to give up … and beyond?

Covid has a good back. China’s problems began long ago: “Since 2019, China has been losing momentum. A number of interrelated elements play against it: an aging country, a loss of competitiveness, rampant corruption, and a real estate sector that accounts for nearly a third of GDP is on the brink of collapse.summarizes Emmanuel Véron, an expert on modern China and associated with Inalco (National Institute of Oriental Languages ​​and Civilizations).

Xi Jinping’s country has the largest elderly population in the world. In 2019, 254 million Chinese were aged 60 and over. According to the World Health Organization, this number is expected to increase to 402 million or 28% of the population by 2040. Meanwhile, its economy recorded its weakest growth since 1976 in 2022, growing just 3% of GDP, according to the Office for National Statistics. It is far from the 5.5% target set by the government in March last year.

Add to that the ongoing Covid epidemic since the sudden lifting of restrictions in early December 2022, and the situation in the country is complicated to say the least. And that’s even more true for the high-tech sector, which is especially confused.

China’s loss of attractiveness

Although China has been the leading supplier of the world economy for 40 years, the first signs of the country’s loss of attractiveness began to appear in 2019 and accelerated with the pandemic. In the technology sector, Apple, which until then produced a large part of its products there, began to diversify its supply chain. Apple’s “made in China” products fell from 44-47% of the total product in 2019 to 36% in 2021.

And according to DigiTimes, the American giant intends to make half of its iPhone production in India by 2027. “China’s economy, including in terms of technology, will not collapse overnight, but it is true that we are witnessing the movement of decoupling, that is, the duplication of supply chains. India, Vietnam, Thailand, Indonesia and even the Philippines are the first beneficiaries because the environment in Southeast Asia is more favorable.”Defines Emmanuel Veron.

“Zero Covid” policy accelerating the movement

China is also a latecomer in terms of innovation, especially in semiconductors, a victim of its very strict anti-Covid policy. In a June 2022 survey by Bain & Company, half of American business owners complained about this “zero Covid” policy in China and its negative impact on their business.

Shanghai’s two-month quarantine, to prevent the export of electronics packaging, was chosen in part to justify the weakness of financial reports last year, although it was not the only reason.

“Very restrictive conditions in China, combined with strong tensions with the United States over Taiwan, led to a shift among manufacturers in late 2021. They decided not to put all their eggs in one basket, but to diversify their production areas. Everything is easier because India, for example, has a real industrial structure, a good level of R&D and a skilled workforce tailored to the needs of technical industrialists.”Chinese expert explains.

Consumer electronics: the challenges are piling up

Inflationary conditions, semiconductor supply issues and an unfavorable euro-dollar exchange rate… 2022 has many pitfalls. “However, not everything can be attributed to the economic situation, the smartphone and computer markets are slowing down and even declining. Thomas Husson, vice president, senior analyst of Forrester consulting firm, emphasizes. We’re in a bit of a downward spiral, and it’s not just supply woes. »

Under these circumstances, breaking away from US/China interdependence will be more complex and can only be done gradually to avoid further deterioration of relations. “Following Trump’s decisions, including the ban on telecommunications equipment and services provided by Huawei, we have entered a technological cold war zone. The political tightening of the Xi Jinping government has confirmed to manufacturers the importance of diversifying the supply chain. However, China remains Apple’s number one market for the iPhone. Under these circumstances, it is impossible to completely break away from this country and risk a boycott.Thomas Husson explains.

What affects our electronic products?

Beyond these geopolitical and macroeconomic conditions, will China’s declining attractiveness for tech manufacturing have a concrete impact on the availability of devices, or even their prices? Because it is not only Apple that started this “decoupling” movement. Other brands are also active in this direction, such as computer company Dell, which plans to outsource 50% of its production to China by 2050, according to Nikkei Asia and Taiwan.

“We may still have a few weeks or even months with shortages of certain components, but 2023 will be the year of a return to normalcy in technology.Thomas Husson analyzes. As for prices, it is very difficult to say at the moment. We have been talking about the gradual increase in production costs in China for several years. This has led some manufacturers to turn to Vietnam, for example. Inflation will also play a role this year. First of all, moving part of the production outside China involves large volumes of very complex issues (components, assembly, logistics, etc.) that require long preparation. Even with the decline, the smartphone market in 2022 would still be 1.2 billion units.

5 or 10 year strategies for manufacturers

While players like Apple have been gradually withdrawing from China for several years, the decision is not for 2019. “We are talking about long-term issues here with strategies implemented over five to ten years. Of course, these plans are subject to adjustments due to political upheavals such as the war in Ukraine or tensions between China and Taiwan, but the tech giants have been preparing these moves for a long time. India is the next big consumer pool for high-end smartphones. So it makes sense for Apple to try to manufacture locally, as it sees it as an important growth driver for years to come.Thomas Husson notes.

The American giant is also determined to play the independence and vertical integration card to become less dependent on foreign players. Bloomberg reports that in addition to its M1 and M2 processors, it intends to use the separation to bring back strategic capabilities such as the development of its touchscreens or 5G and Wi-Fi chips.

The goal: to have the technological know-how to gradually master the main components of their products.

Eternal China does not think in the short term

“One thing we don’t always understand in the West is that China thinks longer than we do. What is important for them is not 2025 or 2030. The country is focused on 2049. On this date, the centenary of the People’s Republic of China will be celebrated. By then, it needs to realize the “China Dream,” which is to regain its No. 1 status on the world stage., the analyst recalls. It is a major project championed by President Xi Jinping since he took over the Communist Party in late 2012. “And for this, if necessary, the Chinese economy will be adjusted. »

Therefore, China is not focused on several years of economic recession between now and the end of the decade. He already sees more. That doesn’t stop it from investing heavily in semiconductors to catch up with Taiwan, South Korea and even Japan.

It is also focusing its efforts on electric vehicles and batteries, two of its dominant markets. “There remain two technological sectors that the country is struggling to develop in the coming years: supercomputers and artificial intelligence. In this regard, the United States and Taiwan are far ahead, but China has the opportunity to react.”concludes Thomas Husson.