A Roadmap: The Present and Future of Electronics Manufacturing
 in Advanced World Economies
By John MacWilliams, Bishop & Associates Inc.

In this issue, I’ll present a topic that is controversial to some and a fait accompli’ to others; i.e. the past, current, and future state of electronics manufacturing by region. In North America, Europe, parts of Southeast Asia, and Japan, domestic manufacturing infrastructures have suffered to varying degrees as China’s influence has impacted their formerly dominant level of involvement in the industry. In particular, we will examine these geographic differences, and predict what may happen in the future as the industry changes and evolves.

The pressure of foreign competition, outsourcing, and offshoring has been with the electronics industry for many years, in successive waves dating back to the 1960s. Outsourcing intensified in the 1990s, as subcontract manufacturers blossomed into the new Electronics Manufacturing Services (EMS) industry. Specialists in PC motherboards, notebook PCs, and other products also emerged to become Taiwan’s global-reaching Original Design Manufacturing (ODM) industry. There was not one specific catalyst for these events, but IBM comes to mind. First IBM outsourced to SCI in Atlanta as they struggled with their PC business, and then came IBM’s internal manufacturing spin-off, which became Celestica in Toronto, Canada. These changes made sense, and to some extent, kicked off the outsourcing industry, because:

• OEMs could save money and resources by outsourcing parts or all of its manufacturing.

• Manufacturing had become a millstone for some, beset by rising investments for new equipment and employee costs.

• They could concentrate on their core mission of developing and marketing advanced products, perhaps on a global scale.

• They could outsource product design to companies that specialize in product areas, but who work through OEMs.

• Expertise among EMS and ODM firms developed over time, giving OEMs assurances on resources, quality, and reliability.

• The global supply chain became the new business requisite.

• Mexico, then China, and now other emerging countries provide low-cost labor, tax breaks, and other incentives.

• Some, specifically China, represent huge developing markets, as well as exports back to home regions.

• Many OEMs have improved existing global footprints or have become global powerhouses using this model.

As this trend accelerated, some saw future problems for domestic manufacturing: employment, infrastructure, key industries, and national security issues. How would one deal with these problems, given that the domestic electronics industry is composed of hundreds of competing companies and suppliers in many different market segments, each with their own objectives and strategies? Several responses emerged:

• Government action, or inaction, on issues of global competitiveness, strengthening R&D, domestic manufacturing and export.

• Industry associations and consortia formed to combat loss of domestic manufacturing.

• Individual company actions, described above but with individual interests, and less overall industry support.

United States: In the U.S., the National Electronics Manufacturing Initiative formed through a partnership of industry and government. The politics of government resulted in NEMI as an industry-led (and funded) consortia to serve interests of member companies and industry at large. NEMI was transformed from a domestic to a global initiative, reflecting the realities of the electronics marketplace and supply chain. iNEMI has done major good works in a range of manufacturing technology issues, and publishes its biennial Technology Roadmap. (See inemi.org 2011 Roadmap to order.). This effort has many strong industry players, including Cisco Systems, Foxconn, HP, IBM, Intel, Lenovo, Microsoft, TE Connectivity, TI, and many others, including supply chain and international firms. It must be stressed that iNEMI efforts are now global. Companies who participate, wherever located, gain knowledge from their membership and work on specific technical projects. iNEMI is not in place to protect the U.S. industry.

In the U.S. and Canada, much high-volume/low-cost product manufacturing has been outsourced to EMS firms who have plants in China, Vietnam, Southeast Asia, Eastern EU, and other low-cost venues. North America has retained some high-volume manufacturing (HVM) and higher-end manufacturing through OEMs, subcontractors, and suppliers who have plants in North America and/or offshore:

• Semiconductor manufacturing where U.S. leads (IC packaging is for the most part in Southeast Asia)

• Connectors (many standard high-volume, computer, communications, and almost all consumer products are offshore)

• Electronic materials and components (many passive and electromechanical components are now offshore)

• Industrial controls (some PC boards are outsourced)

• Military/aerospace (COTs procurement is in place)

• Automotive (becoming more global with the emergence of China and India)

• Medical electronics

• Computers and office equipment (PC production is mostly offshore)

• Telecommunications (cell phone production is in Asia)

• Other specialty/niche markets

Europe: Europe’s market has evolved through several different strategies, as the region matured into its current Union and social democracies. The region also led on environmental regulations, is heavy in basic R&D; and has a local manufacturing culture. EU’s populace is accustomed to high quality, long-lasting products. With a population estimated above 810 million, Europe is 2.5 times larger than the 310 million in the U.S. The EU has experienced:

• Globalization in key industries—but with retention of domestic manufacturing where possible.

• Abdication of high-volume/low-cost manufacturing in areas of consumer electronics and computers.

• Specialization in industrial controls, medical electronics, aerospace, transportation, and appliances.

• Leveraging Eastern Europe’s emerging democracies with its supply of highly educated and/or low-cost labor forces.

• Some countries, e.g., Germany, have increased their competitiveness and have regained export surpluses.

• The European appliance, transportation, and automotive industries exemplify Europe’s own breed of exceptionalism.

• EU’s connector industry has many custom designs and niche suppliers supporting its domestic industries.

• Most other HVM connectors arrive in consumer electronics and computer products imported from Asia.

Japan: Japan became a powerhouse in electronics years ago and retains that position in some areas. The recent Tōhoku earthquake and tsunami exposed Japan’s sole-source positions on several products, including certain semiconductors, BT resin used in IC packaging, and other products. But it also drove home the fact that much of Japan’s electronics industry has been outsourced also, perhaps not as much as the U.S., but significant nonetheless.

An April 11, 2011 Wall Street Journal article, “Looking Offshore After Quake,” describes how the area in and around the quake zone was already in decline, and now companies are looking to move more production offshore. Statistics given in this article show that Japanese manufacturing, as a percent of total value-added economic activity in Japan, has dropped steadily from 36% to 20% from 1970 to 2009. Japanese manufacturers’ offshoring as a percent of their total production has risen from 5% to 17.5% from 1990 to 2010. I’m sure these figures are higher in electronics manufacturing, but less than North America. Japan’s strengths include:

• Semiconductors: Japan has the world’s largest chip fabrication capacity, about 23% of the world’s capacity.

• Japan’s semiconductor equipment manufacturers comprise 35% of the world market and 55-60% of materials.

• Japan leads the world in consumer electronics; but much of that production is in Southeast Asia and China.

• Japan pioneered hybrid vehicle drive trains, LCDs, and solar panels, and most earlier consumer electronics.

• The Japanese connector industry was always strong, and still is.

• Its foundations rest on consumer electronics, semiconductors, and automotive electronics.

• Japan has grudgingly outsourced manufacturing to Southeast Asia and China, retaining as much of its technology as possible.

Taiwan: The Republic of China spearheaded the ODM movement and for years has had government-industry cooperation via ITRI and organizations such as the Taiwan Electronic Connectors Association and Taiwan Electrical & Electronics Manufacturing Association. Companies such as Quanta, Compal, FIC, Elite Group, and many others, emerged in the ODM industry. Now, thousands of engineering and manufacturing jobs have been transferred to China, along with the assembly of PC motherboards, notebook PCs, and a host of other products. Taiwan retains what they call “manufacturing value.” While the country remains vibrant in electronics, it has lost some of its infrastructure to the mainland. Remaining strengths include:

• Semiconductors. Examples: TSMC, the world’s largest IC fabricator; ASE, the world’s largest IC packaging company.

• PCs. Taiwan leads the world with near 100% “manufacturing value” shares in notebook and desktop PCs.

• LCDs. Taiwan, along with Japan and Korea lead in LCDs. Taiwan is particularly strong in monitors.

• Handheld products including new smartphones. Example: HTC Android smartphones.

• Connectors. Taiwan is middling strong with substantial commodity manufacturing in China.

• Taiwan has lost some of its edge in electronics manufacturing, but retains design and has close ties to its neighbor.

There are other areas of note, including India, Singapore, Korea, Malaysia, Thailand, Philippines, and Vietnam—too many to list here. Vietnam seems to be on the rise, as costs increase in China. Singapore has gone upscale from its roots in IC packaging and disk drive assembly. In Korea, Samsung and LG have become leaders in many areas of electronics, including HDTV, semiconductors, and home appliances.

Future: The global market is here to stay. The biggest question mark is China. Cracks have formed in its previous invincible low-cost HVM model. Inflation is increasing; there are challenges to the value of the juan that will increase the cost of Chinese goods on the world market. China’s authoritarian government has helped to perform miracles, but can that continue? For the first time in years, China’s trade surplus last month turned to deficit. Foxconn’s difficulty with the previous mode of having huge campuses housing thousands of young workers is changing. There remains a huge untapped labor market in China’s interior, which could sustain China’s growth well into the future. Growing wealth in China’s 1.4 billion population is trickling down, creating more buying power. The county’s major coastal cities lead the world in modernity and construction.

It appears that the future of electronics manufacturing over the next decade, to a great extent, depends on what happens with China. Without hard numbers, here is what we predict for global electronics and connector manufacturing over the next decade:

China: 

1. China is going through growing pains. However, its infrastructure has grown with modern equipment and processes.

2. China will become a world power in technology, perhaps leapfrogging conventional knowledge by 2020-25.

3. China will lose some manufacturing to Vietnam, India, and elsewhere—including significant “insourcing” to North America.

4. But this will not curtail China’s growth, which is fueled by an increasingly affluent population and internal growth.

5. China’s government will effectively shepherd the country through this period, including current fiscal issues with the U.S.

North America:

1. The U.S. will remain the world leader in semiconductor manufacturing and technology through 2020.

2. Intel will remain #1, with a sales volume challenge from Samsung.

3. Semiconductor processing, including test, will evolve into a new, highly integrated manufacturing process.

4. There will be IC breakthroughs by 2020-25 in new, post-CMOS technology(s), MEMS, and optical silicon.

5. Insourcing will increase. Some HVM will stay here, or will come back from China. 70% to 75% of offshoring is complete and may halt.

6. The domestic connector industry is finding new markets to partially offset those lost through globalization.

7. But the industry will be challenged by next-generation electronic circuitry and miniaturization.

8. The future will depend a lot on non-electronic factors: the state of our economy, government debt, and taxation.

Europe:

1. Europe has already transformed itself into a higher value-added marketplace.

2. Its infrastructure will more and more depend on its higher tech and alternative technology products.

3. EMEA represents regional growth markets, unlike the bordered U.S.

4. Germany has emerged again as the EU leader in manufacturing and export.

5. Its connector industry is well positioned to grow with EU’s “alternative” electrical/electronics industry.

6. Europe’s growth will depend on solutions to its sovereign debt problems and rapprochement with Russia.

Japan:

1. Japan is a mature economy with limited growth prospects and an uncertain future, post-Tōhoku.

2. With proper planning and diligence, Japan will turn this disaster into a positive for future rebuilding and re-growth.

3. Japan’s problem is that it can no longer balance exports against an aging population. This will limit growth.

4. Japan will also be challenged by increased technological sophistication in the region, e.g. China, Korea, and India.

5. Prospects for Japan’s connector industry are nominal. They will depend on automotive, LCD/solar, medical, and other markets.

Taiwan:

1. Similar to Japan, Taiwan has limited or negative population growth potential, projected to top out by 2022.

2. The country has amassed a large population of successful OEM/ODM companies with major China connections.

3. Look at Taiwan going forward as a major well-positioned state adjacent to the world’s fastest growing economy.

4. Growth from 2010 to 2020 will depend on materials science, semiconductor, mobile device, computer, and display technologies.

5. Its connector industry has nominal to negative growth potential, except to the extent that it is successful in China.

All: 

1. Importance of basic and applied research to regional future outcomes.

2. Alternative energy developments and their impact on electronics (or visa-versa) will be paramount 2010 to 2020.

3. This will be driven more by market forces than government edict or subsidies.

4. IC technology progression is slowing. Emerging Research Device (ERD) technology may reshape the industry by 2025.

5. The ever-resilient connector industry will face technologic challenges from new highly integrated forms of packaging.

6. Its future will depend more and more on new markets: HEV/EV, Smart Grid, lighting, and alternative energy.

See connectorindustry.com, electronicsindustry.org, and iNEMI.org for this and other information.

John MacWilliams Senior Consultant and Analyst, Bishop & Associates Inc. John MacWilliams, a senior consultant to Bishop & Associates, has 40 years of diverse experience in the electronics industry. He has worked in sales, market development, and management positions for IRC, TRW, AMP (prior to TE), and his consultancy, US Competitors LLC. He authors the connector chapter for the International Electronics Manufacturing Initiative, and has a website, Electronics Industry. John is a graduate of Lehigh University and resides near Newark, DE.