As the electronics industry struggles to reduce costs and find new growth markets, it is increasingly shifting manufacturing operations to the developing world, with China leading the pack. A new study by the International Finance Corporation (IFC), the private sector arm of the World Bank Group, and management consulting firm Booz Allen Hamilton found that electronics production activity in emerging markets will nearly double, from $65 billion in 2001 to $125 billion by 2005 — and will account for 43% of total worldwide manufacturing growth.

More than three-fourths (77%) of the growth in developing countries will be in China, increasing its share of global electronics production from 8% to 14%, according to Booz Allen and IFC research, a growth rate that is twice as fast as any other region. In fact, the study estimates that electronics production in China will be an $80 billion business by 2005, larger than the estimated $73 billion production in all of Western Europe. Emerging market growth outside of China will be primarily in other developing Southeast Asian countries, Eastern European countries, and Mexico.

Gains in developing countries will not be limited to manufacturing. Higher value services such as engineering and design functions will increasingly migrate to developing nations over the next few years, although this transition will trail the more rapid shift in production. India and Russia in particular have an abundance of highly skilled labor, with labor costs up to 80% lower than in the developed world.

The SARS epidemic has raised concern about economic growth in China and other emerging markets. However, a follow-up to the original survey found that most respondents expect SARS to have a very limited and only temporary effect on the shift of electronics production towards developing markets. According to 22% of senior executives surveyed, SARS should have no impact on the movement of electronics manufacturing to China, 64% expect only a slight temporary impact, and only 14% expect it to have even a moderate impact on this trend. None of the respondents expect SARS to have a significant impact on the long-term growth of electronics production in developing markets.

The findings were derived from 117 in-depth interviews with electronics manufacturing firms of varying sizes and across all regions of the world. In addition, extensive secondary research was conducted to quantify the magnitude of the production shift to developing countries. All elements of the manufacturing value chain were covered in the survey. For the purposes of the report, Booz Allen and IFC define emerging markets or developing countries as all areas outside of North America, Western Europe, Australia, Japan and other parts of the Asia Pacific region, including Hong Kong, Korea, Singapore and Taiwan PRC.

"This dramatic increase in production clearly demonstrates the growing strength of emerging markets," said Dick Ranken, director of IFC's Global Manufacturing and Services Department. "In fact, a main driver of this trend is the rising importance of economies such as China as end-user markets for these products, which increases their competitive advantage in the manufacturing process."

"Emerging markets offer cost savings that are critical for survival in today's hyper-competitive environment," said Barry Jaruzelski, Booz Allen Vice President. "Large multinational corporations are leading the drive to emerging markets — and taking their smaller suppliers with them."

The report highlights several other major findings:

In emerging markets, final assembly, displays, and semiconductors will provide the highest level of growth through 2005.

China will continue to hold commanding positions in key value chain elements such as assembly, displays, and semiconductors, as it evolves into the hub of electronics manufacturing. By 2005, 45% of all high volume assembly will occur in China.

The Asia Pacific region, particularly China, currently dominates electronics manufacturing in emerging markets:

83% of electronic displays manufactured in emerging markets are produced in the Asia Pacific region, with 44% from China;

For connectors and cables, 78% of the emerging markets' output is from the Asia Pacific region, including 66% from China; and

Eastern Europe and Latin America account for 25% and 16%, respectively, of battery production in emerging markets.

By sector, production growth will be led by computers and peripherals, with an estimated $47 billion increase between 2001 and 2005, followed by consumer electronics ($20 billion), handheld devices ($16 billion), automotive electronics, and telecom (both $11 billion).