoming security threats, while also covering other tech issues.

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  • Psst - don't tell the Chinese...

    ...that gov't stimulus programs don't work. Why should the U.S. be the only country suffering under a huge, ponderous debt load thanks to a profligate federal government? This will be a great way to "level the playing field" between the U.S. and China, and we won't have to do anything, just sit back and watch their economy collapse like ours has.
    MikePlano