South China Morning Post
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Robots conduct welding work at the workshop of an automobile manufacturing factory in Qingdao, Shandong province, on January 14. China’s steady progression up the manufacturing value chain means developments such as Dell’s intention to reduce its dependence on China might not be that damaging. Photo: Xinhua
Opinion
The View
by Edward Tse
The View
by Edward Tse

Why China’s move up value chain means Dell’s departure is no big deal

  • Rather than being alarmed and making conclusions about the entire economy, the Dell news needs to be put in context of China’s development
  • Labour-intensive industries are leaving the country to be replaced by higher value-added sectors, and China’s advantages are hard to replicate elsewhere
Edward Tse
Edward Tse
Why you can trust SCMP
Nikkei Asia reported that the US-headquartered Dell Technologies plans to stop making any products that requires semiconductors made in China by 2024 and is planning to move half its production out of China by 2025. Instead of feeling alarmed, this needs to be taken in stride.

The world’s third-largest personal computer manufacturer, behind Lenovo and HP, had a market share of 11.7 per cent in the third quarter of 2022 in China. Besides the three leading players of Lenovo, HP and Dell, there are a number of Chinese mainland and Taiwanese players offering competitive products. Compared to smartphones, internet-of-things products and smart cars, personal computers have seen less innovation.

Supply chains leaving China is nothing new. Labour-intensive industries such as apparel, footwear and toys had started moving to places such as Vietnam, Bangladesh and Cambodia some 15 years ago. Production of consumer electronics such as electronic toys and electronic phone sets have also started to leave China.

Most of the supply chains that have left China involved relatively simple design and production processes that require minimal research and development and little ingenious product prototyping. The relatively stable nature of these product developments implies networks of suppliers of inputs do not change much.

While personal computers require quite a few parts, it is gradually becoming a commodity product. Replicating or moving the supply chain of personal computers away from China is possible, though this could incur higher costs. Dell’s costs of supply chains set up elsewhere could be 15 to 20 per cent higher than those in China.

Dell might also lose part market share in China. Government and state-owned companies in China will replace foreign-branded computers and software with locally developed products by mid-2024, according to Bloomberg.

A cotton picker is at work in Hailou town, Shaya county, in China’s Xinjiang region, on November 10. In 2021 some companies including fashion brands rejected the use of Xinjiang cotton amid allegations of human rights abuses in the region. Photo: Xinhua
In response to Dell’s high-profile move, Chinese consumers might also switch to other brands. In the Xinjiang cotton case from 2021, when certain foreign apparel and sportswear retailers alleged violation of human rights in Xinjiang and declared they wouldn’t use cotton from Xinjiang, some Chinese consumers shifted to local brands and retailers.
Paradoxically, even as Dell is moving its supply chain away from China, other foreign companies are preparing to invest more in their supply chains in China. Some companies in the auto sector, for example, are building or expanding supply chains in China because China’s market is huge and is growing fast, its exports are expanding and cutting-edge innovations are taking place in China.

Bosch plans to build a US$1 billion research, development and manufacturing facility for components for new energy vehicles and automated-driving technology in Suzhou.

Supply chains of sectors such as automobiles, internet of things, smartphones and others require short cycles of product innovation, rapid product prototyping and innovative production processes. They are backed by vast and sophisticated networks of suppliers that are being built out in China. Replicating these supply chains elsewhere won’t be easy as these supply chains require abundance of highly trained engineers, disciplined labour, intricate coordination skills and high-quality infrastructure.
Employees are seen during lunch hour at a Foxconn Technology Group plant – the world’s largest iPhone plant – in Zhengzhou, Henan province, China, on January 6. Supply chains of sectors such as smartphones require short cycles of product innovation, rapid product prototyping and innovative production processes. Photo: Bloomberg

Doug Guthrie, who led Apple University’s efforts in leadership and organisational development in China, put forth three key reasons in January 2022 why Apple was so successful in building its supply chain in China.

The first is the Chinese government’s ability to move labour around the country to meet the needs of companies such as Apple. The second reason is China’s infrastructure that “ties everything together”. The third is the ability of many Chinese cities to build industrial clusters with vast and complicated networks of suppliers.

These are difficult to replicate. Making this happen requires meticulous collaboration between the local governments, suppliers, logistics companies and key manufacturers.

As new product attributes evolve, manufacturing becomes more sophisticated and innovation is now a critical part of manufacturing. Clusters of capable suppliers need to work in a coordinated manner and this is definitely a strength we find in China given its governance approach. Places such as Vietnam and India might be able to take on parts of this kind of set-ups, but it is hard to imagine wholesale replication of such supply chains outside China.
An employee works inside an engineering goods export unit in the manufacturing hub of Faridabad on the outskirts of New Delhi on January 13. Photo: Reuters
Some people would call Dell’s plan as evidence of decoupling between China and the United States. Instead of viewing the changes this way, I would rather think of this as the interplay of China’s core and fringe in its supply chains. China is increasingly moving into products that are more innovative, tech-driven and sophisticated.

While this core is being built and strengthened, supply chains in the fringe that comprise of matured and simpler products are being chipped away. Some of them will get replicated somewhere else.

This dynamic process requires continuous adjustments, and China is constantly upgrading its capabilities to keep moving up the value chain despite headwinds such as US sanctions. The higher it goes, the more difficult it becomes for others to replace it.

Instead of taking one data point and projecting it for all industries, let’s take a longer view, revisit Dell’s case in three years from now and see how it will go.

Edward Tse is founder and CEO, Gao Feng Advisory Company, a strategy consulting and financial advisory firm with roots in China.

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