US electronics industry faces major challenges

The electronics industry has grown outwards from North America, Europe and Japan to manufacturing centres in Taiwan, Korea, China, India and South-East Asia. Most high volume assembly of electronic products is now done in the East and design and research developments are growing in these areas as well. But does that mean we’ve reached the end of the story for North American electronics manufacturing? An overview of the world’s manufacturing centres finds that things are continually changing in all locations.

Shifts in technology, labour and economics, as well as growing concerns about intellectual property and skill preservation, mean that no region has reached a point of predictability.

In the US and North America, electronics manufacturing should continue to play a role in the future growth of the economy and employment.

However, massive outsourcing, particularly to China, has caused infrastructure problems that are moving toward an end-game scenario. North American manufacturing capability and know-how has shrunk, in some cases past the point of no return.

This has happened in other industries too, but the size and sophistication of the US economy means manufacturing is still possible in some markets, such as transport, heavy equipment, agriculture/food and pharmaceuticals - and high-tech/low mid volume and niche market electronics.

Europe has adjusted its electronics manufacturing posture to focus on regional markets and many niche sub-markets, notably motor vehicle, appliance, industrial and medical, and is expanding into Eastern Europe. The ongoing fiscal crisis remains an issue.

Japan remains strong in manufacturing, and has automated its production to retain strategic markets, but it has come under pressure from other Asian economies, particularly Korea.

Other Asian regions, specifically Taiwan and Korea, have had major success, using government cooperation in specific target market dominance, such as computers and displays, and recently have used outsourcing to their advantage.

In Taiwan, they call outsourced production to China ‘manufacturing value.’ Companies like Foxconn, Asus, and Quanta have prospered, serving North American OEM customers with Chinese assembly plants.

China has been the recipient of high-volume, low-cost electronics assembly from all over the world. Central planning appears to have helped, although there are issues resulting from China’s rapid build-up.

At this juncture, it will be very difficult for other regions to catch up, as China is beginning to automate with the latest equipment, to counteract wage inflation.

According to Ray Alderman, executive director of the VITA association for Embedded Computer Products and Standards, during boom times, it could be argued that it was a good business decision to move manufacturing offshore, especially to Asia. The cost of labour was such that the cons of moving could be overlooked by the cost saving of labour.

“Now, that picture has changed. Labour costs in Asia and India are growing at high rates and when you look at the whole labour cost picture, it doesn’t add up.

Labour intensive, high unit volume products can still benefit from the labour costs savings, but the VME industry is not high unit volume and the products are, for the most part, assembled by robots.

The cost of quality, inventory, shipping, protection of intellectual property and user responsiveness all make in-house manufacturing a vital part of the business strategy for VITA members.

Many VITA members keep their manufacturing in-house or use small local manufacturers. These companies are now enjoying the benefits of localisation and are better able to manage costs during an economic slowdown.”

The current scenario, for many companies, is a mix of North American and Asian manufacturing, depending on the type of product. Low volume/high mix production remains in North America for now, while high volume, cost-sensitive manufacturing goes to Asia.

After several years of this activity, foreign recipient locations develop unique expertise in areas such as small form factor manufacturing, use of operator-assisted bench assembly of small electronic parts and associated enabling technologies, such as tool and die making, surface mount assembly and electronic components, which are warehoused or manufactured in local sites.

A wild card in this scenario is semiconductor manufacturing, which is also global, but is still a major North American industry; because it is high tech with low labour costs.

Companies like Intel, TI, and Micron are investing in new fabrication facilities in the US, while continuing to make lower-tech, low-cost products and packaging/test offshore.

This industry remains strong in North America, with 50% or more of its products exported.

But it also has seen a major shift in manufacturing, to where two-thirds of semiconductor products are now made outside North America, including many foundry operations - the IC industry’s equivalent of outsourcing.

To their credit, semiconductor makers have not stood still on promoting domestic manufacturing. They have been particularly vocal on the need for more graduate engineers and scientists to fuel domestic IT developments.

To support investment in US-based, growth-oriented industries, Intel CEO Paul Otellini announced a $US3.5 billion venture capital initiative during a speech at the Brookings Institution in Washington, DC, last year, along with a commitment to increase the number of jobs available for recent college graduates.

Intel made this pledge as part of the Invest in America Alliance, which it leads, and is supported by top venture capital firms and corporations.

The alliance aims to further anchor the nation’s competitiveness on the global stage. It wants to serve as the private sector’s complement to existing State and federal job creation programs.

It will make long-term investment in industries and talent poised to produce the next breakthroughs in technology innovation, including jobs in current and future industries such as molecular diagnostics, bioinformatics, electric vehicle ecosystem and wireless infrastructure.

“Strong, enduring economies grow out of a culture of investment and a commitment to innovation,” said Otellini.

“We simply must have a clear, consistent strategy to promote innovation, investment and start-up companies. There are things business can do, and ought to do, independent of what government achieves.

It would be a long-term mistake to let our future scientists and engineers sit idle after graduation. Today’s announcements are both an investment in the country’s innovators and a signal to the global market about America’s commitment to innovation and future competitiveness”.

Intel, IBM, New York State, and others, are also investing in a $US4.4 billion semiconductor initiative in the State and an equally large investment is being made in NYC to start a new Cornell-NYU-Carnegie-Mellon technical institute on Roosevelt Island.

These, and other investments, are aimed at increasing America’s competitive edge in the electronics, and other, industries via advances in technology and MS-PhD personnel, which have recently lagged MBA and other curricula in North American universities.

Employment in the electronics industry is one measure of the ongoing prospects for this industry and its ability to maintain leadership in a global market.

There has been a steady decline, over recent years, as productivity increased and more work was moved offshore.

At the component level, companies must follow their OEM users who are assembling boards and finished systems in Asia, thus reducing domestic employment, transferring job skills to Asia and eliminating some domestic subcontract work, like tool and die making.

According to the US Census Bureau, employment in the computer and electronic product manufacturing industry (NAICS 334) is forecast to decline by 12% between 2006 and 2016, compared with an ambitious projected overall increase of 11%.

Employment will decline as a result of continued productivity growth, increases in imports of electronic and computer products and outsourcing and offshoring by OEM/EMS users to locations such as mainland China.

Component makers, such as the connector industry, have no choice but to follow their users to new manufacturing locations.

Although much of this design work still takes place in the US, there is ‘leakage’ as manufacturing processes move overseas. Offshore movement will continue to do so as more manufacturing is done in China.

The projected change in employment over the 2006-2016 period varies by industry segment.

Although demand for computers should remain relatively strong worldwide, employment is expected to decline 33.5% in computers and peripheral equipment and 13.7% in semiconductor and other electronic component manufacturing.

Declines in both will be due to the introduction of new technology and automated manufacturing processes, as well as a slowdown in the growth of output in these segments from previously high levels.

These segments will continue to face strong foreign competition and massive offshore assembly:

• Computer and electronic manufacturing (all) 2006-2016: -12.0%;
• Communications equipment 2006-2016: 0.4%;
• Magnetic and optical media 2006-2016: -3.7%;
• Computer and peripheral equipment 2006-2016: -33.5%;
• Semiconductors 2006-2016: -13.7%;
• Audio and video equipment 2006-2016: -21.1%.

Statistics on electronic-related manufacturing tell a mixed story.

Apple certainly knows what is best for its business and shareholders and the company’s P&L statement speaks volumes about its success. Companies in this industry are global enterprises and, as such, need to be low-cost producers.

There is a long litany of reasons why people manufacture offshore via outsourcing, not the least of which is it frees up domestic resources to focus on marketing, engineering and future products.

But that does not mean that under the right circumstances, products for the North American market (or for export) cannot be made in the US.

What needs to happen to improve domestic manufacturing employment and the North American trade balance includes the following:

• Someone, whether it is Apple, Dell, HP, Microsoft, Vizio or Google needs to take a leadership position to manufacture a high volume, next-generation consumer product in the US, to show it can be done.
• Government support is needed in the form of industry-led planning, research, investment tax breaks, lower energy costs, world-leading broadband internet and the promotion of US manufacturing.
• Industry leaders need to discuss the requirements for world-class domestic manufacturing. Intel may have taken a leadership position here, but more needs to be done.
• Strategic technologies and US manufactured products, needed for future world leadership, must be identified and pursued with vigour.

This last point, while critical, is difficult and multifacetted, as companies must compete and want to keep their own developments secret. Most likely, any major new thrust would attract lots of international competition.

Examples of this include LEDs, battery technology and solar panels. US-based companies have no particular incentive to manufacture if it does not benefit their bottom lines. Also, the technologies needed for success may be long-term incubator projects that detract from today’s ROI.

Domestic manufacturing would also need to be done by EMS suppliers (outsourcing is here to stay) who: (a) have invested heavily in Asian plants; and (b) operate on thin margins not conducive to major new investments without immediate payback. But they know how to do it because they are in Asia.

The difference would be tweaking their processes to accommodate higher cost direct labour.

Bishop & Associates comments:

• It is a tough road, but there is still great potential to transform the industry. It’s essential to continue to maintain and grow domestic engineering, product development and R&D, along with manufacturing. They go hand in hand.
• Industry needs to support programs that increase the supply of engineering talent, including manufacturing automation and robotic assembly. Universities and trade schools need to team with industry.
• We need to use strong domestic component product capabilities in semiconductors, connectors, materials technology and research.
• Rebuilding the North American industry starts with cooperation and common purpose between OEMs and component producers. Think big.
• Identifying strategic technologies is a company, industry and national imperative.
• Since we are inevitably in a globally connected economy, companies need to do what is necessary to be competitive and seek global markets. Protectionism won’t work.
• What will it take to form a national commitment to strengthen our regional manufacturing capabilities, to maintain leadership, and to ensure the future progress of our domestic industry?

Robin Pearce, Bishop & Associates
rpearce@bishopinc.com