Cost Drives Migration of Electronics Manufacturing

By Andrew Fletcher -- Movers & Shakers, 6/22/2006

As manufacturers seek to reduce costs, there has been a marked shift in electronics output from high-cost to low-cost locations. Although Asia/Pacific—in particular, China—has been the main beneficiary, Central and Eastern Europe, Mexico and Brazil have also benefited from significant inward investment. In the longer term, many of today's low-cost locations will also offer significant market opportunities, creating the need for further investment in local manufacturing.

In 1995, production in "high-cost" locations (such as the United States, Western Europe and Japan) accounted for 75 percent of electronics output.

By 2000, this figure had already fallen to 67 percent. However, since the collapse of the IT bubble, in 2000, the transfer of production has accelerated, and in 2005, high-cost locations accounted for only 53 percent of the total, according to preliminary figures from Reed Electronics Research. Between 1995 and 2005, Asia/Pacific's share of global electronics production increased from 20 percent to 38 percent. More important, during this period, China's share of global electronics production increased from 3 percent to 16 percent and transformed the structure of the global electronics industry.

Asia/Pacific

Although now seemingly overshadowed by developments in China, the rest of the Asia/Pacific region has played an important role in the global electronics industry, initially through investments by European, Japanese and U.S. companies but also through the emergence of major indigenous companies, primarily in South Korea and Taiwan, that have established a major presence within the global market.

Reflecting the trend of reduced costs and proximity to emerging markets, South Korean and Taiwanese companies, like their Japanese and Western counterparts, are looking to reduce costs, including migrating production offshore. China has once again been a major beneficiary. An example is the Taiwanese computer industry. In 2004, the proportion of computer goods produced by Taiwanese companies domestically fell to 8.3 percent, with China accounting for 85.1 percent and other countries 6.6 percent.

Asian companies are also investing in low-cost locations outside Asia/Pacific. With its proximity to Western Europe and the potential for strong market growth, Eastern and Central Europe have in particular benefited from recent investments in consumer electronics production and most notably TV manufacturing.

South Korea, Malaysia, Singapore and Taiwan are all ranked in the top 10 countries globally in terms of production. As highlighted, South Korean and Taiwanese companies already compete globally. In other countries such as Singapore and Malaysia, with significant government support, companies are looking to focus on high-value products and move away from low-cost assembly, where they are finding it increasingly difficult to compete.

Although China will continue to gain global share over the next five years and eventually surpass the United States as the largest electronics producer, the rate of growth is expected to slow. Rising labor costs, high employee turnover, power and water shortages and the strengthening of the yuan are some of the factors that will contribute to the expected slowdown in growth. The recent anti-Japanese sentiment and the Taiwan government's tougher stance against China, including a firmer role in controlling investments in the country, could also limit future investment.

Thailand, Indonesia and the Philippines all have established electronics industries, and these countries should continue to attract foreign investment. Large potential markets and the move by foreign companies to spread risk and invest outside of China are helping fuel growth.

Vietnam, with its relatively high-quality, low-cost workforce, is also being viewed as a potential long-term rival to China. Vietnam is already benefiting from rising inward investment but, with electronics output of around $2 billion, remains small in global terms. Although Vietnam has to overcome several issues if it is to increase its attractiveness as a low-cost manufacturing location—in particular the need to upgrade its infrastructure—it will increase its share of global electronics output, with Taiwanese and Japanese companies as major investors in the country.

A greater threat to China is the emergence of India. According to the latest figures from the Yearbook of World Electronics Data, electronics production increased by 9.7 percent in 2005, following two years of very strong growth of more than 16 percent. With India's surging domestic market and rising exports, major foreign companies have significantly increased investment there. Like other low-cost locations, India will need to invest in infrastructure as well as develop the current component supplier base to meet its full potential. However, an improved regulatory environment that supports the growth of the industry, continued foreign investment and a rapidly growing market are expected to result in a surge in electronics output from an estimated $10.6 billion in 2005 to more than $35 billion by 2010.

Europe

In Europe, electronics manufacturing is increasingly migrating east. The once preferred locations of Hungary, Poland and the Czech Republic, however, will face increasing competition for inward investment—in particular for greenfield sites.

At $31 billion, Eastern Europe accounted for just under 13 percent of the overall European total in 2005. Looking ahead, production in Eastern Europe is expected to rise substantially as new plants come onstream. By 2010, Reed Electronics Research forecasts, Eastern Europe will account for almost 20 percent of European electronics output, which is forecast to be in excess of $275 billion. It is worth noting that although Western Europe is losing share of both European and global electronics production, it will remain a significant market opportunity.

North America

The same applies for the United States, the world's largest producer of electronics. In 1995, the United States accounted for 27.4 percent of global electronics production. By 2000, this had increased to 28.2 percent, as the country benefited from the Internet-led boom. However, since then, the United States has lost share as companies have accelerated the migration of production to low-cost locations and will account for an estimated 20.8 percent of global electronics production in 2005, according to preliminary figures from Reed Electronics Research.

Mexico, although facing significant competition from Asia (primarily China), continues to attract investment, due to its proximity to the U.S. market. Between 2000 and 2003, electronics output in the U.S. fell by 34 percent. Reflecting the upturn in the market, electronics output in the U.S. increased by around 8.5 percent in 2004 and, from initial estimates, a more modest 2.7 percent in 2005. Initial forecasts for 2006 are for growth of 4 percent.

Japan

Japan accounted for 26 percent of electronics output in 1995. By 2005, this had fallen to 14 percent, according to initial estimates. Although Japanese companies have for many years transferred low-end, high-volume production offshore, the production of high-end products and the introduction of new products have continued to be undertaken domestically.

Strong demand for digital consumer electronics helped increase output in Japan by 2.3 percent in 2003 and by a further 0.1 percent in 2004. However, despite continued demand for flat-panel TVs, production of other consumer electronics equipment, such as DVDs and digital cameras, has since weakened. With the trend mirrored across other sectors of the industry, electronics output in Japan in 2005 is forecast to have declined by 3.4 percent. Although a modest increase is anticipated for 2006, falling prices will put pressure on manufacturing costs in the longer term and result in an increasing proportion of current high-end production's being transferred offshore.

The dynamics of the electronics industry have changed. Volume production is gravitating toward low-cost locations, which, in turn, are the markets that offer the most long-term potential. Lower volume/high-mix products will, however, continue to be manufactured in high-cost locations, creating significant opportunities throughout the supply chain.

In 1995, electronics output was centered on high-cost locations. Today, the industry is global.

Andrew Fletcher is research manager for Reed Electronics Research.

Percentage of Electronics Output by Location 1995-2005

%	1995	2000	2005+
High-cost	75	67	53
U.S.	27	28	21
Canada	1	1	1
Japan	26	20	14
Western Europe	21	18	17
Low-cost	25	33	47
Asia/Pacific	20	26	38
China	3	6	16
Eastern Europe	1	2	2
Rest of World	4	5	7
Total	100	100	100
+ Preliminary Source: Yearbook of World Electronics Data, Reed Electronics Research (www.rer.co.uk)