Economic drivers, challenges creating regional electronics industry
While working on a project in India, previously, I contributed to a series of long and interesting discussions with one of the secretaries to the government of India’s Ministry of Commerce and Industry.
Among many of the topics we discussed, I shared some insight about possible steps India might consider to develop and promote a globally, competitive Indian EMS industry.
Most recently, I contributed to a fact-based electronics industry feasibility analysis orchestrated by IDC’s Manufacturing Insights on various concerns a country might likely face today, and need to address, should a nation without a thriving electronics industry want to create one.
While much of the knowledge and information contained in IDC’s final report will remain shielded from public view, I have been authorized to share some excerpts from the final report with VentureOutsource.com readers.
So, as governments and company executives wanting to create a successful regional electronics industry ask themselves: “What do we need to know?” let’s begin by looking at a typical supply chain world map as it might pertain to a desktop PC. (See Figure 1)
The electronics industry has a global value chain encompassing product design; semiconductor fabrication and packaging, components and subsystems, and final product assembly. (See Figure 2)
And, for the most part, each of the supply chain components mentioned above can be drilled down further revealing even more detail.
Electronics industry performance drivers and outlook
To help paint a picture of the economic drivers for performance that contribute to the overall health of the global electronics supply chain, let’s look at four primary base constituents that make-up this global supply chain while noting the importance of understanding that while the four constituents are related, they each still have distinct personalities impacting relative performance.
On the above note, the OEM base of the global electronics supply chain is a consumer oriented sector.
The base encompassing component and contract electronics manufacturing and design services (EMS / ODM) demand is driven by OEM demand. Therefore, competition is strong and typically played by lowering prices. This can result in poor margins, albeit with growth in revenues.
In the EMS base segment, in particular, readers should note original design manufacturing (ODM) will likely outpace traditional electronics contract manufacturing, which offers a structure (commoditize products, low margins) that does not provide any safety nets against order fluctuations and low-price competitors from emerging countries.
The semiconductor base is a high, fixed cost industry where greater losses can be seen in downturns and higher profits in good times, following innovative developments.
Resilience of Western Europe as a reference
Despite the recent global crisis which now appears to be softening for some industries including the electronics sector, according to some pundits, an April 2009 study by IDC Manufacturing Insights (396 survey respondents) revealed at the time that the overall high-tech business outlook was positive in Western Europe looking out as far as April 2010. See Figure 3 (Also, see VentureOutsource.com findings: April 2009 electronics supply chain business outlook survey results for a more global view on the electronics industry)
Interestingly, at the same time, this same IDC survey revealed the semiconductor industry was expected to come out of its downturn quicker than other industries.
Global electronics industry trends and future outlook
Contrary to what many would like to believe, China still remains the center for electronics manufacturing (components, assembly). However, China is becoming a less popular manufacturing location as OEMs and EMS firms increasingly focus on the total cost to deliver products and service customers.
Meanwhile, the electronics industry will continue to outsource manufacturing, increasingly in lower volume, higher mix emerging segments while OEMs with manufacturing capacity will continue to in-source some production to improve capacity utilization and protect capital investments.
Another developing trend is near-shoring which is becoming more popular for the medical and industrial electronics segments.
Additionally, the Manufacturing Insights feasibility analysis reports that demand for computer hardware products will increasingly shift towards lower priced products.
Looking at OEMs, company executives are continuing to produce efforts to increase efficiency in their supply chains, reduce lead times and reduce inventory levels. And, as manufacturing executives focus on cost reduction, they will also need to accommodate into their plans the increased scarcity of engineering and design expertise while pursuing a desire to leverage low cost manufacturing labor.
Additionally, consolidation of OEMs and suppliers through mergers and acquisitions is likely to continue to occur even as the recession is over.
Looking at the semiconductor industry, although it was strongly hit by the recession, the industry’s outlook remains strongly positive with the use of semiconductor chips in various devices constantly increasing…from consumer electronics to automobiles, medical devices, and industrial equipment.
On this note, the latest World Fab Forecast from SEMI (www.semi.org), the global industry association serving the manufacturing supply chains for semiconductor-based industries, predicts 64% growth in semiconductor fab spending for 2010. There is, however, a critical lack of availability of capital for investment in the semiconductor industry. Major investments in new fabs will come from the top few companies (TSMC, Global Foundries, Toshiba, Samsung, Intel). Additionally, increased merger and acquisition activity is expected in the semiconductor industry.
Critical factors, challenges to building a successful electronics manufacturing industry
On the heels of the electronics industry supply chain background information from the paragraphs above, the following chart highlights the challenges for countries when developing a high-tech industry. (See Figure 4)
To further emphasize the above chart, building a successful high-tech manufacturing industry requires focus on semiconductor manufacturers, contract manufacturers (EMS / ODM) and OEMs.
The key driver for the semiconductor manufacturing industry is innovation and capital. Manufacturing of semiconductors can be attracted by capital and by outstanding skill level.
The critical success factors for semiconductor manufacturing include:
- Availability of capital
- Intellectual property protection
- Well educated people
- Government incentives and funds
- Adequate infrastructures
Some challenges for semiconductor manufacturers might include plant location switching costs which can be extremely high plus, ROI is realized over very long time periods for a new plant (up to 10 years).
On a cautionary note, high-end semiconductor players typically don’t have the financial capacity to make continuous investments whenever doing so is desired plus, there is a lack of investments in new integrated circuit (IC) technologies by venture capitalist firms because VCs now tend to be more interested in emerging technologies such as biotech and solar tech.
High-volume manufacturing in the form of EMS / ODM can be attracted to countries by offering low-cost labor and availability of components (e.g., price and suppliers ecosystem).
The critical success factors for an EMS / ODM model able to offer real outsourcing cost reductions and benefits that actually help OEMs reduce costs and save money [hint: try the outsourcing calculator], include:
- Low cost geographic destinations
- Component costs
- Intellectual property (IP) protection
- Government tax incentives
- Adequate infrastructure
- Developed transportation and logistics
Many challenges for EMS / ODM companies could be categorized as being related to three (3) sourcing flow types:
- Mechanical components: As these are the heaviest components and there is a very high percentage of these in final product, ideally, suppliers should be located close to the EMS / ODM company’s main production facilities.
- Commodity parts (passives, printed circuit boards): Due to small size, sourcing proximity is not critical: thus the main drivers are low cost (for basic commodity parts, which might come from places like China, Mexico, Europe or the US) or quality (for critical commodity parts which might come from the US, Europe, Korea or Japan).
- Key components (memories): These might be obtained from American, Korean, and Japanese suppliers.
Additionally, short lead times can be challenging and significantly impact EMS / ODM companies. To make matters worse, in difficult economic environments customers can change EMS delivery schedules and forecasts…even significantly reduce their forecast period (e.g., from three months to one month).
The key industry driver for attracting OEM to a country is the market. OEMs will open a distribution center (or a factory) if there is a large local or regional market which they can serve.
The critical success factors for OEM include:
- Market opportunities
- Component costs
- Government incentives (import duties)
- Adequate infrastructures
- Developed transportation and logistics
Just like the challenges for semiconductor manufacturing and EMS / ODM companies, OEM company challenges can vary from country to country. However, for the most part, OEMs have to pay attention and watch for many of the same issues semiconductor manufacturing and EMS / ODM companies keep an eye on such as:
- Revisions in import duties which could reduce the economic benefits of assembling locally.
- Exemption of some of the OEM’s products from import tax, thereby eradicating certain tax-advantages.
- Determining whether factories are opened to leverage a competitive advantage provided by a region for a particular OEM or whether factories are opened to exploit import duty advantage – which as mentioned above – could vanish.
To address the issues above, nations and their governmental bodies should look to establish lasting competitive advantages to help retain MNC investors.
What about India?
Since those discussions mentioned at the beginning of this article, the Indian subcontinent has yet to create a name for itself in the EMS industry. In the meantime, other emerging Asian EMS destinations like Vietnam and Thailand have been gaining ground with infrastructure and technological capabilities and employee skill sets and winning some EMS business that could otherwise have gone to India, or even Australia.
Aside from a few noteworthy cases, Indian EMS success stories are more often than not the result of foreign EMS companies doing most of the heavy lifting (putting in required infrastructure, creating a supply base…) at their own expense or small number of domestic EMS organizations.
Contributing source: IDC Manufacturing Insights