Electronics are now so integral to everyday life that it’s hard to imagine the modern world coping without the microchip. Yet the fact that the world’s largest semiconductor manufacturer Intel is celebrating only its 40th anniversary this year, emphasises how quickly this technology has become dominant.
It is now a $1.2 trillion industry, the largest markets being for computers and office equipment (36%), portable and consumer electronics (22%) and communications technology (15%). It is an industry defined by technological advance and changes in fashion.
It has been called a ‘high clockspeed’ industry, with short development lead times, small production runs and volatile markets. The speed of change shows no sign of slowing and electronic technology plays an increasing role in a wide range of products.
Already the cost of the electronics in a new car makes up around a quarter of the car’s value, with some predicting that this will be nearer half the value within just 3 years.
The combination of the rise of the internet, home computing and portable devices has brought about major changes in personal behaviour, to the extent that the information and communication technology (ICT) industry is now central to the social life of an entire generation.
Instant global communication is now the norm and it has spawned new patterns of behaviour that are being played out via social networking sites and by bloggers. Working life has also been transformed, with wireless connections and portable devices enabling remote working.
The increasing sophistication of products has been accompanied by lower prices, helping to sustain the rapid adoption of new products such as flat screen displays. Prices have fallen because the industry has been able to make efficiency gains, on the back of increasing demand in Asian markets and the outsourcing of production to the same region.
In addition, the margins of conventional retailers have been under pressure from online and supermarket retailers. However, some experts warn that the good times for consumers and the industry may be over, partly due to increasing costs amongst Asian producers.
The ICT industry is characterized by the rapid pace of technological development. Consequently, its research and development (R&D) spending has been particularly high.
The ICT industry sits alongside the pharmaceutical industry and automotive manufacturers as a leading investor in R&D.
Thirteen of the top 30 investors in R&D are ICT companies. R&D intensities, the proportion of revenue spent on R&D, are particularly high in this industry, averaging 17.1%.
Professor Dieter Ernst, an expert on global trends in the electronics industry from the East-West Centre in Hawaii, warned that these levels of expenditure may fall though, “Electronic companies are under tremendous pressure from investors to reduce R&D/sales ratios. Most companies have reduced their R&D intensity and are focusing much of their financial resources on stock repurchasing and stock options.”
There is continuing pressure on the industry, though, to develop ever-cheaper products, which are smaller and more powerful. This miniaturisation has allowed for product convergence – so communications technology has merged with entertainment and computing, resulting in mobile phones which incorporate cameras, MP3 players and internet browsers.
The progress of the underlying technology has so far been predicted by Moore’s law, which states that the number of transistors that will fit on a chip (at a fixed cost) will double every two years.
This exponential development of components has fed through into the end-products, most notably delivering computers with ever larger memories, greater speed and higher capabilities. The dimensions of transistors are now reaching the point where quantum effects will come into play, so new approaches will be needed to maintain the pace of change.
Silicon currently forms the backbone of the electronic world, but by using other materials new applications can be delivered. Organic materials such as conducting polymers can be used to make electronic paper or flexible displays and carbon nanotubes could form the basis for a new form of components.
Nanotubes are tiny cylinders of graphite which can be produced to act as semiconductors. They also have good thermal and mechanical properties and are already being used in electronic packaging.
Research is progressing into how they might be dependably engineered into the kind of arrays necessary for computing purposes. Other technologies that may be harnessed include optical computing, which promises much faster computing processes by harnessing photons travelling at the speed of light, and 3-D optical or holographic data storage, which will massively increase computer memory capacities.
The ingenuity of the research teams looks set to ensure that the rate of development will not slow. In just the last few weeks, a new device called a memristor has been demonstrated, which should add a fourth fundamental component for building circuits (alongside capacitors, resistors and inductors).
The lead researcher of the team responsible for this breakthrough was Dr Stan Williams, from Hewlett Packard’s Palo Alto labs. He is very optimistic about what progress may still be possible, saying that fundamental physics suggest that computers could work a billion times more efficiently than they currently do.
If this could be achieved, he pointed out that it would be possible to “put all the powers of all of today’s computers in the palm of your hand.”
Prior to the 1980’s semiconductor companies were vertically integrated and made microchip devices from scratch. The creation of fabrication facilities (or fabs) that could be contracted to produce devices according to a specified design, resulted in the major semiconductor companies adopting a ‘fabless’ model.
Similar changes have taken place at the other end of the product chain. The creation of a finished electronics product now involves a complicated chain of manufacturers with various parts of the process being outsourced to different companies.
These different categories of companies are described by a plethora of somewhat confusing abbreviations. Original Equipment Manufacturers (OEM’s) are the companies we are familiar with on the high street, such as Nokia and Samsung.
Many OEM’s have reduced their fixed costs by outsourcing design and manufacture to Original Design Manufacturers (ODM’s), while concentrating their efforts on branding and marketing of these products instead. Dieter Ernst explained the growing power of these companies, “ODM’s design, develop and source key components – the key functions that define a product. Taiwanese ODM’s (original design manufacturers) provide 95 % of the global laptop market.”
Some of the ODM’s, such as BenQ from Taiwan, now also compete directly with the OEM’s by marketing their own products. Another category of companies, Electronic Manufacturing Service companies (EMS), such as Flextronics, also manufacture components and finished products for OEM’s, usually at a later stage in the life cycle of the product when volumes are higher.
Third party logistics companies are also involved at the end of the supply chain. Companies like TPG Logistics can now carry out the final assembly of products, as well as providing more traditional distribution services.
Professor Petri Helo from the University of Vaasa in Finland is an expert on the structure of the electronics sector. He summarised the changes that have taken place, “EMS companies made it possible to have the fabless model of electronics manufacturing. Now ODM’s are changing the business. New players are able to build products very fast from concepts by providing the whole service from design to distribution. Many successful OEM’s are already using ODM’s to create products such as laptops or mobile phones.”
As with most manufacturing industries, the environmental impact of the ICT industry is now being more tightly regulated by governments. In the European Union, the Restriction of Hazardous Substances (RoHS) directive was implemented in July 2006.
RoHS means that any electronics put on the market in the EU must abide by strict limits on the usage of four metals (lead, cadmium, mercury, hexavalent chromium) and two flame retardant chemicals (polybrominated biphenyl (PBB) and polybrominated diphenyl ether (PBDE)).
The industry has responded by developing new materials (such as lead-free solders) and processes.
Another EU measure, the Waste Electrical and Electronic Equipment directive, now obliges manufacturers to pay for the collection of equipment at the end of its life and then deal with it by recycling or reusing between 50 and 75% of the materials (depending on the category of equipment).
This measure was adopted because of the nature of electronic waste as well as its volume: this already amounts to 20-50 million tonnes of waste each year and its volume is expanding faster than regular waste.
Energy use has also come under scrutiny. Appliances now receive energy ratings and the issue of standby energy use has attracted particular attention. It has been estimated that 5-10% of all electricity used in homes is wasted in keeping equipment on standby.
The International Energy Agency has proposed that by 2010 all appliances should use no more than 1 Watt of power when on standby.
Petri Helo agreed that the focus on environmental matters could result in a major shift for the industry, “Environmental aspects are a big trend in all manufacturing. Products are being assessed from this perspective and the next step is to include eco-efficiency and sustainability within all operations, from manufacturing processes to logistics. Future products will have eco-labels in the same way nutrition facts are reported on food products today.”
Although the industry faces challenges in meeting these environmental standards, it does see itself as part of the solution. The use of ICT can reduce the impact of transportation by increasing the efficiency of engines and improving logistics; it can reduce the need for travel by providing virtual conferencing; and it can reduce energy use in systems via intelligent control.
It is also integral to the development of greener energy sources such as solar panels, fuel cell technology and hybrid power supply for vehicles.
The outlook for the electronics industry is unclear. It is undeniable that it has experienced a period of tremendous growth and technological advance, but this could be under threat from external and internal changes.
Dieter Ernst certainly thinks that the good times are over, “The electronics industry is in turmoil, due to a toxic mixture of pending recession, price inflation and increasing return-on-investment pressures that give rise to underinvestment in R&D.” He went on to warn, “Be prepared for some surprising structural shifts in business models and industry structure.”
The next few years look like being interesting times for the electronics industry, which will have to balance the demands of consumers, suppliers and shareholders in order to continue producing innovative hardware profitably.
Regional manufacturing trends
The largest of the electronics and electrical equipment manufacturers are Siemens of Germany.
They are one of only two European companies in the top 10 largest companies as ranked by revenue, Phillips of Holland (10th largest) being the other. The US has just one representative (Tyco), whereas the Asian representation is much stronger, with four Japanese companies (Hitachi, Matsushita, Sony and Toshiba), two from Korea (Samsung and LG) and one from Taiwan (Hon Hai Precision Industry).
China is not yet represented amongst the biggest players, but that market is where the largest growth is occurring – exports surged by 26% in 2007. China is now the world’s biggest exporter of ICT products, with exports valued at over $400M in 2007, equalling 36% of the country’s total exports.
However, production by foreign-owned companies accounted for around two-thirds of these exports, and joint ventures produced one-sixth, so it will probably be some time before a Chinese company breaks through into the list of the largest manufacturers.
The Chinese Government is trying to upgrade its industry’s capabilities by offering incentives such as tax rebates and loans for construction to attract R&D facilities. Professor Helo explained, “Most of manufacturing especially in consumer electronics has moved to China already.
The Chinese government is now encouraging foreign companies to relocate R&D operations also. One of the reasons behind this is increasing competition with new emerging manufacturing countries such as India.
However, most brand names and OEM’s are still western (with a few exceptions such as Lenovo and Huawei). From the cost structure perspective, marketing, distribution and branding is an important source of both revenue and profit.”
Professor Ernst noted that changes underway in Asia may have significant effects on the industry globally, “There are now signs that there might well be a radical shift on the supply side to cost inflation. For the first time, the China price is beginning to edge up, reflecting rising costs of materials and now also of labour. And price increases are not restricted to China.$quot;
$quot;For the first time, the leading Taiwanese contract manufacturers (Quanta, Compal and Wistron) are demanding price increases from their customers, the global brand marketers. This has never happened before, and indicates that soaring input costs are likely to once again transform this industry. “