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Vertical integration controls costs, lowers prices

Some large manufacturers in China are moving to bring production processes in-house to have better command over costs, delivery and supply. Benefits for buyers could include lower export prices.

High component costs, coupled with labor challenges and other factors that contribute to pricing pressures, are leading many China companies to incorporate upstream and downstream processes in their production. While carried out mainly by large enterprises, vertical integration is helping stabilize component costs and supply, speed up delivery and turnaround, and, more importantly, keep a lid on export prices.

Vertical integration controls costs, lowers prices

Quotes for LCD TVs, for instance, are projected to fall in coming years because more companies are investing in facilities for producing high-generation display panels in China. At present, the component is sourced largely from Taiwan, South Korea and Japan, and accounts for roughly 80 percent of total product cost. When display panel suppliers raise quotes, China's TV makers have no choice but to pay up.

Government subsidies and rebates, however, are encouraging domestic TV manufacturers such as TCL Corp. to branch out into LCD panel production. Together with Shenzhen Century Science & Technology Investment Corp., TCL established joint-venture company Shenzhen Huaxing Photoelectric Technology Co. Ltd solely to make display panels. For constructing an 8.5G LCD panel facility in Guangdong, Shenzhen Huaxing received a 500 million yuan ($76 million) subsidy from the city government.

There are now seven 6 to 8.5G lines in China, of which five are locally owned or invested, and three more are pending approval. The country could possibly have 10 high-generation LCD panel facilities by 2012. When these are all operational, supply is likely to outpace demand, which could then pull down panel costs and, consequently, reduce LCD TV export prices.

Assimilating downstream processes can result in lower prices as well. Dongguan Sopoer Electronics Technology Co. Ltd used to concentrate on electronic components for telecom products. The company branched into manufacturing finished items last year, including diplexers, power dividers, directional couplers, low-noise and power amplifiers, and standing wave ratio alarms. Its clients have been able to save time and money as they no longer have to procure from different sources.

The downside of integration

Being able to do most, if not all, manufacturing processes does have its drawbacks.

Companies need to spend a substantial amount of money to be able to carry out such steps in-house. The return on investment, however, is not always guaranteed and may take years to be achieved. In some cases, ROI is seen 10 years after the expenditure.

This is one reason most suppliers that are integrating processes are in industries where government subsidies or rebates are available. BOE Technology Group Co. Ltd, for instance, received a rebate of 1.6 billion yuan ($242 million) when it constructed a 6G LCD panel line in Hefei, Anhui province.

Overcapacity is another problem as it can drive prices to rock bottom. This is a boon for buyers, but companies that invest large sums of money to integrate upstream processes would have to wait a lot longer to see positive returns.

The boom in the construction of 6 to 8.5G facilities is an example. International players are now actively developing OLED panels. It is possible that by the time all 10 6 to 8.5G lines in China are operational, most demand from major markets will be for OLED displays. This could then result in an oversupply of 6.5 to 8G LCD units and may hurt companies that invested in such facilities.

 


Note: This article "Vertical integration controls costs, lowers prices" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.

All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.

Disclaimer: All product images are provided by the companies interviewed and are for reference purposes only. Those product images featuring products with trademarks, brand names or logos are not intended for sale. We, our affiliates, and our affiliates' respective directors, officers, employees, representatives, agents or contractors, do not accept and will not have any responsibility or liability for product images (or any part thereof) which infringe on any intellectual property or other rights of a third party.



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