Electronics contractors cashing in
By Tony Sitathan

SINGAPORE - In Asia, where all the signs indicate a downturn in the electronics industry, as evidenced by the decline in the margin prices of DRAM (dynamic random access memory) and other chips as well as semiconductors in general, there is one sector that is far outstripping expectations: contract manufacturing.

When the giant Microsoft Corp wanted to roll out its Xbox online gaming console, it turned to Flextronics International, headquartered in Singapore, for its production needs in China. The Xbox is an online gaming console that was recently released by Microsoft in the United States and more recently in Asia.

"It comes packed with hard disk drives, memory chips, PCBA [printed circuit board assemblies] and other active components," said Chettiar Nambiar, a seasoned veteran in the manufacturing industry who previously handled the production requirements of a Fortune 500 company in Singapore. "There is a shift towards virtual manufacturing and outsourcing from Europe and the United States to Asia," he said.

Khaw Kheng Joo, Asia South senior vice president of Celestica, said clients such as Microsoft are looking to Asia as the perfect stepping stone in their global supply-chain business. "Asia presents a host of opportunities, especially China, when it comes to low-cost value-added manufacturing, although there are other areas like Indonesia and Thailand that also specialize in product differentiation and product tooling when it comes to meeting the requirements of the end customer," he said.

According to a survey conducted by Bear Sterns last year, close to 87 percent of original equipment manufacturers (OEMs) had increased their use of electronics manufacturing service (EMS) providers over the previous 12 months and in that time there had been a 25 percent increase in incremental outsourcing from major new outsourcing programs. The EMS industry is estimated to grow exponentially from US$91 billion in 2001 to more than $234 billion by 2006. The overall Asian pie will also have increased from 20 percent of the worldwide EMS market to record 26 percent by that time.

No other segment in the electronics industry promises such returns or pace of growth. According to Khaw Keng Joo, the compound annual growth rate (CAGR) for EMS in Asia is expected to increase by 21 percent before 2006. This is a sweet spot in the electronics industry that has experienced a downward trend in semiconductor-equipment, DRAM and integrated-circuit (IC) sales.

Steve Cullen, the director and principal analyst for semiconductor research of In-Stat/MDR, said the semiconductor industry is in a recovery stage with revenue growth from quarter to quarter. "This year [2002], however, will be about flat [compared with] last year in terms of worldwide revenue. Next year we should see growth of around 20 percent. There has been a shift in IC consumption this year from the US to Asia which reflects the shifting of the contract manufacturing [board stuffing] industry to Asia as manufacturers seek lower costs," he said.

Looking ahead, how can contract manufacturers remain competitive and relevant in the highly charged electronics business? Khaw Keng Joo used the wave theory as an analogy of how the contract-manufacturing business has been progressing. "The first wave was when US IT [information technology] companies outsourced basic PC [personal computer] manufacturing. The second wave saw US communications companies implement outsourcing. The third wave was when the European OEMs began to outsource, while the fourth wave, which is still relevant now, is when the Japanese OEMs began to outsource. This is followed by the fifth wave, which talks about the virtual manufacturing model," he said.

He said that for Celestica to be well recognized as an international EMS player it had to have the right EMS infrastructure in place to provide adequate security to OEMs. It also had to eliminate a long lead time to build its manufacturing infrastructure and implement fast time-to-market and time-to-money methods. And more important, it had to have a global reach providing international support and services, and drive lower costs in order to increase efficiency and eliminate duplication of resources.

"By actively looking at these sets of considerations, it's possible for OEMs then to focus only on their core competencies such as product innovation, marketing and branding including customer care," he added.

According to Philip Koh, a senior Asia-Pacific analyst for Gartner Group, Asia is at an exciting crossroads. "Asia is in an exciting time that is currently experiencing the convergence of consumer electronics, communications (including wireless) and computerization. Although certain segments will outstrip growth in the traditional markets like PCs, the wireless segment is set to grow at a pace of 20 percent based on a year-on-year basis," he said.

China is of course one of the main investment targets of foreign companies. So far more than $400 billion has been invested there since 2000. China enjoys several advantages over other Asian countries for investors. It has a large pool of talented human resources, including electrical and computer engineers as well as foreign-trained engineers who are returning to China. There is also ample low-cost labor on hand, while the potential business within China is enormous. Finally its entry into the World Trade Organization has made it a prized location for large-volume manufacturers.

The ability to establish a trusting relationship with the Asian OEMs and their key decision makers is crucial for international clients. Developing a consistent and full-service solution across the various countries would certainly help the contract manufacturer win orders.
Although cost and customer service are important considerations, according to Seth Sanjay, a semiconductor analyst from Frost and Sullivan Asia Pacific, the importance of technology, experience, skilled personnel, marketing, must not be underemphasized. "Hence in order to stay competitive, companies in the electronic manufacturing services need to move up the food chain. Otherwise, they will be left behind in the technological race. This is further exacerbated by thin margins and high fixed costs," he warned.

And size does matter, since there has already been a series of mergers and acquisitions among contract manufacturers that are wanting to develop their core competencies further to serve a global clientele.

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