Contract electronics manufacture sees countries vie for the business as they try to get on the development ladder, and there is no end in sight.
In January 2015, the US undersecretary of state Catherine Novelli went to meet India's minister for communications and information technology Shri Ravi Shankar Prasad about the subcontinent's plans for a digital economy. Novelli wanted to make sure companies from the US could overcome the trade barriers India has put in place to try to build its own electronics business. The carrot for the US companies is that, if they invest in India to have their products manufactured there, they can be treated as locals - a policy that mirrors the activities of other developing nations around the world as they try to upgrade their economies.
If foreign companies have their products manufactured in India, they not only sell their products in India but have another low-cost place from which to export to the rest of the world. Why does India care so much about giving foreign technology suppliers a break? Because it makes sense.
Since the late 1950s, economists have talked about some industries being 'propulsive' - they not only bring money into a region but drive development and seed innovative companies that operate around the original employers. Electronics is one of those key industries and displays some specific attributes that mean almost no country cannot use it to bootstrap its own industrial development. Only the most landlocked are at a disadvantage simply because they do not have access to cheap shipping.
In Singapore, which has evolved from being a trading port to a centre for technology, the island's Economic Development Board regards electronics as the major industry underpinning national economic growth. According to the EDB, electronics manufacturing contributes 25 per cent of the total manufacturing value-add, and employs just under 20 per cent of people involved in manufacturing across the island. Capital spend is much higher. Of S$16bn in fixed asset investments in 2012, electronics accounted for close to 40 per cent of the total.
The key to that expansion has been contract electronics manufacture, otherwise known as electronics manufacturing services (EMS). Electronics has one key advantage compared to many other industries. The products are often highly modular, using cleanly defined standard interfaces that run from buses such as PCI Express down to the low-speed interfaces such as I2C used in low-end consumer electronics. It is easy for OEMs to parcel up functions and have them absorbed into modules - themselves composed of highly modular integrated circuits - that can be made anywhere with enough skilled staff and assembly equipment.
Three of the top 20 EMS providers are based in Singapore, including Flextronics, which moved its base from the US after a leveraged buyout in 1990. And EMS remains a large contributor to the Singaporean economy.
Similarly, EMS has been a significant contributor to Taiwan's economic growth over the past three decades and also demonstrates the high mobility of electronics coupled with outsourced manufacture. Machinery and chemicals production have more or less kept pace as well, but Taiwan more than doubled its revenue from IT and electronics manufacturing in the decade to 2011. The industry is currently responsible for almost a third of total industrial output even though it has become a victim of the relative ease with which production can be switched to lower-wage economies.
The island is the home of the world's largest EMS company, Foxconn, which has consolidated its status by capturing the bulk of Apple's needs for manufacturing. Pegatron, spun out of Asus as it transformed into a fully fledged OEM, is now the world number-two EMS supplier. As well as Asus, fellow PC maker Acer and phone maker HTC have successfully transformed themselves from EMS specialists into OEMs that sell primarily under their own brand names. However, in a late-2013 briefing paper for the Brookings Institute, Da-Nien Liu and Hui-Tzu Shih argued that the country's suppliers could have done more to diversify beyond conventional contract manufacturing and maintain a stronger position.
Part of the reason why some Taiwanese companies have not decided to move into design is to avoid competing with their customers. The country's flagship business is chip-making, led by two companies that specialise in outsourced manufacturing but not design, either for customers or for their own-brand products. That policy has helped the larger of the two 'foundries', TSMC, grow to become the third-largest chip-maker in the world, behind Intel and Samsung Electronics. However, chip-making is an unusually capital-intensive business and one where wage costs are decreasingly important and so has a different profile from the rest of contract electronics manufacture.
Although fabs were once teeming with technicians transferring boats of wafers from trolleys into manually programmed equipment, the fabs that TSMC now operates are so highly automated that the technician-level staff are no longer required. A boat of 300mm wafers is also so heavy that it needs to be handled by robots. This will only get worse in the next size transition to 450mm wafers. Today, TSMC prides itself on the number of PhDs it employs, many of them involved in front-line production. This has made the location of fabs much more 'sticky' than for plants that put the chips onto PCBs and into systems.
Rising wage costs are likely to convince manufacturers to move operations away from China into other countries, such as India and Vietnam in Asia and into south America as those countries aim to take advantage of the development possibilities made by high-tech manufacture. Taiwan, among many others, has seen the effects of this process.
Rising wages drive offshoring
Although two of the top PC companies are Taiwanese, their products have gradually been offshored to mainland China and further afield. Like Japanese companies before them, which offshored to Taiwan, Korea and China when wages rose in the 1980s, the Taiwanese PC makers have moved production away from the island. By 2006, fewer laptop PCs were made in Taiwan than a decade earlier. Desktop PC production has fared even worse.
The same thing happened to Japan because of the modular nature of the electronics products made there. Writing for the World Bank in 2010, Timothy Sturgeon and Momoko Kawakam noted: 'When wages rose in Japan, Japanese trading companies became intermediaries in more complex 'triangle manufacturing' arrangements that brought factories in Korea, Taiwan, and Hong Kong into a system that had previously consisted of Japanese factories exporting directly to countries in the west'.
Electronics is not alone in using outsourced manufacturing to perform intermediate tasks but it remains unusually prone to these movements. According to the World Economic Forum (WEF), 'trade in intermediate goods amounts to more than half of world trade, excluding oil', much of it facilitated by the invention of the highly modular shipping container in the 1950s. Between the 1950s and the 1990s, the WEF says freight rates fell in real terms by 65 per cent. However, the trend towards cheaper transportation has now gone into reverse.
Transportation costs are becoming a significant factor in determining where plants are sited, forcing a trend back to onshoring according to a November 2012 report, although there has been some slowdown in the trend following the recent slump in oil prices. Electronics, however, is largely immune from the rising costs. One of the key factors is the ratio of value to weight for a large number of products, particularly for intermediate subsystems, making it possible to set up electronics plants profitably more or less anywhere.
There some exceptions, such as flat-screen TVs where final assembly often takes place in or near the destination country. But these are sectors where local assembly and finishing is often driven by punitive trade tariffs meant to limit imports, as well as the value-to-weight ratio.
The thin, delicate LCD and plasma display modules themselves are still made in the Far East but packed together tightly in containers, 10 or 50 at a time, and shipped to the assembly plant where they are married with the control PCBs and the enclosure that will hold them in the final product. They are then finally transported, mainly by road and rail, to local distributors.
Thin margins still worth having
Although manufacturing operations can be set up in most territories, Apple's use of EMS demonstrates the limits of using outsourcing as a tool for economic development if countries fail to capitalise on the potential for having design close to production centres.
A 2007 study found that of the $300 retail price of an Apple iPod MP3 player, just $4 was captured by the Chinese manufacturers that put it together. Today, Apple's gross margins remain the envy of many of its competitors. The margins of the companies that assemble iPhones and iPads are tiny by comparison.
Such wafer-thin margins are difficult for any company to manage but the value that contract electronics manufacturing can bring continues to convince governments that they need to join the game and move the plants into new territories.