While government programs may be the catalyst, consumer demand is the driver. In 2005, notebook computers, handsets and digital cameras were the three fastest-growing product lines in China in terms of both total output and exports. All three product categories are evolving to higher functionality and higher value-add, both of which play to the central government's plans.

Consider handsets. The smart-phone market is expected to grow 100 percent this year as embedded MP3/MP4, camera and gaming functions gain popularity. Domestic handset makers such as Sichuan Changhong, Bird and Shenzhen ZTE are targeting the smart-phone market to take advantage of the higher margins.

"MP3 becomes an essential function in handsets today," said He Shen, an engineer with Taiwan's Sunplus Technology. "Chinese people love this function, so handset makers will require us to provide chips to support it." Sunplus, an audio and memory-chip supplier with sales offices in Shanghai, provides multimedia chip solutions to handset makers that integrate MP3/MP4 playback functions.

"I see high growth in the smart-phone market," echoed Bread Zhu, president of Linpo Electronics Technology, a Shanghai-based electronics distributor and ODM. To serve this market, Linpo has set up a handset unit that provides smart-phone design solutions.