China Reuses Assets And Local Chips To Make Products Cheap

There are various opinions, at various levels, about the mechanics behind the cheapness of Chinese manufacturing, so what I present below is only the extent of what I personally recognize.

The first thing that clearly stands out is the adoption of local Chinese silicon. In my work I often buy products on the market and take them apart to look inside. When I do this with Chinese products, the first thing I notice is that several ICs mounted on the PCB are ones I’ve never seen or heard of before.

Since the IC surface carries a printed marking, I use that as a clue to search for a datasheet. But the datasheets I can find are all in Chinese, and while I can barely make out the overview, honestly the details remain unclear. For some parts, no datasheet is available at all. Reading as far as I can manage, I piece together things like “ah, this IC is an equivalent of such-and-such part from such-and-such company.” Unraveling the circuit configuration gives me a firmer degree of confidence on top of that.

Theories about why local silicon is cheap range from sound to unsound, but I think the mild explanations are the best ones: it’s made using spare fab capacity or surplus material intended for overseas products, or it’s a reproduction of a mature IC, so there’s effectively no asset left to depreciate, or the supply chain is simple and short, so no extra costs get layered on.

Hand a schematic or bill of materials designed in Japan to a factory in China, and what you’re told in many cases boils down to one line: “you’re using nothing but expensive parts.” Naturally, Japanese designers (or designers in the US, Europe, or Southeast Asia) also work hard to find parts that are reasonably priced and reliable when designing circuits. Check prices on widely used global sites like Mouser or Digikey, and it’s simply not true that all the parts are expensive. But for Chinese designers, the parts handled on those kinds of sites are, from the outset, “expensive parts” by definition.

Next is something you can’t tell by looking at a single product alone, but that becomes clear once you buy multiple products on the market and take them apart: asset reuse happens at a level unimaginable in Japan or the West. Take, for example, a healthcare band that measures and displays your pulse.

Generally, you can get one for around $20 if you search on, say, Amazon. But in China, you can get one for a few dollars. I once gathered up around 20 such products as an experiment, and it turned out there were only roughly 2 or 3 patterns of circuit. Same parts, same circuit configuration, and if you’re unlucky, even the same enclosure. All of them were built by reusing design assets.

Several things can be predicted from this. Perhaps the manufacturer is actually the same across the board. Perhaps design data originally created on someone’s commission is being improperly reused. Perhaps the design data itself is circulating behind the scenes. I don’t know which of these is correct, and it’s more reasonable to assume it’s case by case.

Nevertheless, there is a habit of pushing product after product out into the world without spending much on design resources. This naturally affects cost by drastically cutting baseline manufacturing cost, and it also contributes substantially to lowering procurement costs through economies of scale from standardizing parts.

On the other hand, questions remain about customer support and the sustainability of the business. For some products, even though they’re IoT products, the maker offloads responsibility entirely, saying things like “for the app, please use such-and-such from such-and-such company.”

A very positive point is that once you start working with Chinese engineers, you notice they’re all young and talented. Except in a handful of major cities, the general cost of living in China is cheaper than in Japan, but even so, a lavish meal in central Shenzhen, for instance, can end up costing as much as in Japan, or even more.

Even in such circumstances, young, ambitious people feel far more motivated by growing a business with a hit product than by making a quick profit and drawing a high salary. This is no different in Japan or other countries. So they work themselves to the bone while drawing bare minimum living wages.

It seems to me that the active involvement of such young people in manufacturing is contributing greatly to keeping the entire industry cost-reasonable.

The content of this post is an excerpt (original text) from the following book. If you’re interested, please pick up a copy.

The Shape of a Happy IoT Startup

The Shape of a Happy IoT Startup

Originally published in Japanese at https://clazytech.com/2022/08/1128/. Translated with LLM assistance and reviewed before publication.