The search for low labor costs was the first, and primary, driving force behind the exodus of manufacturing from the West to the Asia Pacific region. As OEMs moved manufacturing, the component manufacturers followed in support of their global customers. The manufacturing transfer has been occurring since the 1980s, and it was a steady and predictable pace until year 2000.

The electronics industry recession that began in late 2000 and continued through 2002 quickened the pace. Connector sales declined -19.1% in 2001 and -9.6% in 2002. These were the worst back-to-back years in industry history, making the need for cost reduction a matter of survival rather than just an issue of profit improvement.

Announcements of plant closings in the United States and Europe were frequent occurrences. The move to China became a stampede. For example, in 2001, China was a $1.8 billion connector market. In 2006, China is a $6 billion market, achieving a 27.2% compound annual growth rate. This compares to a 1% compound annual growth rate for the North American connector market from 2001 to 2006.

The transfer of manufacturing to China continues, but the pace has slowed and seems to be a function more of building capacity to support the growing consumer demand in China for electronic products. Today, approximately 50% of what is manufactured in China stays in China. That percentage is going up quickly as the population becomes more affluent consumers.

In our estimate, 75% of the China “build-up” is complete. By 2010 it will be 85% and by 2015 it will be over.

India, Eastern Europe, and Latin America will go through economic expansion. However, it is difficult to imagine these regions having the same impact on western manufacturing.

China Growth Engine for Electronics

China will soon surpass Germany as the world’s third largest economy. Estimates place China’s GDP at $2.8 trillion, narrowly smaller than Germany’s GDP of $2.9 trillion. Only Japan and the United States have larger economies.

China’s GDP is growing in the 10 to 11% range while German GDP growth is 2.5 to 3%. It is clear that China will surpass Germany in 2007.

China will surpass Japan by 2013 and become the world’s second largest economy, assuming Japan expands at 2.5% per year versus 10% annual expansion for China.

This should not be surprising. China has a 1.3 billion population versus 82 million people in Germany. China should certainly be able to produce more than Germany. However, what is surprising is the speed, and short expanse of time, this has happened in little more than a decade.

Even more startling is the rapid expansion of China’s electronic manufacturing capability. The growth in China electronics manufacturing was four times larger than their GDP growth.

The market share dynamics of the connector industry provide a perfect example of how fast China became a major manufacturer of the world’s economic products.