Electronics Here, There, Everywhere: Implications for Industry Design Chain & Supply Chain Landscape. That was the initial headline for this article but the lengthy wording worked against this choice and a shorter title was substituted. Yet, this analogy demonstrates clearly what’s happening in the world of electronics and how the ubiquity of semiconductors and other technology applications is altering the industry dynamics, forcing enterprises to expand into or withdraw from some business segments, blurring the lines between hardware and software vendors, and generally disrupting established patterns and relationships.
The consumer electronics market is certainly big and getting bigger. In the United States, total consumer electronics sales for this year are forecast to reach $215.8 billion, led by tablets, smartphones and laptops, according to Gary Shapiro, president and CEO of the Consumer Electronics Association (CEA). By 2014, the global consumer electronics market, consisting of audio/visual equipment and game consoles products, will have sales of $289.5 billion, up more than 14 percent from $254 billion in 2009, with the audio/visual equipment segment accounting for 91 percent of sales, according to a Datamonitor report.
“Across geographies and market segments, demand for consumer technologies remains high,” noted Accenture in a research report. “In the shifting landscape of increasingly multi-function devices, and compelled by consumer willingness to experiment, industry players have tremendous opportunity to change the game to win.”
True, huge profits are flowing into the coffers of some companies – Apple, Facebook, Google & Samsung Electronics come to mind here – but savage competition in other areas and failure to either anticipate or respond to drastic changes and enter into new markets have clipped the wings of once-dominant players – Motorola and Nokia are prime examples here. Industry researchers said the consumer electronics market is witnessing both opportunities and huge disruptions, and companies will need to respond swiftly to these changes.
If only those were the only disruptions facing enterprises in the electronics industry today. Just figuring out how and where a company should play a role has become extremely difficult, and merely navigating the contours of changing relationships among suppliers, OEMs, contract manufacturers, distributors, third-party software developers, independent design firms, as well as specialized logistics and marketing offerings and services are equally problematic.
OEMs no longer feel bound by product or market barriers, and component suppliers must ferociously defend margins by rolling out waves of “proprietary” products, many of which have short shelf lives. In distribution, top-tier players are being called upon to play a greater role in the design and supply chains, noted Gerry Fay, president, global electronics marketing group at Avnet Inc. As the mass consumer electronics market has taken over as the main product driver in the industry, so has the role each sector plays with distributors becoming involved not just in traditional component supplies but also in design and other subassembly functions.
“The role of the components distributor is changing. There’s greater systems complexity, which is challenging for our mass market customers because many of them lack the vast engineering resources of a large OEM to keep pace with the accelerating technologies and consumer demand,” Fay said in an interview. “The requirements on distribution from the engineering perspective are growing."
Avnet is being asked to not only sell chips but also to do the systems sell and the total solution sell, he added.
Consumers are exerting greater power on the electronics industry and drastically changing the dynamics of the market in all operational aspects, including design and development of components and finished goods. Without much fanfare many players in the electronics industry are altering their design chains, new product development initiatives, distribution strategies, manufacturing, and other supply chain operations in response to the growing role and increasing dominance of consumer applications in the market.
What this means is that some companies will not even bother to develop products for certain markets because volumes are too low – industrial, military and aviation, for example – or because margin pressures are so intense the return on investment is too paltry, as Dan Deisz, director of design engineering at Rochester Electronics pointed out at a recent industry event. (See: Military, Aviation Markets More Vulnerable to Counterfeiting).
For many industry veterans, the rapid “consumerization” of a market that was once heavily focused on enterprise and industrial applications represents one of the more daunting challenges facing everyone in the industry design and supply chains. The corrosive effects of average price declines make companies choose whether or not they want to increase their exposure to the mass consumer market, a segment characterized by rapid price swings or so-called commoditization.
In response, parts makers, contract manufacturers and distributors must decide whether to continue offerings in segments of the industry dominated by consumer applications (high volume, rapid change) or focus on proprietary products aimed at lower volume, high-mix end equipment, according to observers. That shift has been noticed at leading industry players and they are responding swiftly to this new reality, according to Chris Beeson, VP, global sales & business development at Digi-Key Corp.
“We are really letting the market tell us what’s of value,” Beeson said in an interview while responding to a question about the distributor’s slight change in business proposition to support some of its customers’ production needs. “The customers came to us and said ‘we would really appreciate if you could entertain more aspects of the challenges that we have.’ At all times we are trying to understand the market and the signals of the market.”
Right now, the market is signaling the strong presence of consumer applications, but simply understanding this doesn’t mean attending to it at the expense of the enterprise’s profit motives. At the OEM– and electronics manufacturing services (EMS) provider–level, companies are dividing into three groups: the first focused exclusively on consumer, the second adopting a hybrid model (mass market and specialized), and the third more intent on serving specialized end markets. Other industry players, meanwhile, find themselves compelled to select a segment to service while varying their portfolios to include higher margin value-added offerings.
Opportunities & Challenges of Electronics Here, There & Everywhere
Some industry firms are avoiding the consumer market outright, frightened off by the giddy margin erosions, price sensitivity and accelerated new product introduction processes. Other OEMs are locked in a never-ending race to establish or defend a dominant presence in certain consumer segments. Companies like Apple, Google’s Motorola Mobility, Lenovo, Nokia, HTC and Samsung Electronics are fighting a nasty turf war in the mobile handset/tablet PC market, while Dell, HP and other PC vendors are locked in a similarly destructive war in their market segment.
For supply chain partners, including component vendors and distributors, that must serve both the mass market and low-volume but high-value industry segments, deliberate actions are being taken to protect margins. Some of these actions include taking advantage of the Internet to expand productivity and reduce “touch” such that customers only pay for services that boost their competitive positions, according to Avnet’s Fay.
What’s clear, for now, is that due to the sheer size of the market and its future potentials, consumer applications will play an outsized role in deciding how the industry evolves, and importantly, how the various sectors relate to and compete with each other. That’s because electronics are being incorporated into more parts of human activities than ever before with no single industry segment shielded from this often disruptive excursion, according to Brian Krzanich, CEO at Intel Corp., the global No. 1 chipmaker.
“The past few years have seen dramatic changes in the way consumers use and interact with technology, and those trends aren't slowing down,” Krzanich said while presenting the company’s latest quarter results to investors. “The technology has become mobile, it's become personal and the trends are being dominated by the consumer.”
Intel is keenly feeling the impact of the consumer's growing dominance in the electronics market and is responding to this trend, Krzanich said. The company in less than two years has shifted its focus and pushed to have a greater presence in the smartphone and tablet PC sector. As a result, Intel’s products range from the traditional PC market to all-things digital, and not just in smartphone and tablets, he noted.
“Only 18 months ago, our product line was really only in PC and we didn't have products that played very extensively in tablets,” Krzanich said. “Today we have product lines that expand across both [PCs and digital]. We’re heading into a world where you have a lot of segmentation of technology into different markets.”
In the second and concluding part of this report, we will review the different areas of the economy that are seeing an incursion of semiconductor and other electronics components and examine the implications for the design and supply chains.