Trends Shaping the Electronics Industry

By The Smart Cube

February 02, 2015 at 9:58 AM

By Namita Dahiya, Assistant Manager, and Shweta Saxena, Analyst, The Smart Cube

Today few industries are as global and multifaceted as the electronics industry. Companies in this category are extremely responsive to consumer demands, and operate in a business environment that is highly dynamic and prone to challenges. Electronics companies are developing strategies to address ever-evolving challenges.

Emerging Consumer Electronics (CE) Products Category

Driven by two major CE products categories—liquid crystal display (LCD) flat-panel television sets and mobile- connected devices (which primarily include smartphones and tablets)—the US CE industry has achieved record- level revenue of $211.3 billion in 2014. However, the industry is witnessing drop in growth rates due to sliding average selling prices of CE products. Post witnessing a 7.7% Y-o-Y revenue growth in 2011, growth rates dropped to 4.4%, 1.8%, and 2.0% Y-o-Y in 2012, 2013, and 2014, respectively. Amid this, the emerging CE products category (which is capturing consumer sentiments globally via innovative features) has surfaced as an opportunity to accelerate the industry’s growth rate.

According to Consumer Electronics Association (CEA), a US-based standards and trade organization for the CE industry, although the emerging CE products category is estimated to account for only 2.4% of the US CE industry by value in 2014, it is likely to grow 242% and 108% Y-o-Y in 2014 and 2015, respectively.

Companies have started to reap benefits through innovations in emerging product categories. Globally, ultra HD LCD television shipment is estimated to rise from negligible in 2012 to ~10 million units in 2014 (refer to Figure 1).

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According to Analysys Mason’s (UK- based telecom, media, and technology consultancy), the global smart wearable devices market—comprising bands, watches, glasses, transformable, and other wearable devices—is expected to reach ~217 million units (~$23.0 billion) by 2020 (refer to Figure 2).

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However, some product categories, such as 3D printers, require companies to strategize differently to improve sales. Although 3D printing is replacing the conventional manufacturing process and being applied in prototyping, and product innovation and development, high cost prevents its wide adoption. Hence, 3D printer manufacturers are focusing on developing low-cost 3D printing devices aimed at increasing product adoption, followed by market penetration.

Vietnam Emerging as Manufacturing Hub for Global CE Players

Global CE giants are shifting manufacturing focus from China to Vietnam on account of increasing labor costs in the former. Availability of cheaper and better quality labor pool, proximity to China, improvements in infrastructure, and political stability, along with investment incentives offered by the Vietnamese government, are key factors facilitating this trend.

According to the Ministry of Planning and Investment of Vietnam, the country attracted $10.2 billion foreign direct investment (FDI) during January– August 2014. South Korea surpassed Japan (the largest source of FDI in Vietnam in 2013) to become the largest investor, accounting for 31.5% (or $3.2 billion) of the total FDI during this period. The electric and electronics industries remained the focus of these investments. While FDI businesses accounted for 25% of Vietnam’s electronics industry, they captured 80% of the total domestic market and a majority export turnover share in 2013.

In November 2014, Samsung secured a $3 billion investment license from the Vietnamese government to build its second smartphone manufacturing facility in Thai Nguyen, Vietnam. The company has an existing $2 billion smartphone plant, which became operational in March 2014, in the province. To encourage investments, the government plans to evade corporate tax—for the next four years, followed by payment of tax at half the applied rate (at that point in time) for the subsequent nine years—to Samsung’s smartphone operations in Vietnam.

Microsoft is planning to relocate its smartphone (marketed under the “Nokia” brand) manufacturing base by shifting 30 production lines from its factories located worldwide to Vietnam by end 2014.

As per data published by General Statistics Office of Vietnam, export of CE products (including electronics, computers, telephones, and spare parts) from Vietnam grew at a 52.5% CAGR (by value) during 2010–2014 (refer to Figure 3).

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Expanding Horizontally to Web-connected CE Products

The global CE industry has been recording significant horizontal integration, primarily to expand in the newly developed internet-connected CE devices market.

According to a study (Internet of Things – Smart Home Devices and Controllers) conducted by the CEA and Park Associates (US-based market research firm), strong growth is predicted in the US market for smart home products, with 20% households with broadband connections intending to buy one or more smart home devices in 2015.

In August 2014, Samsung acquired SmartThings (US-based smart home platform developer) for $200 million to capitalize on the latter’s product expertise (which allows people to sync connected gadgets to a single smartphone app and hardware hub) and customer base.

In October 2014, Samsung announced its plan to build a $15 billion manufacturing facility for advanced chips for internet-connected appliances in South Korea.

In January 2014, Google entered into an agreement to acquire Nest Labs (US-based home automation firm) for $3.2 billion. Through the acquisition, Google intended to leverage Nest Labs’ positioning in the growing web- onnected household appliances market.

Accentuation in the number of horizontal integration deals undertaken by CE industry players globally—toventure into the growing web-connected CE devices market—is likely to drive market consolidation, increasing the bargaining power of global players.

Emergence of US and Other Asian Global CE Players, and Decline in Global Market Share of Japanese CE Industry

The Japanese CE industry, which once captured a majority share of the global market, has been witnessing a decline in sales for more than two decades. Theshare of consumer durables in Japan’s exports has reduced from 30% in 1986 to 16% in 2013 by value.

According to experts, while Japanese firms focused on hardware improvisations, they neglected rapidly evolving software and changing preferences of consumers.

The declining trend in the Japanese CE industry continues to aggravate. Sony— former growth leader in the Japanese CE industry—reported losses during 2011– 2014 primarily due to stiff competition from Apple and Samsung (refer to Figure 4a and 4b). Similarly, other Japanese CE companies— such as Toshiba, Sharp, Hitachi, and Panasonic—have also been adversely affected.

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The fall in CE business is driving Japanese companies to shift focus to other segments, such as heavy machinery, industrial electronics, infrastructure, and satellites. For instance, in September 2014, Toshiba announced plans to concentrate on serving B2B customers while withdrawing from unprofitable market geographies.

Further, to increase focus on specific businesses, some Japanese CE firms are pruning non-core/loss-making segments. In July 2014, Sony sold its personal computers segment “Vaio” to Japan Industrial Partner (JIP—a Japanese private-equity fund).

As is clearly visible, a wide range of new devices—including web-connected consumer electronics, wearable devices, and 3D printers—have emerged in the recent past as a result of changing consumer needs and advancing technology, impelling electronics companies to realign their strategies with the upcoming trends. Moreover, many companies, such as Microsoft and Samsung, are shifting their production sites to low-cost manufacturing countries—Vietnam being the latest one. However, what remains to be seen is the impact of these trends on the global electronics industry in 2015, and on the strategies of electronics bigwigs such as Apple and Samsung.



Tags: electronics Strategic sourcing Procurement Technology market commodity sourcing strategy category intelligence
Category: News Article

The Smart Cube

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About The Smart Cube

The Smart Cube is a global professional services firm that specializes in delivering custom research and analytics services to corporations, financial services, and management consulting firms. The Smart Cube has conducted more than 17,000 studies to date across virtually every major industry, function, and region through its global team of over 400 analysts. The firm is headquartered in the United Kingdom with additional offices in the United States, China, Germany, Hong Kong, India, Romania, Switzerland, and Uruguay. The Smart Cube is ISO 27001 certified and audited by BSI for assurance on data protection and confidentiality.


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