Practical Chip Design

Some time ago, as the storm of recession broke over the industry, we encouraged companies to look quickly to developing markets for demand that was not based on conspicuous consumption. Since then there has been a devastating collapse in end-user demand across the industrialized nations. In contrast, countries such as China and India appear to be using their banks to support their citizenry—rather than committing ordinary citizens to enrich the banks. Our dim view of developed-world demand seems to have been justified.

Apparently European companies—always of necessity more outward-looking than their US competitors—are starting to believe similarly. According to a report in today's Financial Times, companies including Philips, carmaker Renault, and German truck-builder MAN are planning to get over half their sales from emerging markets by 2015. Electrical engineering giant ABB said that in q3, 55 percent of new orders came from emerging markets. The company said the demand for investment is significantly higher there.

The Financial Times article also quotes David Michael, head of Boston Consulting Group's globalization practice in Beijing: "Many industries are at the tipping point where 50 percent or more of global demand is in emerging markets." There is a simple message here. If your business plan is to be part of a supply chain that ultimately brings expensive discretionary goods to developed markets, you have a short-term problem rapidly turning into a long-term strategic error. You are specializing away from the market growth.

The alternative isn't simple. It requires learning what life is like for the emerging middle class. As Xilinx president and CEO Moshe Gavrielov pointed out to me recently, there is a genuine and growing end-user demand coming from people around the world: people who perhaps for the first time can make discretionary purchases. And the alternative means learning how investment patterns in emerging economies turn into demand for electronics systems, and ultimately for semiconductors. That means working with emerging-market systems OEMs and service providers. The Financial Times report said major competition for the Europeans' expansion would come not from US companies but from local ones: the likes of Shanghai Electric and Huawei.