Rising consumption, rising influenceHow Asian consumerism will reshape theglobal electronics industryA report from the Eco...
Rising consumption, rising influence                                                 How Asian consumerism will reshape th...
Rising consumption, rising influence    How Asian consumerism will reshape the global electronics industry    Preface    R...
Rising consumption, rising influence                                                 How Asian consumerism will reshape th...
Rising consumption, rising influence    How Asian consumerism will reshape the global electronics industry    products in ...
Rising consumption, rising influence                                                 How Asian consumerism will reshape th...
Rising consumption, rising influence    How Asian consumerism will reshape the global electronics industry      This brief...
Rising consumption, rising influence                                                                 How Asian consumerism...
Rising consumption, rising influence    How Asian consumerism will reshape the global electronics industry    Chart 2    M...
Rising consumption, rising influence                                                 How Asian consumerism will reshape th...
Rising consumption, rising influence                                How Asian consumerism will reshape the global electron...
Rising consumption, rising influence                                                 How Asian consumerism will reshape th...
Rising consumption, rising influence                               How Asian consumerism will reshape the global electroni...
Rising consumption, rising influence                                                       How Asian consumerism will resh...
Rising consumption, rising influence     How Asian consumerism will reshape the global electronics industry     absolute n...
Rising consumption, rising influence                                                 How Asian consumerism will reshape th...
Rising consumption, rising influence                                 How Asian consumerism will reshape the global electro...
Rising consumption, rising influence                                                 How Asian consumerism will reshape th...
Rising consumption, rising influence     How Asian consumerism will reshape the global electronics industry         Many A...
Rising consumption, rising influence                                                 How Asian consumerism will reshape th...
Rising consumption, rising influence     How Asian consumerism will reshape the global electronics industry     Trend 4: T...
Rising consumption, rising influence                                                 How Asian consumerism will reshape th...
Rising consumption, rising influence     How Asian consumerism will reshape the global electronics industry     may well b...
Rising consumption, rising influence                                                 How Asian consumerism will reshape th...
Rising consumption, rising influence     How Asian consumerism will reshape the global electronics industry24             ...
Whilst every effort has been taken to verify the accuracyof this information, neither The Economist IntelligenceUnit Ltd. ...
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Rising consuption, rising influence: How Asian consumerism will reshape the global electronics industry

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Rising consumption, rising influence: How Asian consumerism will reshape the global electronics industry is a new report from the Economist Intelligence Unit, sponsored by DHL Supply Chain. Based on interviews with senior executives in the electronics sector and Economist Intelligence Unit industry forecasts, the report assesses the challenges and opportunities facing global electronics companies, and particularly those doing business in Asia.

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Rising consuption, rising influence: How Asian consumerism will reshape the global electronics industry

  1. 1. Rising consumption, rising influenceHow Asian consumerism will reshape theglobal electronics industryA report from the Economist Intelligence UnitSponsored by
  2. 2. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industryContentsPreface 2Executive summary 3Introduction 5Asia’s rising consumption of global electronics output 7Trend 1: Asia will leapfrog many stages of technology development, driving new forms of electronichardware, software and services 10Trend 2: Asia’s urban population will increase, driving demand for new types of electronics products,but rural markets will also become increasingly attractive 13Trend 3: While rising incomes drive consumerism in Asia, they also undermine its strengths in low-costmanufacturing. This will cause a rethink about the nature of branding, both for Asian and non-Asiancompanies 16Trend 4: The growing influence of Asian design and innovation will push electronics in new directions—and see the rest of the world take on Asian ideas 20Conclusion 23© The Economist Intelligence Unit Limited 2011 1
  3. 3. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry Preface R ising consumption, rising influence: How Asian consumerism will reshape the global electronics industry is an Economist Intelligence Unit report, sponsored by DHL Supply Chain. The EIU conducted interviews independently and wrote the report. The findings and views expressed here are those of the EIU alone. Justin Wood was the author of the report and Sudhir Vadaketh was the editor. Gaddi Tam was responsible for design. The cover image is by David Simonds. We would like to thank all interviewees for their time and insights.2 © The Economist Intelligence Unit Limited 2011
  4. 4. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industryExecutive summaryT he electronics industry has been an important driver of Asian growth and development, creating millions of jobs and supporting the construction of essential infrastructure. For much of its history,however, Asia’s electronics sector has been geared towards producing exports for the rest of the world.Only some of the goods have been consumed within Asia. That trend is changing quickly, as economic growth in Asia outstrips that of developed Westernmarkets, and ever-richer Asian consumers buy more electronics goods. Income in Asia (ex-Japan) isrising twice as fast as in America. As the region catches up, demand in Asia for electronic products hassignificant room to grow. Given the unprecedented rise in income levels in emerging Asia, important questions arise aboutthe impact that greater consumerism will have on the region’s electronics industries. How will demandchange in the years ahead? Will Asian consumers want products and services that are different tothose preferred by their counterparts in the West? How will Asia’s rise feed into product development?How will it influence the shape of new technologies? How will Asian consumerism change patterns ofproduction and distribution that have historically been dominated by exports to other parts of theglobe? This briefing paper identifies four trends that will shape the electronics industry in Asia over thecoming five to ten years. Taken together, these four trends will completely change the nature of theglobal electronics industry:• Asia will leapfrog many stages of technology development, driving new forms of electronichardware, software and services. The late arrival of many parts of Asia to the digital age will enablethe region to leapfrog certain development stages. As a result, Asia will find itself in the driving seat,steering the ways that new technologies are implemented and exploited. This will create opportunitiesfor firms to sell innovative new products to Asia’s consumers.• Asia’s urban population will increase, driving demand for new types of electronics products,but rural markets will also become increasingly attractive. Asia is still predominantly rural, but isurbanising at a rapid pace. This migration to the cities will lead to demand for new types of electronic© The Economist Intelligence Unit Limited 2011 3
  5. 5. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry products in areas such as raising consumer safety levels, improving resource usage and reducing environmental impacts. Just as important, Asia’s vast rural communities will become increasingly plugged into the digital age, driving a raft of new opportunities for electronic products and services. • While rising incomes drive consumerism in Asia, they also undermine its strengths in low- cost manufacturing. This will cause a rethink about the nature of branding, both for Asian and non-Asian companies. As production costs in Asia rise, margins are being squeezed at contract manufacturers and other low-cost producers. To survive, and to capture the opportunities arising from rising consumerism, these firms will shift strategies and start to build brands. This move will present a threat to the current dominant players in the electronics sector. In response, non-Asian firms will increasingly adjust their own brands to take on more Asian characteristics. • The growing influence of Asian design and innovation will push electronics in new directions— and see the rest of the world take on Asian ideas. As Asian electronics companies build brands and get closer to their customers, they are playing a bigger role in the design of new electronics products. Just as important, Asian companies will continue to push deeper into the upstream end of the value chain, producing new components and technologies. The result of these two trends will be a much greater role for Asia-based innovation and design in the electronics industry. Increasingly, Asian ideas will flow into other markets.4 © The Economist Intelligence Unit Limited 2011
  6. 6. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industryIntroductionT he electronics industry has been crucial to Asia’s growth and development. Starting in the 1960s, Western electronics firms began moving their manufacturing to Asia to avail of the region’scheap labour. In the decades since, those initial investments have blossomed, turning Asia into amanufacturing powerhouse that now produces two-thirds of the world’s electronics products. Calculating the contribution of the electronics industry to Asia’s rapid rise and development istricky. Some products, such as TVs, telephones and computers, are easily recognisable as electronicsgoods. But the industry also plays a critical role supplying parts for everything from cars and airplanesto factories and power stations. What’s more, almost every type of service industry, including hotels,financial services and healthcare, continues to grow ever more reliant on electronics. What is clear, however, is that the investment that has poured into the electronics industry overthe past 50 years has driven the industrialisation of Asia, creating millions of jobs and supporting theconstruction of essential infrastructure. The region has rapidly absorbed technological know-how andmanagerial capabilities from its foreign investors, and many of the sector’s biggest companies are nowAsian-owned and run. For much of its history, Asia’s electronics sector was geared towards producing exports for therest of the world. While some of the goods were consumed within Asia, the majority were shipped toEurope, the US and other destinations where consumers were wealthy enough to afford them. Given Asia’s rapid economic growth, however, incomes and wealth in the region are risingsubstantially. Research from CLSA1, a Hong Kong-based investment brokerage, estimates that the 1 Mr & Mrs Asia, CLSA, Spring 2010middle class in Asia ex-Japan will rise from 570m in 2010 to 945m by 2015, with 90% of the increasecoming in just three countries—China, India and Indonesia. The research defines middle class as a percapita annual income of US$3,000 or higher, the point at which consumers no longer spend all theirincome on the necessities of life, but have money left over for discretionary items. This rising wealth is already fuelling a surge in consumerism across emerging Asia, and creatingdeep pools of domestic demand within the region. While exports to other parts of the globe willcontinue to be an important part of Asia’s development story, the opportunities within the regionitself are growing ever more exciting and will exert even more influence on the future of the electronicsindustry.© The Economist Intelligence Unit Limited 2011 5
  7. 7. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry This briefing paper aims to explore these opportunities by identifying trends that will shape the electronics industry in Asia over the coming five to ten years. Before discussing trends further, however, it is important to understand the scale of Asia’s rising consumption of electronics products.6 © The Economist Intelligence Unit Limited 2011
  8. 8. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industryAsia’s rising consumption of globalelectronics outputF ollowing the global financial crisis of 2008 and 2009, growth in the mature economies of the OECD has slowed substantially. Record levels of consumer and government debt need to be reined in andrepaid. As this deleveraging process unfolds, levels of spending will be constrained. Emerging markets,by contrast, are in much better shape, and growing vigorously. Among emerging markets, economicgrowth in Asia is the most exciting of all. The Economist Intelligence Unit (EIU) forecasts that real GDP growth in the global economy will be3.1% this year (measured at market exchange rates). In the US it will be 2.7%, in Japan 1.6% and inthe euro zone, 1.5%. In Asia (ex-Japan), however, growth will be 6.8% (see Chart 1). Incomes in emerging Asia are still significantly below those of mature economies. In 2010, forexample, while the US had a per capita GDP (measured using purchasing power parity) of US$47,560,the equivalent figure in China was just US$7,740, and in India US$3,480. But given the differentChart 1GDP growth(% real change per annum) Asia (ex-Japan) OECD World10 8 6 4 2 0-2-4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Source: Economist Intelligence Unit© The Economist Intelligence Unit Limited 2011 7
  9. 9. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry Chart 2 Market demand for telecoms and IT equipment in Asia (ex-Japan) (US$ bn, left-hand scale) Share of world market demand, % (right-hand scale) Greater China India and South Asia 4,500 45 South Korea South-east Asia 4,000 40 3,500 35 3,000 30 2,500 25 2,000 20 1,500 15 1,000 10 500 5 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (Greater China is China, Taiwan and Hong Kong; South Asia is India, Sri Lanka and Pakistan; South-east Asia is Indonesia, Thailand, Malaysia, Singapore, Philippines and Vietnam) Source: Economist Intelligence Unit Chart 3 Market demand for domestic electrical appliances in Asia (ex-Japan) (US$ bn, left-hand scale) Share of world market demand, % (right-hand scale) Greater China India and South Asia 180 30 South Korea South-east Asia 150 25 120 20 90 15 60 10 30 5 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (Greater China is China, Taiwan and Hong Kong; South Asia is India, Sri Lanka and Pakistan; South-east Asia is Indonesia, Thailand, Malaysia, Singapore, Philippines and Vietnam) Source: Economist Intelligence Unit Chart 4 Market demand for household audio and video equipment in Asia (ex-Japan) (US$ bn, left-hand scale) Share of world market demand, % (right-hand scale) Greater China India and South Asia 60 30 South Korea South-east Asia 50 25 40 20 30 15 20 10 10 5 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (Greater China is China, Taiwan and Hong Kong; South Asia is India, Sri Lanka and Pakistan; South-east Asia is Indonesia, Thailand, Malaysia, Singapore, Philippines and Vietnam) Source: Economist Intelligence Unit growth rates, income in Asia (ex-Japan) is rising twice as fast as in America. As the region catches up, demand in Asia for electronic products has significant room to grow. Take demand in Asia (ex-Japan) for telecoms and IT equipment. Back in 2000, the value of demand stood at nearly US$700bn, or just over 14% of the world market. By 2014, the EIU forecasts that demand will be worth US$4.1trn, or 36.8% of global demand (see Chart 2).8 © The Economist Intelligence Unit Limited 2011
  10. 10. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry It’s a similar story with domestic electrical appliances, such as fridges and washing machines. Backin 2000, demand in Asia (ex-Japan) stood at US$18.6bn, or 10% of the world market. By 2014, the EIUexpects that it will reach US$159bn, or 22% of world demand (see Chart 3). In the household audio andvideo equipment sector, Asia (ex-Japan) will climb from 12.5% of the world market in 2000 to 29% by2014 (see Chart 4). Where electrical products are embedded into other products, the rise in Asian demand is just asevident. Take cars. In 2009, China overtook the US as the world’s biggest car market. Across Asia (ex-Japan), the region’s share of global car sales will rise from 8% in 2000 to 41% in 2014, according to theEIU. This rising demand for electronic goods in Asia will exert significant influence on the electronicsindustry in the years ahead. The nature of this rising influence is discussed in the following chapters.© The Economist Intelligence Unit Limited 2011 9
  11. 11. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry Trend 1: Asia will leapfrog many stages of technology development, driving new forms of electronic hardware, software and services T he late arrival of many parts of Asia to the digital age has been traditionally viewed as a disadvantage. It may well turn out to be a positive, however, in that it enables the region to leapfrog certain development stages and look to the future with a relatively open mind. In many senses, Asian markets face greater freedom in the direction of their investments. For example, there is no need to wring extra returns out of past, legacy investments, and no reluctance to invest in new technologies. As a result, Asia will find itself in the driving seat, steering the way that new technologies are implemented and exploited. Nowhere is this more evident than in the telecommunications sector. While countries in the West have invested billions of dollars building out fixed-line phone networks, many parts of Asia will never have to do so. Instead, they will move directly to owning mobile phones. India, for example, has 36m2 Economist Intelligence Unit fixed line connections, but 700m mobile subscribers.2 Many observers argue that the same leapfrogging effect will happen with personal computers. Instead of buying PCs, Asia’s citizens will increasingly access the Internet for the first time over mobile3 Can India lead the mobile- devices. Research from McKinsey & Co3, a strategy consultancy, shows the picture in India. Today,Internet revolution?,McKinsey & Co, February only 24% of India’s 81m Internet users access the Internet via a mobile phone. But by 2015, when the2011 Internet population will have swollen to 450m, some 79% will access the Internet via a mobile device. Jayant Murty, Asia Pacific director of strategy and integrated marketing at Intel, a US computer chip maker, argues that Asia’s ability to leapfrog stages of technology development will make the region much more open and flexible in the face of new technologies. He also sees that flexibility causing a blending of different technologies that will redraw the lines between separate parts of the electronics industry. Sure, low-income Indians might use their phones to get online, but, says Mr Murty, “It is going to be increasingly hard to differentiate between what is a mobile phone and what is a computer.10 © The Economist Intelligence Unit Limited 2011
  12. 12. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industryWhen you can Skype from a tablet PC, is that a phone or a computer? Devices come in every size thesedays and with varying levels of connectivity.” Research from Gartner, an IT research firm, confirms that technology leapfrogging is alreadyhappening. In March, Gartner reduced its global forecasts for sales growth of PC units in 2011 from15.9% to 10.5%4, as consumers embrace what some are calling a “post-PC world”. “We expect growing 4 Forecast Alert: PC forecast is lowered as consumers diversifyconsumer demand for mobile PC alternatives, such as the iPad and other media tablets, to dramatically computing needs acrossslow home mobile PC sales,” says George Shiffler, a research director at Gartner. devices, Gartner, March 2011 Peter Coffee, director of platform research at Salesforce.com, an Internet services company,believes mobile devices will dominate electronics in the years to come. “It doesn’t matter whetheryou’re a consumer or a business person, everyone wants to access information via mobile platforms,”notes Mr Coffee. “In Asia, which is arguably ahead of the rest of the world in its adoption of mobiledevices, this is even more true, because the traditional keyboard environment of desktop computersdoesn’t suit Asian languages.” He also sees a trend towards greater provision of “cloud-based” services such as those offered byhis own company. This is where users access software and services over the Internet by using a browserrather than having it installed on their own devices. The benefits of cloud-based services have longbeen extolled by proponents of the idea. For one, consumers do not need to upgrade their software;this is done at the cloud’s centre by the central service provider. For another, consumers do not need tobuy expensive data storage, servers and IT systems because, again, the service provider manages thesethings. What’s more, with mobile access, consumers can get their data and access their services fromany device that has a web browser. In Asia, Mr Coffee believes the region’s lack of legacy investments in software will mean it embracescloud-based services much more readily. And this adoption of cloud services will have a significantimpact on the course of the region’s consumer electronics. It means that consumers will no longer need to own expensive electronic devices to accesssophisticated services. Instead, they can use just a simple “edge device” that offers little more than aweb browser. The computing power that used to reside in the consumer device is now aggregated withthe service providers who run their services in the cloud. “For the past two decades, the trend in consumer IT hardware was to push ever more computingpower out to devices. The price would stay the same, but the computing power would get faster andbetter every year,” says Mr Coffee. “In a cloud-based world, the emphasis shifts. You no longer need toput computing power out at the edge, you need it at the centre. That means consumer devices can besignificantly cheaper.” In Asia, although incomes are rising swiftly, they remain relatively low by global standards. But withthe availability of cheap consumer electronics devices, many more of the region’s citizens will be ableto access the Internet and consume sophisticated cloud-based services. Of course, for these cloud-based models to take hold, the penetration of Internet access and thequality of the connection need to improve substantially. At present, Internet access is relativelyundeveloped in much of the region. The Philippines, for example, has a mobile phone penetration rate 5 International Telecommuni-of 81%, but Internet penetration of less than 10%5 (see chart 5, below). cations Union© The Economist Intelligence Unit Limited 2011 11
  13. 13. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry Chart 5 Internet users per 100 inhabitants 100 80 60 40 20 0 ar a ng ia an ng g m My h a sia ka es an a Ph tan e lia Au n ia d a os nd re re n di s or in d pa an na m in ys de an ist Ko iw La ne ra bo Ko la Ko In ap kis Ch an Ja pp al et la la Ta iL st ai an do m ng Ze h Ma h Vi Pa ili Th Sr Ca rt gh ut In Ho Si w Ba No So Af Ne Source: International Telecommunication Union, 2009 Broadband Internet penetration is even lower still. But numerous efforts are under way to improve access in Asia. In 2010, the GSM Association calculated that worldwide investment in wireless broadband was US$72bn, of which 47% was in Asia. Wealthy markets like Japan and South Korea have long been keen advocates of broadband technology and are moving swiftly to upgrade to the latest wireless standards, such as 4G. But now the less wealthy markets such as China and India are pushing into wireless connectivity too. In China, the government is aggressively promoting wireless broadband, not only because of the benefits it brings to consumers and businesses generally, but because China believes the size of its domestic market gives it an opportunity to become a standard-setter for the world in broadband technology (see trend 4, page 20). In India, the push into broadband Internet is also striding ahead. In June 2010, the country auctioned off the spectrum needed to support wireless broadband services. This will offer a much cheaper alternative to existing wired broadband that serves only city dwellers. PricewaterhouseCoopers, a consultancy, estimates that the number of mobile broadband subscribers in India will rise from 100,000 today to 107m by 2015, of which 26m will be in rural areas,6 Mobile Broadband – Outlook predominantly using 3G handsets to access the Internet6. As the country-wide roll-out of wireless2015, PricewaterhouseCoop-ers, 2010 broadband accelerates in the years after 2015, more and more communities will gain access to the Internet and the opportunities that it offers. This deepening penetration of broadband services will drive not only significant demand for telecoms hardware and investment, but also open up huge opportunities in rural markets, as the next chapter explains.12 © The Economist Intelligence Unit Limited 2011
  14. 14. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industryTrend 2: Asia’s urban population will increase,driving demand for new types of electronicsproducts, but rural markets will also becomeincreasingly attractiveA sia is still predominantly rural. Of the region’s 3.7bn citizens, almost 61%—or 2.2bn people—live in rural communities. In many countries, the rural population is far higher, such as in Laos and SriLanka, both of which are 85% rural (see chart 6, below). But over recent decades, Asia’s residents have increasingly been moving to the cities, and this trendwill continue as rural workers abandon their homes in search of a better life in the cities. This rural-urban migration will continue for the foreseeable future, swelling Asia’s cities in the years ahead.However, high birthrates in rural areas will ensure that Asia’s rural populations do not decline inChart 6Rural population as share of total(%) 100 80 60 40 20 0 a n ka a No olia an sh ar Ca al m ia te a nd na os a ng Mo a n re es e ta di di re i or pa p an na ys m es de es ist La Ko in i la bo kis Ko Ne In Ch Ko ng ap an la Ja iL -L et n ai pp la an m h Pa do Ma ng ng or My Th Vi h ng Sr rt ili gh ut In Tim Ho Si Ph Ba So AfSource: EIU and World Bank, 2008© The Economist Intelligence Unit Limited 2011 13
  15. 15. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry absolute numbers, but instead stay at similar levels to today. For electronics companies this picture presents compelling opportunities—both in urban and rural areas. For a start, growing pockets of wealthy consumers that are concentrated in urban areas will represent ever more attractive markets. Given the density of people, infrastructure is more easily installed in cities than in rural areas. Just as important, distribution chains for delivering products are more easily managed. But it isn’t just the market size and concentration of cities that are exciting. These burgeoning cities will present growth opportunities for new types of electronic products. At Philips, a Dutch electronics giant, this trend is interpreted as a new market for “consumer safety”. Urbanisation inevitably means many more people living in ever closer proximity to each other. That puts great pressure on resources such as air and water, and raises the risks of pollution, especially in poorer countries. The rising lifestyle aspirations of the middle classes in these cities are likely to outstrip the ability of governments to upgrade their infrastructure and improve environmental and safety standards to meet those aspirations. Antonio Hidalgo, executive vice president and chief technology officer of Philips, says his firm is developing numerous products with Asia’s expanding urban markets in mind. One new product line centres on air filters. Quite apart from the pollution generated by factories and traffic, urban dwellers often suffer from poor quality building materials. “In China, new apartments have very high levels of volatile organic compounds in the air such as formaldehydes that are present in the glues used for wooden flooring,” explains Dr Hidalgo. “The usual solution is to leave an apartment unoccupied for three or four months after buying it, with the windows open. But that doesn’t actually work, and the air is often still highly toxic.” Since launching its range of air filters in China, Philips has seen demand rocket. Other areas of focus for its consumer safety products are water filtration systems and food safety products. Another opportunity linked to urbanisation is rising demand in Asia for products and services that are more environmentally-friendly. Rising wealth and soaring consumerism will have a negative impact on the environment—an impact felt most keenly in urban areas. For their part, consumers will recognise this and start to demand electronic products that are as environmentally-friendly as possible. Just as important, governments will also fret over the region’s carbon footprint, its use of resources, and its quality of life. The net effect will be that electronics companies will need to think much harder about how to address these concerns. For Rohit Girdhar, head of corporate development in Asia Pacific for Infineon Technologies, a German semiconductor business, these trends represent a significant opportunity. His company makes chips for a number of industries, from cars to trains to power generators to home appliances. But across all these industries, Infineon is focused on producing electronic technology that promotes energy efficiency. “Governments and consumers in Asia are increasingly demanding greater sensitivity to the environment,” says Mr Girdhar. “This is a trend that is driving our product development.” Amongst other things, Infineon is creating systems for running smart grids in cities that use digital technology to reduce electricity wastage. It is designing chips that run air-conditioners more14 © The Economist Intelligence Unit Limited 2011
  16. 16. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industryefficiently, and which go into computer servers to reduce the energy needed to run them. In transport,it makes chips that go into electric cars and high-speed electric trains that cut down on the use of fossilfuels. Just as important as emerging urban opportunities, rural areas will grow increasingly exciting forelectronics companies. Traditionally, such areas have been of scant interest because rural communitiesgenerally have lower purchasing power and are widely dispersed, making them hard to reach. But asmobile broadband access is rolled out, as cheaper-access devices such as smart phones and tablet PCsare developed, and as cloud-based computing models grow, so Asia’s rural markets will feature evermore prominently on the radar screens of electronics firms (see previous chapter). “Cloud-based models, with simple cheap access devices at the edge, will push Internet access downto the common man in Asia,” says Mr Coffee at Salesforce.com. “Rural villages will have access to thesame level of computing power open to governments and multinational companies by connectingthrough their village Wi-Fi relay station.” While this development is driven by rising consumerism, it will also drive further consumerism inturn. “At this stage, rural markets in Asia are really only about fast moving consumer goods (FMCG),like shampoo,” says Mr Murty at Intel. “But in the next three to five years we will see an explosion inrural markets for electronic goods and services. It will happen much more quickly than people think.” He sees rapidly changing demand for the services that rural citizens use. Today, he says, it is lessof an indulgence than it is for Western consumers. “For wealthy markets, the Internet is often aboutFacebook and Twitter and games. For rural markets, the services people use are more about findingadvice on crop rotation and the market prices for their goods,” he explains. “But as Internet accessmoves from being a shared community resource, like a village kiosk, to a personal one in the home, sothe use will switch to entertainment and music and social networking.”© The Economist Intelligence Unit Limited 2011 15
  17. 17. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry Trend 3: While rising incomes drive consumerism in Asia, they also undermine its strengths in low-cost manufacturing. This will cause a rethink about the nature of branding, both for Asian and non-Asian companies C onsumerism in Asia is rising because incomes are growing. While that is positive when it comes to selling goods and services, it also means that labour costs are climbing. That in turn is undermining the business models of many Asian electronics companies that have grown up as contract manufacturers producing goods on an outsourced basis for other companies such as Apple, Dell and HP—the ultimate owners of the brand and intellectual property. In the past, these contract manufacturers have competed by being the cheapest producer. In the future, they will switch their focus away from relentlessly managing costs downwards, to building and owning brands. For their part, Western electronics firms will respond by making their own brands more Asian in character. While the trend to localise brands has been in place for some time now, in Asia it has largely been FMCG and low-value products that have made the shift. Now, as incomes rise, higher-value consumer durable brands are making the shift too. There is much evidence that worker incomes, and hence production costs, are rising across Asia. Consider China. Data shows that the wages of Chinese migrant workers employed in the7 The puzzle of migrant labour country’s factories rose by 17.3% in real terms in 2009. At Hon Hai, a Taiwanese contract electronicsshortage and rural labour sur-plus in China, John Knight, manufacturer, a high-profile labour dispute in Shenzhen in China led to a pay-rise of 67% in 20107. TheDeng Quheng and Li Shi, Chinese workforce will stop expanding in 2013, says the EIU, as the nation’s one-child policy beginsDepartment of Economics,Oxford University, July 2010 to bite. Soon after it will start to contract, adding further pressure to wages. A rising currency makes16 © The Economist Intelligence Unit Limited 2011
  18. 18. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industrymatters even worse for exporters—the EIU forecasts that the renminbi will rise from an average ofRmb6.47 to the US dollar in 2010 to Rmb5.7 in 2015. Such rising costs are outstripping productivity improvements, inevitably squeezing margins. Ifmanufacturers try to pass on the costs to their customers—the brand owners—they risk losing thebusiness to factories in cheaper locations elsewhere in the world. Some contract manufacturers willcontinue to do well, by concentrating on growing their economies of scale in a bid to maintain theirmargins. Others, though, will decide to move into different parts of the value chain. They face twochoices, depicted by Stan Shih, founder and retired chairman of Taiwan’s Acer, a computer company, as“the smiling curve” (see Chart 7).Chart 7Stan Shih’s “Smiling curve” Intellectual property BrandsValue Todayadded 1960s/70s R&D, components, Manufacturing and Marketing and and technology assembly sales Supply chain processes Manufacturers can either move upstream, by designing and building the components, such ascomputer chips, and intellectual property that go into products. Or they can move downstream intobrands and managing the relationship with end-customers. Both ends offer much bigger opportunitiesfor adding value than being stuck in the middle as a mere product assembler. The manufacturingportion of the value chain has become less attractive in recent years because competition has increasedas more and more countries opened their borders to international trade. What’s more, the barriers toentry for new companies are relatively much lower than in the upstream and downstream activities.© The Economist Intelligence Unit Limited 2011 17
  19. 19. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry Many Asian manufacturers have already ventured deep into the upstream part of the value chain, but few have ventured into the downstream, branded end. Of course, Asia does have globally- recognised electronics brands. Panasonic and Sony in Japan and LG and Samsung in South Korea need no introduction. But in the less developed parts of Asia, precious few brands have emerged. Now, with rising incomes, local markets in such countries are becoming wealthy enough, with sufficient purchasing power, to support the development of local brands. Making the transition to brand management, however, will be challenging. It requires a complete change in mindset in how companies are run. Being cheapest, or pursuing the latest technology, is no longer the primary consideration. Instead, firms need to become more people-focused and market- driven in order to develop true user insights that serve as the starting point for product development. It isn’t enough for a manufacturer simply to stick a logo on its products and buy some advertising. What’s more, brands represent a promise between a company and its customers. That promise must stand for reliability, quality and consistency so that customers come to trust the brand and grow loyal to it. Issues such as after-sales and repair services become critical parts of a brand’s character. Emerging Asia does have successful examples of electronics companies that have made the transition from contract manufacturer to brand-owner. Acer is widely respected in laptops, and Huawei of China has built a strong brand in telecoms equipment. But many other companies have struggled. Case Engelen, president and founder of Titoma, a Taiwan-based electronics design firm, believes Chinese companies will continue on the path to brand development, but progress will be slow. “The Japanese and Koreans succeeded in building brands because they had a culture of gradual improvement. They worked constantly on issues of quality and reliability. They took a long-term approach to improve every year,” he says. “The Chinese and Taiwanese are a bit more short-term in their thinking and more opportunistic. They sell toasters one year, then fridges the next, wherever the opportunities are. In China, the focus is still very much on price rather than quality.” One short-cut to the hard slog of building a brand is to buy an already established name. This was the route taken by China’s Lenovo when it bought the PC business of America’s IBM in 2005. Some observers expect more such deals in the years ahead. “Companies in China and India are sitting on a lot of cash. We’ll see them use it to buy international brands because it just takes too long to build them from scratch,” says Mr Murty at Intel. What’s more, he adds, “China has country of origin issues, where Chinese brands are sometimes perceived to be poorly made.” Buying a foreign brand allows Chinese firms to overcome this perceptional challenge. For their part, non-Asian electronics brands will recognise the increasing competition from these local brands. Partly in response to this threat, and partly in a bid to get ever closer to Asia’s consumers, these American and European companies will try to take on a more Asian character. Of course, Western firms have been adapting their brands to suit local markets for many years now. But in Asia, where incomes are low, these adaptations have largely been confined to FMCG and low- value products. Laurent Philippe, a former president of Greater China for Procter & Gamble, a US consumer goods firm, said in an interview in 2004 with McKinsey Quarterly: “We do not see our brands in China as global brands; we see them as Chinese brands… known in China by their Chinese names.”18 © The Economist Intelligence Unit Limited 2011
  20. 20. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry Now it is the turn of electronics brands to follow the same path, as incomes in emerging Asia riseto levels where consumer durables and electronics goods are affordable. At Philips, for example, DrHidalgo says he wants “Philips in China to be a Chinese company”. To that end, he is moving more of thefirm’s global leadership to Asia, and embedding Philips engineers into Chinese families—where theylive with their customers—to build a deeper understanding of the local markets.© The Economist Intelligence Unit Limited 2011 19
  21. 21. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry Trend 4: The growing influence of Asian design and innovation will push electronics in new directions—and see the rest of the world take on Asian ideas A s Asian electronics companies build brands and get closer to customers, they are playing a bigger role in the design of new electronics products. Just as important, Asian companies will continue to push deeper into the upstream end of the value chain, producing new components and technologies. The result of these two trends will be a much greater role for Asia-based innovation and design in the electronics industry. Robert Haak, managing director of Insight InterAsia, an electronics consultancy based in Singapore, says that the West, and the US in particular, still dominates in the design of high-end electronics products. “There is a widespread belief that the American market, because it is large and wealthy, is the best place to design the latest and greatest products,” he says. But, adds Mr Haak, Asia will increasingly carve out niches where it leads the design field. Japan, for example, dominates the design of digital cameras. South Korea has established itself as the leading design centre for televisions. “China could emerge as the leading centre for the design of affordable smart phones, given that it is the world’s biggest mobile phone market,” he says. Certainly as Asia becomes richer, its consumers and their tastes and preferences will be an ever more important part of the design picture. For Western firms, it will no longer be enough to design products in a central location and then adapt them for different markets. They will instead need multiple innovation points that take local consumers—and increasingly Asian consumers—as the starting point for design rather than the end point. Among the new design directions will be a focus on affordability by using the principles of “frugal engineering”. While incomes in Asia are rising, they are still low, so designers are taking established20 © The Economist Intelligence Unit Limited 2011
  22. 22. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industryelectronics products, deconstructing them, and then re-designing them with Asian consumers in mind.Engineers at GE, an American conglomerate, have developed a hand-held electrocardiogram (ECG)called the Mac 400 that sells for US$800, less than half of what a typical ECG would cost. The Mac 400was developed at a GE laboratory in Bangalore in India with rural communities in mind. Given the costpressures on health systems the world over, however, it is now selling successfully in the West too. But it isn’t just the unique needs and tastes of Asia’s consumers that will draw the region everfurther into the design and development of products. At Titoma, Mr Engelen believes the region’sdeepening involvement in component design will also play a part. “It is getting harder for non-Asian companies to do electronics design outside Asia,” he argues.Asian companies are producing components that are not only ever more sophisticated, but also partof wider Asian-designed component sets and systems that all fit together—such as Chinese computerprocessors that integrate seamlessly with locally-produced memory drives, ports and the like. IfWestern companies want to incorporate these components and systems into their product designs theyneed to be close to these companies in order to understand the evolving technology and how differentcomponent suppliers work together. This is often already the case, with Western firms relying heavily on the in-house design capabilitiesof their contract manufacturing partners in Asia. The result is an increasingly globalised innovationnetwork, with engineers and designers across the globe working together on new products andservices. Nonetheless, the part played in these networks by Asia-based designers will grow as theregion rises. At Intel, Mr Murty says innovation in electronics hardware has already moved significantly to Asia,but that the software innovation that goes into the products is still largely concentrated in the West.That will gradually change, he argues, as R&D teams become organised along more global lines.“Innovation is no longer restricted to home markets, but comes from all over the place, “ he says. “AsAsia rises, it will contribute more ideas.” At Infineon, the influence of Asia is already clear. The firm has 21 R&D centres around the globe, ofwhich two are now in Asia—in Bangalore and Singapore. Just as important, to get closer to its clients,the firm has set up four customer research centres, in Beijing, Shanghai, South Korea and Taiwan. Philips has also moved more of its development teams to Asia where they are designing productsspecifically with Asian consumers in mind. Interestingly, many of the ideas that come out of Asia arenow finding their way into products designed for other markets too. Work that Philips has done in Chinaon rice cookers, for example, has influenced the design of paella and risotto cookers in Europe. In India, meals often require lengthy time spent grinding down spices. The machines used for thegrinding can be extremely noisy, so the Philips India team developed new technologies around soundinsulation and vibration control. Those new sound-dampening technologies are now finding their wayinto the company’s line of vacuum cleaners in the West. Importantly, as Asia’s markets grow deeper and richer, the technology that arises from them will seeAsia dictate ever more of the global electronic standards that define future technology directions. Anexample of this is in China, where the government and local technology firms have developed their ownstandard for 3G wireless broadband services. Given the size of the Chinese market, this new standard© The Economist Intelligence Unit Limited 2011 21
  23. 23. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry may well be adopted beyond China’s borders, and so give China and its technology companies ever more clout in the world of electronics. Meanwhile Taiwan has emerged as the pre-eminent centre in the world for developing WiMAX, an alternative broadband technology. The government views WiMAX as a big chance to lead the next stage of electronics development globally.22 © The Economist Intelligence Unit Limited 2011
  24. 24. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industryConclusionA sia’s rapid economic growth will have a profound impact on the global electronics industry. First, Asia will leapfrog many stages of technology development, driving new forms of electronichardware, software and services. This will create opportunities for electronics firms to sell innovativenew products to Asia’s consumers. Second, as Asia’s urban population increases, it will drive demandfor new types of electronics products. At the same, Asia’s rural population will increasingly be pluggedinto the Internet, and will start to consume new products and services. Third, rising incomes will undermine Asia’s traditional strengths in low-cost manufacturing.This will result in a whole generation of new companies emerging onto the global scene, as Asianelectronics manufacturers push into brand ownership and management. These firms could eventuallypose a threat to traditional behemoths such as Apple, the American technology company. In response,non-Asian firms will increasingly adjust their own brands to take on more Asian characteristics. Fourth, Asian design, preferences and habits will increasingly influence electronics innovation. Thiswill have an impact on the nature of electronics R&D as well as the end products sold and used globally. Taken together, these four trends will completely change the nature of the global electronicsindustry. As much as Asia’s rise poses a threat to the incumbents in the electronics sector, it alsopresents fabulous opportunities for growth. Never before have so many people entered the middleclass so quickly. Given the scale of this shift, there are bound to be one or two suprises along the waytoo.© The Economist Intelligence Unit Limited 2011 23
  25. 25. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry24 © The Economist Intelligence Unit Limited 2011
  26. 26. Whilst every effort has been taken to verify the accuracyof this information, neither The Economist IntelligenceUnit Ltd. nor the sponsor of this report can accept anyresponsibility or liability for reliance by any person on thisreport or any of the information, opinions or conclusionsset out herein.Cover image - David Simonds
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