Chinese Wi-Fi Equipment Manufacturers Discreetly Adjusting Strategies in an Attempt to Tackle Mounting Pressures and Stabilize Business

The global hub of Wi-Fi equipment manufacturing is concentrated in the Pearl River Delta region of Mainland China’s Guangdong province, which includes the cities of Shenzhen, Guangzhou, and Dongguan. This region is uniquely equipped to serve this role because it alone contains the complete end-to-end supply chain required for the manufacture of Wi-Fi, and offers cutthroat pricing thanks to a combination of relatively low-cost labor, high inter-vendor competition, and shrewd management practices, such as the rapid cutting/expanding of headcount in accordance with market fluctuations, and the subcontracting of orders to smaller Original Equipment Manufacturers (OEMs) when demand exceeds capacity. Yet vendors in the region understand that in an increasingly volatile and competitive market, they need to adapt to survive. Therefore, they are trialing revised strategies that, if fulfilled, have the potential to reorganize the Wi-Fi equipment supply chain and disrupt the established global Wi-Fi equipment ecosystem. The first is the gradual shift in Wi-Fi equipment manufacturing capacity away from the Pearl River Delta region toward locations that are less politically sensitive and offer lower labor costs. The second is the goal of many OEMs and Original Design Manufacturers (ODMs) in the region to expand beyond their low-key origins to develop their own consumer-facing brands. Finally, the third major development is the establishment in Shenzhen of a new Wi-Fi standardization organization, which aims to give local vendors an expanded role in global 802.11 industry standardization. This ABI Insight examines these three trends, outlining the factors driving the shifts, assesses the impacts, and provides some guidance for how the industry should respond.

The first major trend underway in the global hub of Wi-Fi equipment manufacturing is being prompted by recent political and economic pressures. As tensions between the West and China increase, Mainland Chinese Wi-Fi vendors with large client bases in Western markets are increasingly looking to set up factories abroad to avoid scrutiny. Vietnam is proving the most popular destination, with India following close behind. Manufacturing in these countries not only allows Chinese Wi-Fi vendors to bypass restrictions on made-in-China products, but also enables them to exploit the lower labor costs compared to the Delta River Region, which have risen sharply in recent years. Many vendors are still wary of establishing and operating a manufacturing facility abroad because it is unfamiliar territory for them, and they know that it will require overcoming a host of challenges they have not faced before. Among their concerns are the belief that these markets have inferior logistics and supply chain infrastructure compared to China, fears that the local workforce might protest, assumptions that the local governments are corrupt or may unfairly tax Chinese entities, and suspicions that their technology will ultimately be stolen from them. For now, it is primarily those with strong client bases in Western markets that are investing in Vietnam and India. For example, TP-Link, which is the world’s largest residential Wi-Fi Customer Premises Equipment (CPE) vendor and has a significant market share in Western markets, has opened factories in both Vietnam and India in recent years.

For Wi-Fi equipment vendors with primary markets not in the West, but still sensitive to the increasing labor costs in the Pearl River Delta, China’s Jiangxi province is emerging as the top destination for new factory development. LB-LINK is an example of a Wi-Fi equipment manufacturer that opened a factory in Jiangxi province in 2022. The attractiveness of Jiangxi is not simply that the cost of labor is significantly cheaper than in the Pearl River Delta, but that the local government is offering generous incentives for investment in the province. This is the same development strategy that the city of Shenzhen successfully implemented several decades ago, only now that increasing labor costs are making manufacturing increasingly uneconomical in the city, it is transitioning again from a center for manufacturing toward a Research and Development (R&D) hub. Reflective of this, in 4Q 2023, Wi-Fi equipment manufacturer Winstars will open its new R&D center in Shenzhen, but selected Jiangxi for the location of its new domestic manufacturing facility in 2022.

The second trend is a newfound determination by many of the previously under the radar Mainland Chinese OEMs and ODMs to raise their profile and develop their own consumer-facing brands. The recent turbulence in the Wi-Fi CPE market has hastened the urgency for some, as they feel that controlling their own brand is a more stable business than relying solely or primarily on OEM/ODM business. The directors of several vendors also believe that they have now reached a stage of maturity that enables them to progress beyond being merely an OEM/ODM. This is especially true for firms that are still family controlled (common in the smaller OEMs/ODMs), as this decision may be tied up with the personal ambitions of the owners. Reflecting the desire to expand their own brands, several smaller OEMs/ODMs are proactively developing their own independent strategies. This is an important point, because previously it was rare for Chinese OEMs/ODMs to devise their own market strategy—instead, they would simply emulate the strategy of the market leaders in China, namely Huawei, ZTE, and TP-Link in the Wi-Fi networking equipment business. Although low-cost, this approach seldom produces robust strategies, because there is a high likelihood that they do not fully understand the strategy they are attempting to copy, and even if they do, there is no way for them to be sure that the market leaders themselves do not have a distorted view of the market (e.g., over-anticipating the adoption of 5G Fixed Wireless Access (FWA) CPE). Following the implementation of new strategies, these vendors are aiming to capture greater market shares in the international market, and some are even eying Initial Public Offerings (IPOs) over the coming 24 months. The emergence of these new brands has the potential to inject further competition into the ecosystem, which could act to spur innovation, while also exerting downward pressure on prices.

A third major recent development is the establishment in Shenzhen of a new 802.11 industry standards body called the WLAN Application Alliance (WAA). Commencing operations in September 2022, the Alliance’s stated purpose is to drive improvements in the end-user experience by addressing common Wireless Local Area Network (WLAN) pain points, such as lost connections or interference. The Alliance is intended to serve as the platform through which vendors can collaborate on solving these issues, with the organization assuming the role of the governing body setting and regulating the associated standards. The WAA stresses that it is complementary to the industry’s main standardization body, the Wi-Fi Alliance, because it focuses solely on the application of WLAN, whereas the Wi-Fi Alliance is concerned with standardizing the technological underpinnings of 802.11. Setting Shenzhen as the headquarters of the WAA will help raise the profile of the city as a Wi-Fi R&D hub, and the organization could provide Chinese vendors the opportunity to exert a greater influence on the course of WLAN development. That said, the WAA’s influence will remain limited until it is able to expand membership beyond its current base of predominantly Mainland Chinese Wi-Fi equipment vendors. To do this, it will need to work hard to build up trust with the rest of the ecosystem.

Given the centrality of the Pearl River Delta to the Wi-Fi ecosystem, the trends discussed above have the potential to cause major repercussions throughout the industry. These are some of the ways they will impact the market over the coming years:

• Heightened Marketplace Competition: As newer vendors attempt to gain market share for their brands, they may adopt predatory pricing strategies, as TP-Link did when it grew its retail market in the West over 10 years ago. At the same time, Chinese OEMs/ODMs that set up alternative manufacturing sites in locations like Vietnam or India will be in a position to potentially win back some of the business they lost in recent years due to political sensitivities around purchasing from Mainland China. These developments will act to increase competition in the marketplace, forcing vendors to reduce margins and/or introduce differentiating innovations to retain or grow market share.
• Potential for Supply Disruptions: While the establishment of new manufacturing sites will diversify supply, they are not yet tried and tested, so the chances of interruptions to production schedules are higher. This may be caused by less developed local supply chains and logistics, or by conflicts with the local government or workforce. If hiccups do occur, OEMs/ODMs will also not have the luxury of subcontracting portions of orders to smaller OEMs as they did in the Peal River Delta. Steps to minimize potential disruptions to supply chains include working with trustworthy local Quality Control (QC) partners and identifying redundant manufacturing sites for backup.
• New Platforms for Industry Collaboration: If the WAA is able to expand its member base, then it has the potential to significantly improve the user experience of many everyday applications. Yet, gaining the trust of the broader ecosystem may prove challenging due to concerns of government oversight, a belief that the alliance is too China-centric, and a lack of clarity over how this new organization differs from existing industry standards organizations. The WAA will need to address these concerns with prospective members. Ecosystem vendors, on the other hand, should engage with the WAA to gain an understanding of their mission, and to make an informed decision as to whether or not participation would be beneficial for them.
• Improved End-User Experiences: Hightened competition between ecosystem vendors will help drive down costs and spur innovation, while a new standardization body focused on addressing common Wi-Fi connectivity challenges will improve the quality of home and enterprise networks. These trends will all benefit the end user. For example, lower Average Selling Prices (ASPs) could help accelerate the adoption of the latest Wi-Fi technologies in cost-sensitive developing markets, while this price pressure may also force incumbent vendors to expediate innovation to remain competitive, leading to a faster go-to-market for emerging value-added services like Wi-Fi sensing. Resolving common Wi-Fi connectivity challenges will also benefit end users, as the improved overall Quality of Experience (QoE) could facilitate the delivery of cloud-based services in the home and can raise productivity in the enterprise.