Industry forecasts point to significant growth for the duration of 2014 and beyond; but this growth is not just more of the recent same. There are new demand drivers shifting the supply chain balance and with it a new trend in manufacturing is budding. At the center of the growth in consumer electronics is the new expansion of smart devices into lower-priced tiers, with the hopes of answering the demand, by global millions of consumers, for smart devices that have been far outside their price ranges.
ASP is changing the supply chain
Not only is there logic behind this positive growth forecast based on widening the consumer base for smart devices, there also is global GDP data favorably supporting the economic reality that these forecasts can hold weight. More importantly, we are already seeing the initial wave of the lower-priced smart device boom being played out in China, especially. The quick rise of Xiaomi to overtake Samsung as the top smart device is proving that this next phase of growth which we are in has legs. Other new contenders include Huawei, Lenovo and Acer, not to mention long-standing global mobile leaders Nokia and Motorola, all gunning for a leading piece of the new, low-cost smart device market.
The quick rise of new OEMs and the intensifying competition for lower-priced, internet capable, and relatively feature rich, smart devices is changing the industry. This new competition is opening the industry supply chains to new strategic alignments along with new opportunities for a first-mover advantage in new consumer markets. The new supply chains and new strategies come from the challenge of manufacturing these new devices at significantly lower costs. Margins must be tightened even more, demanding a rethinking of component strategies.
How do you narrow already thin margins to provide low-cost smart devices? It's time to rethink the entire supply chain, the bill of materials (BoM), and the engrained Moore's Law approach to new devices, offering smaller, faster, more powerful ICs at each iteration. Considering the cost of technology shrinks, the few leading-edge fabs that exist (assuming you can even book orders for production when you need the chips) are dealing with high upgrade costs that are passed onto clients. But does the new market consumer looking for a low-priced smart device really care more about 64-bit technology or are they more interested in having a (likely first) smart device to connect (likely for the first time) to the internet and have mobile phone access as well? Speed is not as important as connectively as many research reports of the emerging mobile economy have shown.
Demand from new, emergent consumers is focused more on previous-generation technology over next-generation technology because price outweighs all other variables. This is a major change in our industry's strategic thinking. As a result, we are seeing that the hot new OEMs in the Asian markets (and quickly following will be the South American, Indian, and African markets) are not compelled to use the same supply chains as the global leaders such as Samsung or Apple (nor do they really have the supply chain clout to demand production time). Instead, we see new supply chains being forged in China, Southeast Asia, and the "next emerging low-cost regions," as the MIT Sloan article discusses. In these areas, what I call a new "next-shoring" is taking place and the new, locally based fabs, manufacturers and suppliers are at the core of the lean supply chains that enable the next generation of competitive, low-cost, reasonably-featured, smart device to be produced.
Next-shoring – gearing up
Our industry has experienced regionalized and localized off-shoring and re-shoring phases when markets, economic and manufacturing shifts have happened. One of the fundamental reasons for offshoring manufacturing is cost, whether labor, materials, logistics costs, or other supply chain margins that can be trimmed. China experienced a tremendous economic and urbanization surge when offshoring arrived to its shores in search of cheaper labor, factories, and dedicated infrastructure. Now, China is experiencing the result of rising economic positions and emerging middle classes which have come with increased labor costs, leading to the present watershed moment in the global supply chain.
In the current next-shorting phase, we are seeing China's low-cost position replaced by Southeast Asian manufacturing sites such as Vietnam, Central and South American sites including Mexico and Brazil, and the potential for emerging African sites. China is now outsourcing and offshoring low-value manufacturing and trade between emerging market economies is quickly growing to outpace trade with the developed market economies.
As these supply chain shifts mobilize China as the center for higher valued supply chain events, local supply chain networks are also gaining. China relies on imports for IC supply to assemble devices for internal markets and for export markets. Furthermore, locally designed, manufactured, assembled, low-cost, smart device supply chains are surging in China. The result is the rise of OEMs such as Xiaomi and Huawei, to name two recent leaders. Now, as recently reported by McKinsey & Company, with both global leaders moving fabs to China and the Chinese government "[…] putting significant funding and effort behind new policies relating to the development of the semiconductor industry." These events are likely to move favor to localized supply chain partnerships.
These are significant events that are reshaping the global semiconductor supply chain as the demand for low-cost smart devices continues to grow and the market opportunities shift to focus on new market consumers, particularly those in regions that have been underserved to date. Where will these changes lead our industry, our industry leaders, and the shape of innovation and design changes to come?
Ken Neusaenger is director of sales development for Smith & Associates