The east coast is where you have to be these days

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Not long ago, choosing to manufacture in China might have seemed a low-cost alternative for companies in the most price-conscious parts of the tech market.

Now, there is rarely an option.

That is the message from companies such as Logitech, the Swiss supplier of mice, webcams and other peripheral devices for desktop computers. “We totally depend on China, it is the hub of hubs,” says Guerrino De Luca, chief executive.

The growing reliance on China as a manufacturing base is apparent in the corridor between Shanghai and Suzhou, the neighbouring city where Logitech has its local operations. Since the late 1990s, all the company’s main suppliers have set up operations here and have expanded their capacity several times over.

Having come to the area only to service the most commodity-like part of its business, Logitech now builds all its high-end products in the corridor. “The whole supply infrastructure is here,” says Mr De Luca.

The same pattern has been repeated in many parts of the tech and consumer electronics world, as a supply chain that used to span a wider part of the region, or the world, has gravitated to the provinces along China’s eastern coast.

The process of shifting manufacturing from Taiwan is now largely complete, says Philippe de Marcillac, senior vice-president, international business units at IDC. China is now the centre for everything from computer monitors to motherboards. The next stage is likely to be more difficult: moving higher up the food chain. But it is a necessity.

Founder, the country’s second-largest maker of PCs, once made a decent profit, says Wei Xin, chairman. Not any more: profit margins in the PC business has followed the downward of profits in the television industry in a previous decade.

“We have to go to a higher part of the value chain,” says Mr Wei. For Founder, that has meant a push into higher-value components, competing with Taiwanese manufacturers to make motherboards for PCs, while also building a plant to make memory chips for specialised graphics.

Much of China’s pursuit of a higher place on the tech ladder depends on the creation of a local chip industry.

An explosion of chip design companies in the past five years is estimated by local industry executives to have increased the number of design houses 10-fold, to 500, many of them consisting of only a handful of people.

While this is seen as unsustainable, the broader shift of tech manufacturing to China and the rise of a huge local market, particularly in consumer electronics and mobile handsets, suggests that more of the silicon content should be produced locally, says Jesse Parker of Aventis, a US tech consulting firm.

“The decision of which chip to use – the ‘design-in’ decision – is being made in China now, not in Chicago,” he says. “That’s something that didn’t happen in Taiwan: China is where the customers are.”

Yet creating a presence from scratch in one of the world’s most technologically complex and capital-intensive industries will not be easy. Ambitious ventures such as SMIC, which has built a plant to produce the latest generation of 12-inch wafers in Shanghai, are coming up against the limits of local expertise, says Gordon Eichhorst, head of technology banking at HSBC.

“Why build a leading-edge foundry in China in the first place?” he says. “There isn’t a labour benefit, and there aren’t a lot of services around.”

Export restrictions on some chipmaking equipment from countries such as Taiwan and the US, and unwillingness of some companies to bring their latest technology to China, add to the limitations, he says.

Similar problems face other parts of the tech business that are heavily dependent on intellectual property.

BOE Technology, China’s second-largest maker of liquid crystal displays, recently completed a manufacturing line based on fifth-generation technology – at least one step behind much of the new LCD capacity being created in Taiwan and South Korea, and two generations behind the most cutting-edge technology.

Finding the huge capital required to invest in newer plant – BOE estimates it will need $8bn over the next five years – will be a strain, given the difficulty Chinese companies have in accessing capital markets.

Wang Dongsheng, BOE chairman and chief executive, rests his case for greater competitiveness on an inevitability based on the huge domestic market and the presence of so many other manufacturers.

“It will take five years to catch up,” Mr Wang predicts. “Where is the future hub of [LCD] products? It’s not going to be Taiwan, it’s not going to be South Korea, nor Japan – it will be mainland China.”

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