Gary Kibblewhite, chairman of the International Distributors of Electronics Association (IDEA) recently visited a number of distributors of electronic components on the Chinese mainland and gave a presentation to others in an attempt to encourage Chinese component distributors set up their own local trade association.

There is a belief that global electronics market is being heavily impacted by the rising tide of counterfeit products coming out of the Asian region and in particular, from China.

In recent years as the country progresses towards becoming a major electronics manufacturing nation, China has developed a number of entirely legitimate brands based on locally created intellectual property and these too are beginning to be impacted by counterfeiters.

As a result the authorities in China have started to not only crack down on counterfeit operations but also to raise the overall standards of the entire Chinese electronic components supply network.

It is my belief that the formation of a local trade association for the electronic components supply chain will help speed processes already underway such as an increased focus on sophisticated products and the flotation of local distributors on the Shenzhen Stock Exchange.

Improving product quality and adding more corporate governance will benefit everyone, but will of course, add substantial cost into to the Chinese supply network.

The process is already well underway. During my time in China I visited local distributors with $100m plus annual sales and noted that they were apparently organised in a very similar way to companies in Europe and North America.

Some companies operate state of the art facilities and provide their workforce with heavily subsidised in-house restaurants, gyms etc. In contrast, I also saw companies operating from tables in huge shopping malls that housed many hundreds of other distributors. Western quality control procedures in these places, in particular ESD protection, were noticeable only by their absence.

Inner Strength

In what I took as a practical manifestation of the Chinese principles of "Inner Strength" I was fascinated by the number of larger Chinese distributors who operated out of premises that appeared stark and utilitarian from the outside but once entered revealed spotless marble floors.

A number of meetings with companies revealed that the same issues affect electronic component distributors in China as affect distributors elsewhere in the world.

The Chinese are also concerned with issues such as franchise aversion, design-win protection issues, cost escalation and margin erosion, although the latter from a much lower base as - with the notable exception of catalogue-based distributors - gross margins in China currently rarely exceed 10%.

Distributors in China also find it difficult to get good technical staff and struggle to keep up with what they perceive to be inflationary wage demands, although manufacturing labour in China can still be hired for around $120 per month and with largely unregulated conditions of employment.

Government's role

The Chinese government is making changes to the tax regimes and as these start to bite it will be interesting to see whether the Chinese electronics industry manages to achieve its growth goals over the next couple of years.

Historically the tax rate for inward investing companies has been 15% whereas the local companies had to pay 33%. Over a five year transition period the standard rate for Chinese industry is changing to 25% except for 'hi-tech' companies, both domestic and international, who will benefit from a reduced rate of 15%.

Planned changes in the government ministries responsible for the local industry are designed to increase the focus of Chinese manufacturing on key areas such as aerospace, medical and some high tech end user markets.

All these changes should, over time, benefit Chinese component distributors. With an electronics distribution available market (DTAM), not including DRAM, in excess of $15bn, which is not far short of that of the US, there is ample scope for domestic growth.

Gary Kibblewhite is honorary president of Afdec and chairman of IDEA.

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