A recent report by industry group The Chinese Association of Electronics Component Industry indicated that sales of the top 100 vendors in 2002 totaled $5.6 billion, down 11% from the previous year. Profits dropped 5% from a year earlier, to $417 million.

The group noted that sales of optical fiber and optical components were hit particularly hard as telecom companies sharply cut back their capital spending.

Those findings do not surprise Steve Rago, an analyst at iSuppli Corp., El Segundo, Calif., who attributed the slowdown to the Chinese government's reorganization of the country's telecom industry.

"There was uncertainty by Chinese telecommunications companies over government funding, causing them to dramatically reduce equipment purchases," Rago said.

While U.S.-based companies may not see a reason to lose sleep over the predicament of their Chinese rivals, they should be concerned, he said.

"What has happened in the last 18 months is that some China-based telecom equipment companies are increasingly exporting products to regions like Eastern Europe and India," he said. Two such companies are ZTE Corp. and Huawei Technology Co. Ltd., both of Shenzhen, Rago added.

Data from the Chinese Association of Electronic Component Industry supports that premise, noting that electronics component exports grew 8.4% in 2002, to $2.19 billion, with China's entry into the World Trade Organization paving the way for increased sales abroad.

As the torrid pace of China's telecom market cools, major Chinese companies are diversifying into other areas like consumer electronics, according to iSuppli. But as these products become more sophisticated, they sometimes require higher-technology components than what is made in China, as is the case with capacitors.

The Chinese Association of Electronic Industry noted that Chinese exports of capacitors jumped 28% last year, to $858 million. But imported capacitors rose 47% in 2002, to $2.4 billion, leaving a negative trade balance of $1.5 billion in that category.

Shawn Wood, an iSuppli analyst, attributes the imbalance to the higher technology and cost of capacitors imported into China.

"The smallest capacitors made by China-based companies come in the 0402 package," he said. "But smaller 0201 capacitors are being used for Bluetooth modules and wireless phones." Wood added that large Far East-based suppliers of multilayer ceramic chip capacitors, including Murata Manufacturing Co. Ltd., Yageo Corp., and Samsung Electro-Mechanics Co. Ltd., are importing 0201 capacitors into China.

As competition intensifies, more suppliers realize they must establish plants in China to compete with local vendors vying for business from global OEMs and EMS companies locating there. More U.S. companies are taking this route.

For example, Kemet Corp. is building a 125,000-sq.-ft. plant in Suzhou to make tantalum capacitors by July 2003.

By: DocMemory
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