Saidi Insights: Analysis and Forecast of the Trend in China’s Electronic Information Manufacturing Industry in the Second Half of 2020

01 Overview of the First Half of the Year

(1) The industry’s growth rate has turned from negative to positive, achieving rapid stabilization since the second quarter.

First, the growth rate of the industry's value-added has achieved rapid stabilization and growth. From January to May, the value-added of electronic information manufacturing enterprises above a designated size increased by 3.7% year-on-year, a slowdown of 5.7 percentage points compared to the same period last year (9.4%). However, this growth rate was 6.5 percentage points higher than in the first quarter and still 2.3 percentage points lower than the nationwide growth rate of value-added for industrial enterprises above a designated size during the same period (6.0%). In May, the industry’s growth rate reached 10.8%, 5.8 percentage points higher than the national industrial growth rate. The rapid rebound in production following the resumption of work and production has accelerated the stabilization and recovery of the industry.

Second, operating revenue growth has turned from negative to positive. From January to May, the electronic information manufacturing industry above designated size achieved operating revenues of 4.02 trillion yuan, roughly flat compared to the same period last year (4.06 trillion yuan). The year-on-year growth rate reached 1.3%, a decrease of 5.1 percentage points from the 6.4% growth rate recorded in the same period last year. However, this marked a successful reversal of the continuous negative growth trend observed in the first four months (-1.6%), and it has now led the way toward subsequent positive growth momentum.

Third, profit growth accelerated significantly from last year’s low base. From January to May, total profits reached 170.9 billion yuan, representing a year-on-year increase of as much as 34.7%, a rapid improvement of 47.7 percentage points compared to the same period last year (-13%).

(2) On the export side, led by integrated circuits, the negative growth trend that began at the start of the year has started to reverse.

First, the export situation is promising, with positive growth observed since May. From January to May, the cumulative export delivery value of the electronic information manufacturing industry reached 1,994.98 billion yuan, representing a year-on-year increase of 1.5%. This reversal marks an end to the negative growth trend observed prior to April and highlights a markedly positive outlook compared to the overall industrial export decline of -6.2% during the same period. Monthly growth rates from March to May all exceeded 10%, reflecting a steady growth momentum.

Second, the export situation for products is diverging, with integrated circuits standing out as the sole bright spot. According to customs data, from January to April, China’s exports of integrated circuits totaled 32.4 billion U.S. dollars, up 8.8% year-on-year, with the growth rate falling by 11.7 percentage points compared to the same period last year. Exports of liquid crystal display panels reached 5.6 billion U.S. dollars, down 19.5% year-on-year, with the decline widening by 10.1 percentage points compared to the same period last year. Mobile phone exports amounted to 30.8 billion U.S. dollars, down 10.5% year-on-year, while laptop computer exports totaled 21.4 billion U.S. dollars, down 1.2% year-on-year.

(3) Fixed-asset investment turned positive from negative, and the growth momentum in May was encouraging.

First, the information industry is boosting rapid growth in investment in high-tech manufacturing. From January to May, the year-on-year growth rate of fixed-asset investment in electronic information manufacturing enterprises above a designated size reached 6.9%, an increase of 5.8 percentage points compared to the period from January to April. This growth rate surpassed the figure for the same period last year (6.2%) by 0.7 percentage points, indicating a promising growth trend. Investment in high-tech manufacturing increased by 2.7% year-on-year, up 6.3 percentage points from the January-April period (-3.6%). Among these, investment in the manufacturing of computers and office equipment rose by 12%, becoming a key driver of growth in high-tech manufacturing investment.

Second, the resumption of work on major projects has become a key driver of investment. With the active promotion of the workgroup for resuming production and business operations, major projects in the fields of integrated circuits and new display technologies—such as Yangtze Memory Technologies, Hefei Changxin, China Star Optoelectronics Technology, and BOE—are steadily advancing.

(4) Production of key products is diverging, with integrated circuit output growing rapidly.

First, computer production achieved a slight increase. From January to May, cumulative production of microcomputer equipment reached 120 million units, representing a year-on-year increase of 2%. Of this total, 32.64 million units were produced in May, up 22.3% from the same period last year.

Second, smartphone production continues to experience negative growth, constrained by insufficient demand. The cumulative production of mobile handsets reached 463 million units, down 16.5% year-on-year. The decline widened by 8.5 percentage points compared to the same period in 2019, but narrowed by 1.7 percentage points compared to the January-April period. Among these, the cumulative production of smartphones totaled 356 million units, down 8.6% year-on-year. However, smartphone production in May reached 90.54 million units, up 8.4% year-on-year.

Third, integrated circuit production is growing rapidly. From January to May, China’s integrated circuit output reached 93.5 billion units, an increase of 13.3% year-on-year. The growth rate was 14.5 percentage points higher than that in the same period of 2019. Specifically, in May, production totaled 21.5 billion units, up 3.4% year-on-year.

(5) Domestic resumption of work and production has been completed ahead of schedule, creating a window of opportunity for industrial development.

From the perspective of industrial segments, different links in the electronic information manufacturing industry and various sub-sectors have been affected to varying degrees by the pandemic. Intellectual-intensive segments such as R&D and design, as well as industries with high cleanliness requirements like integrated circuits, have seen relatively faster resumption of production and operations. Looking at major regions, key provinces and cities such as Guangdong, Jiangsu, Shanghai, and Sichuan had already achieved large-scale resumption of work by mid-February.

Overall, given the long supply chain in the electronic information manufacturing industry, key enterprises can effectively drive the resumption of production and operations both upstream and downstream, thereby accelerating the pace of recovery. Currently, the average rate of employees returning to work in the electronic information sector has been largely achieved, laying a solid foundation for further boosting output and restoring normal R&D and manufacturing activities. Against the backdrop of the ongoing global pandemic, China’s orderly resumption of production and operations—and maintaining robust production capacity and market cooperation with countries such as Japan and South Korea, which have relatively stable epidemic control measures—will help us seize the window of opportunity presented by the ongoing restructuring of the industrial landscape amid the pandemic.
 

02 Second-Half Trend Forecast

In the second half of 2020, provided that the global pandemic does not fundamentally disrupt the division of labor in supply chains, there is no large-scale secondary outbreak of the domestic epidemic, and Sino-U.S. industrial rivalry does not escalate, the development of the electronic information manufacturing industry throughout the year will shift toward positive expectations, achieving steady growth in a relatively stable production environment. Key cities, driven by stimulus measures such as consumption vouchers, are expected to experience several waves of rebound momentum.

Based on data from January to May, the industry’s value-added growth rate for the first half of the year is expected to remain around 5%. Operating revenue growth will turn from negative to positive, and profits are projected to maintain a high growth rate of over 10%. Looking ahead to the full year, the industry’s value-added growth rate is forecast to be between 6% and 10%, operating revenue growth will be around 5%, and profit growth will stay at approximately 10%. Against this broader backdrop, China must guard against three major risks while seizing two key opportunities.

(1) The Three Major Risks

One risk: The overseas market for smart terminal products may accelerate its contraction. The COVID-19 pandemic has dealt a significant blow to global sales of smart terminal products such as personal computers (PCs), smartphones, and color TVs, with shipments of all three major types of finished devices experiencing declines to varying degrees. Market data shows that in the first quarter, smartphone shipments fell by 11.7% year-on-year—the largest quarterly decline in the past 15 years. The color TV market was the most sensitive to the pandemic, with shipments dropping 32.3% quarter-on-quarter—far exceeding the declines seen in PCs and smartphones.

Currently, there are two phenomena in the electronic equipment market that deserve attention:

First, PCs and smartphones are increasingly concentrated among major brands, intensifying competitive pressure on smaller and mid-sized brands. In the first quarter, the three PC brands—Lenovo, HP, and Dell—captured 65.6% of the market share, an increase of 5.1 percentage points compared to the same period in 2019. Meanwhile, the five mobile phone brands—Samsung, Huawei, Apple, Xiaomi, and vivo—accounted for 71.9% of the market share, up 1.8 percentage points year-on-year, putting comprehensive pressure on sales of smaller and mid-sized brands.

Second, the trends in the quantity and value of smartphone and color TV exports have begun to diverge. According to customs data, from January to May, China’s smartphone exports plummeted by 17%, a decline significantly greater than the overall drop in mobile phone shipments, potentially exposing the industry to the risk of supply chain relocation. Color TV exports fell by 15%, with the decline in export volume reaching 7.8 percentage points, raising the risk of a price war as companies may be forced to slash prices to maintain competitiveness in overseas markets. It is expected that in the second half of the year, smart terminals will continue to face dual pressure from both the supply and demand sides. Major industry events such as the Barcelona Mobile World Congress may not be able to proceed as scheduled, inevitably impacting the timing of new product launches—including 5G phones—and the market response. The ongoing global spread of the pandemic has sounded an alarm about potential disruptions to supply chains. We must prepare contingency plans to address the accelerating downturn in the smart terminal market, accelerate the integration of domestic supply chains, and intensify efforts to develop the domestic demand market.

Risk No. 2: The localized impact of the global pandemic on supply chains remains significant. Since the beginning of this year, the pandemic has posed different risk factors to the supply chain of electronic information products at various stages: Before February, the primary risk was insufficient production capacity due to restrictions on personnel and logistics; in March, the outbreak in Japan and South Korea created a significant risk of widespread disruptions in the supply of materials and components; and since April, the major outbreaks in Europe, the U.S., and globally have led to weak market demand and heightened the risk of overseas supply disruptions in critical links of the industrial chain.

以手机为例，我国手机芯片、存储器、面板等配套供应链生产端，除中国大陆外，大多集中于日、韩等国以及中国台湾地区。由于相关国家和地区疫情控制平稳，主要终端生产企业备料充足，短期内产线停工风险较小，但仍要谨防疫情蔓延带来更大范围、更长时间的影响。为此，必须持续跟踪重点厂商海外生产基地、重点环节和物料的生产情况，做好与相关厂商对接和重点风险预案。

Risk No. 3: The U.S. continues to escalate its suppression measures, such as the “Entity List.” On May 23, the U.S. Department of Commerce added 33 Chinese companies and institutions to its Export Control “Entity List.” This latest round of the “Entity List” marks the first time that Qihoo 360, China’s leading player in the domestic cybersecurity market, has been included. Moreover, the list continues to target innovative enterprises in the field of artificial intelligence, adding eight AI companies—including CloudWalk Technology and CloudMinds. In the short term, the supply chains and markets of these entities will be relatively little affected; however, in the long run, they will still face significant constraints in terms of foundational software and hardware.

In this “Entity List,” the United States has opened a new front in cyberspace regulation and is focusing its efforts on striking at China in both the technological R&D stage and the trade-services sector. On the one hand, the scope of restrictions has been extended from the application level to the fundamental R&D stage, with new additions including institutions such as the Beijing Computer Science Research Center and Harbin Institute of Technology, aiming to curb China’s basic R&D efforts right at the source of technology. On the other hand, the list now includes targeted sanctions against companies involved in the agency, import, and export of semiconductor equipment and high-precision instruments and meters, signaling that the U.S. is further escalating its suppression of China’s entire industrial chain.

(2) Two Major Opportunities

Opportunity No. 1: “New Infrastructure” brings new opportunities for information infrastructure development. Since being explicitly proposed in March and included in the 2020 Government Work Report in May, “new infrastructure” has drawn enthusiastic responses from provinces and cities across the country. To date, dozens of provinces, cities, and key urban areas have introduced policies to support the development of new infrastructure. Compared with traditional infrastructure, “new infrastructure” focuses on industries as its primary beneficiaries, placing greater emphasis on supporting industrial upgrading, encouraging early adoption and pilot applications, promoting the integration and coordinated development of regional production factors, accelerating the establishment of a multi-stakeholder governance model involving government, enterprises, and social organizations, innovating diversified funding mechanisms and benefit-sharing arrangements, and thereby creating new opportunities for the development of the electronic information industry.

In the second half of the year, the state is expected to issue further guiding opinions to promote the development of new infrastructure. Relevant policies and projects at the provincial and municipal levels will also accelerate implementation, further boosting the development of 5G, data centers, artificial intelligence, the Internet of Things, and upstream and downstream industries. These sectors will become key engines driving China’s economic and social transformation and innovative development.

Opportunity No. 2: Ultra-high-definition video applications and the replacement of 5G phones are expected to unleash new demand in the consumer electronics market. First, the ultra-high-definition video industry chain is accelerating its maturation, and new integrated models are expanding application horizons. Since May, the Ministry of Industry and Information Technology and the National Radio and Television Administration have jointly issued the "Guidelines for Building an Ultra-High-Definition Video Standard System (2020 Edition)" and the "Work Plan for Jointly Promoting the Development of the Ultra-High-Definition Video Industry by Ministries (Bureaus), Provinces, and Cities," establishing a comprehensive ultra-high-definition video standard system and clearly defining key tasks for ultra-high-definition video development in each province and city this year. It is expected that in the second half of the year, the entire ultra-high-definition video industry chain will continue to be refined and improved, potentially opening up new integrated application models and spaces such as "Ultra-High-Definition + 5G + AI."

Second, the deployment of 5G base stations is accelerating, and demand for upgrading to 5G-enabled mobile phones is rapidly picking up. Currently, the nationwide deployment of 5G base stations has exceeded 250,000, and by year-end, 550,000 stations will be completed, covering all prefecture-level cities across the country. As China’s new 5G infrastructure continues to advance and improve, shipments of 5G-enabled mobile phones in China are also showing a steady upward trend. From January to May, 81 new 5G phone models were launched, accounting for over 50% of all smartphone models released during the same period.

In the second half of the year, China’s 5G smartphone shipments are expected to increase further. The prices of entry-level 5G models are likely to drop to as low as 1,500 yuan. The accelerated deployment and declining prices of 5G base stations are poised to trigger a “replacement wave” for 5G devices, thereby further unleashing a new round of market demand for smartphones.