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PCB Industry Printed Circuit Board (PCB) market analysis: China's dominance is threatened

| Author/ Editor: Michael Gasch / Erika Granath

China's been dominating the global printed circuit board (PBC) industry since 2006. Now, the U.S.' shift in foreign policy threatens China's role as the main driving force in the global PCB industry. In this article, we look at where the PCB market is and where it's headed.

China's been dominating the global printed circuit board (PBC) industry since 2006.
China's been dominating the global printed circuit board (PBC) industry since 2006.
(Source: Adobe Stock)

In 1980 North America, Europe, and Japan shared 80 percent of the global printed circuit board (PCB) production. Meanwhile, the share of these regions stands at less than 15 percent. While China in 1980 barely held a 2 percent share of the market, it had secured an astonishing 54 percent of it in 2018.

For a long time, China's industrial growth seemed to have no end. Now, it does, however, look like the trend is coming to an abrupt halt. One significant factor does speak for that no other market will threaten China's current share of the market: no other market has a supply chain even remotely as complete as China. Europe and America lost their supply chains the minute they outsourced most production to Asia. To rebuild local production facilities and expertise in these markets would require time, great effort, and huge budgets.

The U.S. once made China's extraordinary growth possible. Now, it looks like they'll also be the cause of the Chine's market's downfall. When China opened its borders to foreign investment, American companies tried to outperform each other with new locations in China. Today, it's an unpredictable president who has managed to ruin the trust that took decades to build up in only a few years.

China’s plans to dominate hi-tech sector with ‘Made in China 2025’

When China became the outsourcing center of the world, many foreign companies from all over the world—predominantly Taiwan, Japan, and Korea—established their own production facilities there. Because of this, new and complex technologies—which either can't be manufactured in Europe or North America at all or can't be produced there in the necessary quantity—were developed in China. China has had a dominating position in some technologies for many years—multilayers and HDI boards are just two examples. China's percentage is considerably higher than the already elevated world market share may suggest. And several others are "on the go" to win a higher market share.

The development of China's printed circuit board industry over time.
The development of China's printed circuit board industry over time.
(Source: Michael Gasch)

Decisions are usually taken by individual companies, or in some cases by consortiums, in Western economic systems. In these economies, the companies are also the ones taking care of the necessary funding of the project. The government will only get involved on rare occasions. Things work differently in China. In China, it's the government that stipulates and finances most of the desired technology, that the private sector is involved is rare. The West often doesn't recognize this fundamental difference, leading to many wrong conclusions.

A substantial part of Chinese economic growth can be traced back to this type of sponsorship by the government. China's goal isn't just to become independent from the West but to move from being a technological follower and subcontractor to become a technological leader. This is the objective of the program "China 2025," which, seemingly overnight, made the U.S. aware that they aren't only losing their competitiveness but as well their technological dominance if China's growth continues uninterrupted. This realization was the nation's real reason to pick a quarrel and to start the trade war. While China and the U.S. are the main parties in this conflict, the dispute between these giant economies has come to impact the entire global economy.

China's printed circuit board production volume over the past twenty years.
China's printed circuit board production volume over the past twenty years.
(Source: Michael Gasch)

Moving factories out of Chinas is a slow, complicated, and expensive process

Some companies have started to relocate their facilities in other South East Asian or Central American countries. However, as the supply chains, there aren't (yet) in place, the procurement has turned out to be substantially more expensive. Now, the U.S. is not the sole reason for these moves. Some transfers were planned years before the U.S. started to demand rising wages and stricter laws in China. The development sprung out of the trend of companies wanting closer relationships with their collaboration partners.

This isn't to say that the U.S. actions haven't accelerated certain developments. Not everything is panning out the way the Americans intended for it to, though:

  • One of the aims of the U.S. administration was to reduce the trade deficit, but in 2017 and 2018 it grew by 20 percent. Only the hefty tariffs imposed by the end of 2018 and in 2019 were able to reduce U.S. imports from China.
  • The U.S. deficit is now an anomaly between several countries. Arbitrary decisions to impose tariffs like the ones experienced in the recent past by Mexico or Vietnam are showing that no one is safe, and sanctions may also hit those countries to which facilities have been relocated.
  • The idea was to close the factories in China and to relocate them to the U.S. But a lack of skilled workers, too high wages, and a non-existing supply chain doomed the attempted projects to failure (Apple was, for example, unable to procure the necessary erection screws in enough quantities for one of their products).
  • The goal of the Americans is to weaken China's economy. This attempt may be successful for the short term (for the next two to three years). After this period, China will be a much stronger competitor for American companies.
  • Instead of stopping the Chinese in developing their own technology (e.g. chip production) and software, the American (mis-)behavior will accelerate all those projects, which initially were planned for a later time.

The U.S. government’s unpredictable regulatory decisions have turned out to be a catalyst to reorganize the Chinese economy

The Americans have managed to send out one message loud and clear, namely that of the U.S. being an unbelievable and defaulting party.

This development, which is driven by America, intensifies the reorganization of the Chinese economy. China already had this type of change on its agenda. However, the U.S. actions have come to speed up the process. Nevertheless, China's growing importance as the global subcontracting center came with several adverse developments:

  • The number of available workforces declined, which caused a significant increase in wages
  • Incidental wage cost became a vital cost factor.
  • The willingness of central, provincial, and urban authorities to distribute grants and subsidies generously but to ignore violations of labor or environmental laws declined considerably. This was achieved not least due to continuing protests of foreign customers.

One initial measure was that health and safety regulations at work were controlled. This step was then followed by verification of compliance to environmental laws. While these laws and regulations weren't exactly new, it was new that they were enforced. In cases where the maximum permissible value was exceeded and immense air and water pollution was a fact, the local authorities often solved the problem with "helpful contributions".

China has imposed stricter regulations on the PCB industry

Things have changes in the past four years. Rules and regulations are not only enforced more rigorously but have also been exacerbated by the Chinese government. Companies that don't recognize the new maximum permissible levels will be given a fairly short time to conform (maximum two moths). The companies that don't manage to turn things around in this time, will see their factories closed. This has happened numerous times in Shenzhen. There, old factory builds have now been demolished.

The Chinese government took further drastic actions in early 2019. The so-called "minimum requirements for the PCB industry" act came into effect in February 2019. The act states that:

  • New facilities should be built in combined industrial parks only, this as it makes controls easier.
  • Companies that wish to obtain a permission to expand existing manufacturing facilities or build new factories have to meet strict criteria to be allowed to apply for financial aid or loans. Depending on the nature of their business, different minimum levels of revenue per capita and a minimum profit are stipulated. With these new rules it should be avoided that additional but uneconomic capacities are built.
  • The average usage of capacity should reach at least 50 percent of the nominal capacity installed. With this rule oversized no-name producers should be eliminated. Large and reliable manufacturers are moving to the province to build new facilities. There will be 15-20 percent more capacity available than now—despite all forced factory closures.
  • As a result of China aiming to become the world's technical leader, technology companies are required to invest at least 3 percent of their annual revenue in research and development.
  • New administrative rules (like the implementation of a common calculation and valuation basis etcetera) should hinder so called "creative accounting" that is made to escape taxes.

China government is looking to strengthen the leading players’ dominance in the PCB industry

According to an estimate of the Taiwanese magazine "Digitimes" some 20 percent of all PCB-manufacturers will be affected by these new laws.

Independent estimates predict that there're about 1,500 PCB shops in China. If one adds the mom-and-pop shops the number will, of course, be considerably higher. The new rules apply to all companies, both young growing ones and the ones that have financed their existence through growth made under the no-observations era.

The Chinese trade association CPCA believes that the new rules will result in a 30-50 percent decline in the number of PCB shops in China in the next five years. It's safe to assume that other sectors of the industry —electronics manufacturing service companies, for example—will be subject of similar sharpened regulations soon.

The consequence for many procurement officers will be that they must search for new suppliers. And this might be a realistic chance for an honest review of total cost of ownership and to accept European manufacturers in the supply chain.

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