NAND Flash Leads Semiconductor Market Growth in 2020
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Electronics makers were the lead architect of the digital marketplace. They supplied its bolts and nuts – the hardware and software behind the technology – and should know what it’s supposed to do and how it works. Alas, the electronics industry itself has not mastered its creation and has struggled to counter the effects of the digital economy on the market, according to analysts and industry executives.
The transition to a digital-focused world is the most intractable challenge electronics enterprises will face over the next decade and many of them will fail to complete the switch, they said.
If taming what consulting firm McKinsey & Co. dubbed “disruptive digital forces” isn’t complicated enough, electronics manufacturers have also been sucked into an unwinnable political contest where governments, regulators and other power centers are laying claims to the industry’s core operations, including R&D, intellectual capital, design chain, supply chain, production and even how – and for whom – enterprises can deploy their products.
With the advent of the digital economy and the dispersal of electronics design, supply chain, investment and R&D activities over many corners of the globe, Western companies and their fast-rising south East Asian competitors have become pawns in a game of political and economic brinksmanship that is proving challenging to the old ways of conducting high-tech business, according to industry executives. The transformative effects of digital technology on corporate operations has added to the burden companies face, according to John Chambers, executive chairman of Cisco Systems Inc.
“This digital era will dwarf what’s occurred in the information era and the value of the Internet today,” Chambers said, in a McKinsey report. “As leaders, if you don’t transform and use this technology differently — if you don’t reinvent yourself, change your organization structure; if you don’t talk about speed of innovation—you’re going to get disrupted.”
Unfortunately, simply being alert and proactive to today’s changing marketplace will not shield an enterprise from its disruptive waves as Cisco itself has found out. The company’s competitive landscape is more slippery today partly because of many factors entirely beyond its control. Cisco has now for years been trying to appease the Chinese government to avoid being shut out of the world’s second-biggest economy. Last year, Cisco announced plans to invest as much as $10 billion in China to “support the growth of local economies and businesses” in the country. 
“Cisco is deeply committed to our Chinese partners,” said Cisco CEO Chuck Robbins in a statement announcing the transaction. “With these new partnerships and initiatives, Cisco is investing in the next generation of Chinese technology innovation, helping capture the opportunities presented by digitization and committing Cisco resources to ensure success together.”
What was left unstated in Cisco’s $10 billion investment announcement was an acknowledgement of the difficult political terrain global technology companies must navigate today. In addition to riding the shape-shifting digital market, electronics makers must also pander to unpredictable regional gods such as China, India and even certain Western countries, including the U.S. and Australia, analysts said. In China and in the U.S., many technology firms are being excluded from some market sectors due to security concerns.
Dale Ford, VP & Chief Analyst, IHS Inc.
“Considering the trends and dynamics, one of my concerns is that we could see directives that make some companies strong in their own countries or regions but they might find it more difficult to compete in other countries or regions,” said Dale Ford, chief analyst at IHS Inc., in an interview. “We already see the signs of this taking place. Cisco can’t do business in China; Huawei can’t do business in the U.S.; India and other places are putting up tariffs that require products to be produced in their countries. These moves could be detrimental to the entire electronics industry on a long-term basis.”
Extreme Volatility
It’s true that new, powerful, regional player are impacting the evolution of the high-tech sector but electronics manufacturers have other problems aside from the insistence of countries like Brazil, China and India on asserting their rights to define their roles in the new digital technology system.
With competitive pressures piling up and the rising profile of new players, the system that has powered the industry’s growth for decades is showing signs of strain. As a result, components manufacturers, OEMs and others in the design and supply chains have come to the conclusion that a more agile and dynamic model is required for survival.
Realizing that the design and supply chains that once drove growth in the electronics industry may now be moribund or simply too broken to repair, executives at the individual enterprise level and throughout the market have engaged in all-out efforts to revamp operations and regain competitiveness even while grappling with changing fundamentals and disruptive innovations. Still, although companies talk about the need for a new system to facilitate engineering and production activities in multiple markets, nobody believes the most optimal structure has emerged.
“There are many changes taking place currently in the global design engineering chain and in the supply chain and they are impacting everything,” said Gregory Tashjian, managing partner at Massachusetts-based Inventory Management Partners LLC, a provider of excess inventory management services to electronics OEMs and contract manufacturers. “The pace of technology change is very rapid and as a result we have extreme volatility.”
Whatever system that emerges from this flux would have to be global in scope but also adaptable for local and regional preferences, observers said. In other words, companies must have the capability to harness resources for global competitiveness but be also able to satisfy the demands of local players, including consumers, governments and suppliers, according to Cisco’s Chambers.
The data and networking equipment manufacturer began taking steps to align its operations with changing market forces as far back as 20 years ago but has intensified this in recent years. One core area of change has been in engineering and product innovation, Chambers said. “
The sources of innovation have to move from being something you do on the fringe to something you have to do mainline,” he said. “We transformed our engineering organization from being in silos to being horizontal, taking out about 5,000 people. We changed our sales organization, which is one of the top sales organizations in high tech. Yet we changed 41 percent of the client interface and execs because they were selling routers and switching technology, not business outcomes, architectures, and speed-to-market delivery.”
The reorganization Cisco is implementing has its own challenges. At its core, the electronics industry has always relied upon the predictability of its functional operations. Today, however, the predictability of the design and supply chains has been compromised by the adoption of disruptive business management processes across all geographies. At the height of the industry’s growth, the various regions concentrated on specific parts of the product process but today all those walls – such as design in the West and production in Asia – have been coming down.
Furthermore, the vertical structure of the old market has given way to a flatter system that now includes multiple players, many of them operating in specialized sectors where their narrower focus can enhance creativity and competitiveness. Independent semiconductor design firms are thriving in China, for example, creating opportunities in emerging OEM segments and disrupting the dominance of bigger players.
As a result of these developments, electronics engineering design – long the exclusive preserve of Western OEMs – is fast-shifting to new regions and players, forcing a rethink of not just the design strategies but also of all the support structures surrounding the activity. This development is forcing change at component suppliers, many of which face the prospects of being shut out of certain markets due to security concerns and stringent local sourcing demand by countries such as China, India and Brazil. One such change is the rise in R&D investments to foster the development of intellectual property in China by companies such as Cisco, Intel and Qualcomm. In effect, companies must rethink their entire structure to be competitive, according to Chambers.
“Focus more horizontally on how things work together as opposed to silos,” Chambers said. “If you don’t reinvent yourself, change your organization structure; if you don’t talk about speed of innovation — you’re going to get disrupted.”
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