Rebooting The Electronics Industry After The Economic Crisis
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Rebooting The Electronics Industry After The Economic Crisis

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The reeling financial markets are challenging global business leaders to aggressively rethink their strategies. Across the electronics industry, effects are likely to be quite different, reflecting ...

The reeling financial markets are challenging global business leaders to aggressively rethink their strategies. Across the electronics industry, effects are likely to be quite different, reflecting the enormous diversity of the industry itself. From consumer electronics to medical devices, industry sub-segments will have to respond – each in its own way – to lower consumer spending and stricter access to capital.

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Rebooting The Electronics Industry After The Economic Crisis Rebooting The Electronics Industry After The Economic Crisis Document Transcript

  • IBM Global Business Services IBM Institute for Business Value Electronics Rebooting the electronics industry New innovations are vital to address unprecedented economic challenges The reeling financial markets are challenging global intelligent, interactive electronic devices – from the largest business leaders to aggressively rethink their strategies. flat-panel television to the smallest radio-frequency identifi- Across the electronics industry, effects are likely to be quite cation tag – is here to stay. To operate efficiently in the new different, reflecting the enormous diversity of the industry economic environment, electronics companies will need to itself. From consumer electronics to medical devices, respond decisively to the sharp downturn by staying true to industry sub-segments will have to respond – each in its the industry’s renowned reputation for valuing innovation. own way – to lower consumer spending and stricter access to capital. The sub-segments of the electronics industry each play a role in the business ecosystem. While semiconductors give At the same time, the Internet has permanently changed intelligence to devices, some electronics products serve not just our everyday lives, but also society at large and as stand-alone finished goods and others provide input how enterprises operate around the world. The desire for components for other industries (see Figure 1). Figure 1. The role of electronics in the business ecosystem. Semiconductor capital equipment Electronics components and raw materials Semiconductor and electronics manufacturing services Electronics products and services Other industries Network Equipment Industrial Automation Office Equipment Providers Automotive Healthcare Medical Devices Consumer Electronics Aerospace & Communications Defense Distribution channels Consumers Source: IBM Institute for Business Value analysis.
  • Opting for innovation: Industry outlooks by sub- Potential innovations: With the growing demand forsegment clean energy, photovoltaic cells represent a tremendousTo help global business leaders gain a broad view of the opportunity for semiconductor companies to use theirdiverse electronics industry, and to help them plot their manufacturing capacity and know-how in a related productfuture innovation courses, IBM has prepared quick outlooks category. Also, new intelligent consumer and commercialfor selected industry sub-segments: semiconductor, devices will require custom chipsets that require substantialNetwork Equipment Providers, Industrial Automation, office design capability. These areas may well entice thoseequipment, medical devices and Consumer Electronics. companies that choose to defer capital investment, but are willing to explore new revenue opportunities.Semiconductor: To fab or not to fab? Network Equipment Providers: ConsolidationImpact: The semiconductor sub-segment is hugelyfragmented, with hundreds of players of various sizes that continuesare focused on a wide range of product types and market Impact: The Network Equipment Provider (NEP)niches. The segment is already in a cyclical down-cycle, sub-segment derives its sales from the build-out or upgradeawash in excess capacity and government incentives for of telecommunication infrastructures. Its customer base ofbuilding even more. From DRAMs to processors, pricing telcos will likely defer investment in infrastructure programsis in a free-fall.1 With many of the costs in semiconductor in a tight credit market. Even as demand for bandwidthmanufacturing fixed, marginal cost for additional chips is appears to be insatiable, a sharp drop in capital spending islow. Because of this, we may see substantial price fluctua- expected to force NEPs to sharpen their value propositionstions before the economic downturn reverses. for the latest voice and data technologies.For the time being, foundries are expected to make minimal The new economic environment may test which NEP caninvestments, and we may see technology node delays since control costs and survive in the long run. Telcos will becustomers will likely avoid being part of the risk during an looking for cost savings through supply chain efficiency,economic downturn. In addition, we may see manufacturing and the savings can be significant. In Australia, Telstraconsolidate as companies transition to fabless design recently completed a major supply chain overhaul thathouses instead. slashed inventories by 50 percent and eliminated over 2,000 suppliers.4 Repeat that process worldwide and a significantOutlook: In spite of the short-term troubles, the long-term decrease in the number of remaining NEPs is possible.outlook for the semiconductor industry is very strong.Demand for chips and advanced technology, and the Also, since telcos have consolidated substantially in recentspread of electronics into nearly every product seems years, they are now poised to make coordinated buyingunstoppable. And with each succeeding generation of decisions as merged enterprises. They come from atechnology, the number of players who can afford the strong negotiating position and are ready to benefit fromexponentially increasing table stakes in this business has economies of scale, seeking equipment providers that canbeen dropping to about half that in the prior generation.2 match their sizes. As a result, NEPs are facing more pricing pressures and are entering their own periods of consolida-Recent big private equity investments in the space appear tion.5to be a vote of confidence in this scenario. Semiconductorconsolidation is likely to attract private equity investors, Outlook: In spite of cost pressures and likely consolidation,with their long-term outlooks. For a few players already there are a few bright spots where NEPs can seek revenueheavily invested in the space, the choice will be to exit now opportunities in both the consumer and enterprise markets.at big losses or hang on and wait for signs of an upswing. Competition among cable, DSL and other broadbandWe believe that with over US$450 billion in raised – but providers is set to intensify in the next couple of years asuninvested – capital, private equity firms will choose the consumer demand for bandwidth – both fixed and mobilelatter.32
  • – seems insatiable. Bandwidth caps and speed restrictions develop additional services that will improve their clients’may fall by the wayside as telcos chase consumer revenue total cost of ownership. By analyzing their maintenanceand try to offset rapidly declining landline revenue.6 trends and data, IA companies will be able to create new offerings that off-load risk from their clients and lock outEnterprises, though generally cutting costs, may also spend after-market service and parts competitors as well, therebyon selected investments. Those that enable telecommuting, improving margins.remote working, and post-merger integration money-saversare likely to get the most attention. Many enterprises are Potential innovations: IA companies can explore waterlooking at saving money by mobilizing employees and and energy management improvements for existingthen giving them a single broadband path for voice, instant manufacturing processes used at factories. Not onlymessaging, and enterprise data. The savings on office could such solutions reduce operating costs, but alsospace and operating costs are big, but it requires an help factories follow the growing trends among industrialinvestment to be enabled. NEPs may be able to capitalize companies to implement environmentally responsibleon these opportunities by fulfilling these enterprise needs. programs. In turn, IA companies can establish their reputations as global companies that are committed toPotential innovations: A “green” supply chain has the sustainability.potential of providing NEPs with significant cost savings.Many of the major NEPs are based in Europe, where the Office Equipment: Upgrades deferred pendinggovernment and its people have been more advanced in better timesaddressing environmental issues. NEPs can save money Impact: Unlike some other parts of the electronics industry,by reducing heating and cooling costs during the manufac- the office equipment sub-segment is already highly consoli-turing process. They can also provide stronger business dated, both in computing as well as printing, scanning andcases to their telco customers if their equipment consumes copying. As a result, most players in this sub-segment areless energy. well positioned to weather a period of reduced demand. While equipment upgrades are unlikely, office equipmentIndustrial Automation: Demand for factory companies will continue to service their installed bases atequipment drops customer sites.Impact: The Industrial Automation (IA) sub-segment islargely driven by capital expenditures that come from Outlook: Other changes may have a more profoundfactory and office growth and renovation, all of which effect on the office equipment sub-segment. Foremostcould be quickly and significantly impacted by the credit is the shifting definition of “the office.” More and morecrunch. With capital investments cut back, companies that companies are slashing office space and asking workersspecialize in maintenance – rather than new infrastructure to telecommute, not only to reduce the cost of maintaining– could stand to benefit most from the new economic office space, but to improve job satisfaction. That trend,environment. combined with the rise of cloud computing and the increasing ubiquity of broadband connections, may have aAs orders for new plants decline, IA companies are shifting much bigger negative impact on the sub-segment than atheir investments from new products to equipment refur- short-term reduction in demand.bishment opportunities. Products that improve the return oninvestment for refurbishment with lower energy costs should For parts of the office equipment sub-segment facingbe particularly popular. declining demand, intense market share competition is likely in the next few years. To offset some of the price competitionOutlook: Growth is likely to be strongest for those and pump up demand, office equipment companies arecompanies who offer Contractual Service Agreements buying distributors and service partners. Signing long-term(CSAs). Operational services now have the opportunity to 3
  • deals now may allow these companies to refresh clients’ is underway. Within two to three years, big changes couldequipment bases and pump up demand at the start of affect the sub-segment, primarily driven by healthcarethese contracts. However, with little experience in pricing changes in the U.S. market, the world’s largest and theand managing complex multi-year service deals, some origin of most medical device advances and regulatorycompanies may be embracing far more risk than they frameworks adapted in other industrialized countries.understand. Consequently, medical device makers around the world watch developments in the U.S. system with great interest.For those office equipment customers that are able tospend money in the new economic environment, much The U.S. healthcare system is near a breaking point inof it may go into transforming the office from a primary terms of raising costs, while maintaining quality and access.workspace to a meeting and collaboration location. Video Government leaders have proposed various approaches toprojectors, teleconferencing and video-conferencing overhauling the system. High-cost interventions, includingsystems, and “hot desking solutions” – such as call routing many with advanced medical devices, could be the firstand unassigned workspaces – are all key features of to suffer during belt tightening. With margins often at 70the emerging office environment. Color printing is likely percent and higher, and a dearth of studies to show theto increase in importance, too. As fewer documents are added value of the most expensive devices, the industry isprinted, a greater proportion is likely to be for customer vulnerable to buyer pricing pressure.presentations and thus designed to impress. In spite of such possible changes, public leaders and theirPotential innovations: The virtual office of tomorrow constituents are typically slow to agree upon healthcarewill need equipment that can recognize users and their initiatives to be implemented. We believe the medical devicepreferences. Whether to monitor and adjust chair heights industry will weather the economic downturn quite wellor temperature settings, the next generation of office overall and do not expect any dramatic change in rates ofequipment may require these and other assorted kinds of industry consolidation in the near term.built-in “new intelligence” that can provide greater insightsabout helping individuals work more productively. Potential innovations: Remote monitoring and disease management systems are an excellent example of howMedical Devices: Government payers hold new intelligence can be integrated into electronics devices.steady... for now Historically, the performance and quality of implanted devices have been monitored on a quarterly or annualImpact: Healthcare remains an industry apart, and conse- basis. Major device manufacturers are looking to expandquently, so does the medical devices sub-segment. As the range of remote monitoring options for patients and tocountries grow wealthier, demand for healthcare rises much demonstrate that such options can offer clinical benefits.faster than income. In the developed nations, despite lower Assuming they can show, for example, a reduced level ofpopulation growth rates, aging populations continue to relapses and shorter hospital stays for a range of healthpump up spending. Medical devices, though costly, often conditions from diabetics to heart attacks, demand for theseresult in much higher quality of life and fewer hospital visits, devices could take off.and so have typically seemed immune to market ups anddowns. Consumer Electronics: Price competitionDemand for healthcare and medical devices, is unlikely intensifiesto face big changes as a result of the credit crunch in Impact: Even in good times, the Consumer Electronicsthe very short term. Governments are the world’s biggest (CE) space is characterized by deep price competition,health payers and their access to credit is not in doubt. compressed product lifecycles, and continuous pressureThis advantage helps to buffer medical device companies to reduce costs. Diminished consumer credit will arguablysomewhat from the economic downturn. lead to a decrease in discretionary spending. Consumers may now perceive the latest CE products – which manyOutlook: While the economic downturn may not have a would typically purchase at the earliest possible retail avail-drastic effect on medical device companies, another force4
  • ability – to be luxury items they can no longer afford. Price aside other types of new product introductions. But CEcompetition is likely to intensify. Retailers, hoping to attract companies can differentiate their products by building incustomers with aggressive sales and promotions, will turn new intelligence, embedded software to provide usersthat pricing pressure on their original equipment manufac- with a different value proposition. Improved softwareturer (OEM) suppliers. development methodologies and tools can allow CE companies to re-use embedded software and simplifyMost at risk are Japan’s electronics companies, whose customization efforts. Already, we are seeing globalreturns on invested capital have been chronically low and positioning systems (GPS) that recalculate driving timewhose market shares have been declining for more than based on user-generated information, and gardeninga decade.7 The strong yen, currently at a 13-year high gadgets that recommend plant selection based on theiragainst the U.S. dollar, translates into lower profits for those ability to collect and interpret soil and weather conditions.Japanese companies that rely on the large U.S. consumer These products not only compete on price, but offer uniquemarket.8 features to the consumer.Outlook: The top priority for many CE companies will be to As the economic downturn has unfolded, IBM took a look atcut costs. CE companies will likely look first at back-office each of these six major industry segments. Looking ahead,and shared service functions since these activities do not we believe three types of behaviors will prevail in electronicsaffect relationships with retail partners or product avail- (see Figure 2):ability. CE companies are expected to consolidate back-endprocesses in optimal locations and, where possible, • Consolidators. In the semiconductor and NEP segments,leverage global resources in low-cost countries. we expect significant industry consolidation. • Cost Cutters. In the IA and office equipment sectors,Supply chain management is likely to gain greater attention. some consolidation will occur, but the focus will be costPlayers throughout the extended supply chain will be reduction and operational excellence.focused on working down existing inventories to alleviatethe need for working capital. Retailers will likely delay or trim • Share Grabbers. In medical devices and CE, increasedorders, OEM companies will aim to reduce output levels, and competition for market share is likely, but for differentthe effect will ripple out to contract manufacturers in Asia. reasons. In medical devices, the competition may be set off by new regulations and payer strategies. In CE, it isPotential innovations: Products that appeal to the cost- expected from intense price pressure and disruptions inconscious consumer are likely to dominate, often pushing the retail environment.Figure 2. Industry dynamics in electronic sub-segments. Network Semi- Equipment Industrial Office Medical Consumer conductors Providers Automation Equipment Devices Electronics Reliance on capital expenditures Reliance on consumer spending Reliance on government spending Subject to persistent price pressures “Consolidators” “Cost Cutters” “Share Grabbers”Source: IBM Institute for Business Value analysis. Low High 5
  • Investing for a smart future deepest center of excellence. In a highly dynamic market,Regardless of the industry dynamics requiring a particular the additional agility and reduced costs provided by thissub-segment to focus either on consolidating, cutting costs, model can help electronics companies sustain perfor-or grabbing market share, one thing is clear: the electronics mance without losing touch with their local customersindustry is experiencing constant change and it demands around the world.continuous investment. Enterprises that cannot keep The new economic environment will potentially reshapeinvesting in their operations may be fated to fall furthest some industry sub-segments, sometimes under con-behind during an economic downturn. What’s more, they ditions of exceptional speed and stress. In thesemay miss great opportunities to create the innovations that conditions, the ability to rapidly execute on separationscan help prepare them for better economic times. and integrations will make the difference between thriving in adversity and ending up on the auction block. TypicalFor those electronics companies that do continue to invest, merger or separation value creation comes from strongwe foresee three focus areas: integration performance in operations and supply chain1. New intelligence – Seek ways to help users take advan- activity. Companies that quickly leverage procurement, tage of new sources of information to make better manufacturing and distribution for efficiency while push- choices. ing products through combined sales channels – by New product innovation will likely entail using new intel- staying close to customer needs – should weather a ligence and embedded software to create devices that downturn better. can collect, analyze and present information that better 3. Green and beyond – Enact energy, environment and sus- helps end users. This will require that electronics com- tainability initiatives. panies de-emphasize their traditional focus on hardware and focus instead on software development, including Supply chain management, though much improved rigorous requirements management. Long a well-struc- in recent years, still has many benefits yet to be fully tured discipline in industries such as aerospace, defense exploited, including cost savings from effective water and and automotive, requirements management will become energy management. In the past, the availability of cheap a critical competency for electronics companies. credit made it easy to push inventory ownership off onto suppliers through Vendor Managed Inventory (VMI) pro- Coming up with the right requirements is just one of the grams. first steps in an end-to-end product development lifecy- cle. Strong and consistent execution will remain essential This made balance sheets more attractive without fixing to separate the winners and losers in the new economic the real problem – a lack of collaboration across the environment. value chain. With suppliers potentially struggling to get the same credit levels now and even beyond, we expect2. Dynamic enterprise – Adapt faster to customer expecta- companies to start taking the nuts and bolts of sales and tions. operations planning much more seriously, and consider In recent years, electronics companies have led the trend how business practices that support global sustainability toward global integration. More and more, electronics can actually be good for the bottom line. companies are shifting to a model where major back- office functions are globally centralized while sales and market-facing activity is localized. This transformation has not only helped to slash costs by moving resources to their optimal global locations; it has improved skills and responsiveness by moving decision-making to the6
  • Salvation through innovation References 1The coming months will unquestionably present new and LaPedus, Mark. “Samsung profit falls 43% amid memoryinteresting challenges – electronics is already one of the slump.” EE Times. October 24, 2008. http://www.eetimes.world’s most extensively and deeply global industries. com/showArticle.jhtml?articleID=211600372&cid=mostpFrom Silicon Valley to Bangalore, from Europe’s mobile and op_article_eet ,communications leaders to amazingly productive factories 2 Bailey, George and Wendy Huang. “More than “Moore” toin China, electronics represents one of the earliest engines Win: Optimization Strategies for Success in a Maturingof growth in emerging markets, as well as a source of Semiconductor Industry.” IBM Institute for Business Value.innovation and opportunity in mature markets. April 2008. http://www-935.ibm.com/services/us/index. wss/ibvstudy/gbs/a1029558?cntxt=a1000050In looking ahead to industry transformation, the single 3biggest wild card remains the same in good times and bad: “Once Bitten, Twice Shy.” The Economist. October 16,innovation. Perhaps more than any other, the electronics 2008. http://www.economist.com/finance/displaystory.industry has an endless ability to reinvent and transform cfm?story_id=12436197itself, from cloud computing to the surprising longevity of 4 “Telstra and IBM Supply Chain Agreement to Deliver up toMoores law. Electronics innovation goes beyond functions AU$200 Million in Additional Savings.” IBM Press Release.and user experiences; it extends to operational excellence December 6, 2007 http://www-03.ibm.com/press/us/en/ .and business model design – and it should prove invaluable pressrelease/22848.wssto electronics companies as they face the economic 5 Bailey, George and Christian Seider. “And then therechallenges of today and beyond. were few: How to survive the next wave of con-Authors solidation among network equipment providers.” IBMBruce Anderson, General Manager, IBM Global Electronics Institute for Business Value. November 2007 http:// .Industry. Bruce can be reached at baanders@us.ibm.com www-935.ibm.com/services/us/index.wss/ibvstudy/gbs/ a1029033?cntxt=a1000050Paul Brody, Partner, IBM Global Business Services. Paul can 6be reached at pbrody@us.ibm.com Radia, Ryan. “Comcast to double broadband speeds.” The Technology Liberation. October 21, 2008. http://Waishan Leung, Senior Managing Consultant, IBM Institute techliberation.com/2008/10/21/competition-drives-for Business Value. Waishan can be reached at waishan. comcast-to-double-broadband-speeds/; Sullivan, Mark,leung@us.ibm.com “AT&T’s iPhone Mojo Won’t Last, Better Fix Slow DSL.” PC World. October 23, 2008. http://www.pcworld.com/About IBM Global Business Services article/152737/atandts_iphone_mojo_wont_last_better_fix_With business experts in more than 160 countries, IBMGlobal Business Services provides clients with deep busi- slow_dsl.html 7ness process and industry expertise across 17 industries, Bailey, George, Wendy Huang and Shinji Misono. “Winningusing innovation to identify, create and deliver value faster. the global challenge: The Japanese electronics compa-We draw on the full breadth of IBM capabilities, standing nies’ race to innovate.” IBM Institute for Business Value.behind our advice to help clients innovate and implement March 2007 http://www-935.ibm.com/services/us/index. .solutions designed to deliver business outcomes with far- wss/ibvstudy/gbs/a1027400?cntxt=a1000050reaching impact and sustainable results. 8 Hosaka, Tomoko A., contributor. “Strong Yen Hurts Japanese Electronics Makers.” Associated Press. October 29, 2008. http://tech.yahoo.com/news/ap/20081029/ ap_on_hi_te/japan_earns_electronics 7
  • © Copyright IBM Corporation 2008 IBM Global Services Route 100 Somers, NY 10589 U.S.A. Produced in the United States of America November 2008 All Rights Reserved IBM, the IBM logo and ibm.com are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. If these and other IBM trademarked terms are marked on their first occurrence in this information with a trademark symbol (® or ™), these symbols indicate U.S. registered or common law trademarks owned by IBM at the time this information was published. Such trademarks may also be registered or common law trademarks in other countries. A current list of IBM trademarks is available on the Web at “Copyright and trademark information” at ibm.com/legal/copytrade.shtml Other company, product and service names may be trademarks or service marks of others. References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates. GBE03119-USEN-00