EXECUTIVE SUMMARY

In today's globally competitive business environment, electronics companies are under relentless pressure to provide innovative products in shorter time cycles, at reduced cost, and with improved quality. The electronics industry is driven by demands for products that are smaller, lighter, cheaper, and better than the ones they replace. In order to meet market requirements, industry has been moving to Asia, which is now the primary source of electronic components and is soon to become the primary market for consumer electronics.

Japan has been the undisputed leader in the Asian electronics manufacturing industry. This was clearly demonstrated in the JTEC report on manufacturing and packaging in Japan (Boulton 1995). With superior component and equipment capabilities, Japan continues to provide the technology needed to manufacture advanced electronic products throughout Asia. Korea and Taiwan are now competing for second and third place. The long-term strategies of Korea, Taiwan, and Singapore are to increase self-sufficiency by reducing dependency on foreign sources of materials, components, and equipment. The Korean government has provided continuing R&D support to industry in an effort to capture markets from Japan in such components as semiconductors and flat panel displays. The Taiwanese government has relied heavily on nationally funded research to develop and transfer semiconductor and packaging technologies into the private sector. Acer, Taiwan's largest computer maker, and Formosa Plastics, Taiwan's largest conglomerate, are attempting to become world leaders in computers and related components, respectively. As an aggressive new entrant in electronics, Singapore falls behind Korea and Taiwan in its breadth of capabilities, but it is attracting and subsidizing locally conducted R&D by foreign firms and gaining a strong reputation as the "intelligent island." While Hong Kong has significant experience in electronics, it appears to have fallen behind in the technology race and instead has chosen to invest heavily in China. Malaysia lags Singapore and Hong Kong in industrial capabilities but has growing strength in semiconductor and electronic component manufacturing.

Korea, Taiwan, and Singapore find themselves facing rapidly rising incomes and living standards that are pushing up labor costs. To maintain competitiveness, companies are rapidly transferring labor-intensive operations into neighboring countries like China, the Philippines, Thailand, and Indonesia. As the benchmark for low-cost manufacturing, China is forcing its Asian rivals to move into higher value-added products, to develop proprietary technologies, and to invest in capital-intensive businesses.

Korea, Taiwan, and Singapore are rapidly upgrading their production capabilities to utilize advanced component and process technologies. Governments in these three countries are committed to advancing electronics technologies by supporting developments in production equipment, related materials, and components. NatSteel in Singapore, Samsung in Korea, and Oriental Semiconductor Electronics (OSE) in Taiwan are among the many companies that have used government support to advance their production capabilities.

The transfer of operations from newly developed to developing countries has facilitated the creation of regional trade and the development of industrial trade zones as part of "regional polygons" or "regional triangles." There are currently eight growth polygons in East and Southeast Asia, and additional triangles are being planned. Four regional triangles have been established since 1989 involving parts of 11 countries. Regional cooperation provides a competitive model to attract investment and technology. The Southern Growth Triangle, known as SIJORI (Singapore, Johore State of Malaysia, and Riau Province of Indonesia), was formed in 1989 and covers a population of six million people. According to Singapore government officials, it attracted $10 billion in private sector investments during its first five years (1990-1995).

While these Asian nations are geographically and culturally distinct, each is in the process of improving its infrastructure to support product and process realization, from research and design though manufacturing and marketing. The high-quality jobs provided by the electronics industry provide the incentive to offer foreign companies substantial capital investment opportunities. The newly industrialized economies of Asia are making it attractive for foreign companies to move their most advanced technologies and most capital-intensive facilities there. This can only be followed by growing trade imbalances with the United States. The rapid development of Asian nations is creating a large middle-class population of consumers in an area that includes nearly one-half of the world's population. It is projected that the Asian middle class (excluding Japan) could exceed 700 million people by the year 2010. The member countries of the Association of Southeast Asian Nations (ASEAN) alone represented a population of over 500 million by the end of 1996 (Tranzer 1996). China and India account for over 2 billion people. The electronics industries in these countries are growing at nearly 30% per year. The countries visited by the WTEC study teams are expected to prosper as major suppliers to these developing markets. It is further expected that technology transfer and the demand for increased production capacity will accelerate the creation of a very large middle class in Asia.

The United States and Japan will continue to play dominant roles in Asia as major sources of technology and as major markets for Asian products. Even while this report was being written, it was evident that Korea, Taiwan, Singapore, Hong Kong, and Malaysia no longer simply exploit technology from the United States, Japan, and Europe. They are working hard to become less dependent on external technology transfer. By developing its own intellectual property, Taiwan's Industrial Technology Research Institute is able to cross-license and obtain lower royalty rates on licenses for Taiwan's firms. National planning and implementation of long-term strategies in the countries of this study will make them less dependent on the United States and Japan and more competitive in global markets. At the same time, firms from the United States, Japan, and Europe will continue to invest in Asia and transfer their leading edge technologies in order to participate in these growth markets.

This report helps to explain the attractiveness of this migration of manufacturing operations. It is imperative that U.S. government and industry officials understand these trends and consider policies that will slow the outflow of capital and technology, if not reverse the trend. There is much concern that it may be too late. Table E.1 shows the current rankings of major Asian players compared to the United States. In electronics research and development, the United States and Japan are equally matched in innovating next-generation technologies. In product design, Japan has a clear lead over the United States and has been providing most of the new product concepts over the past several decades. There is little question, however, that Japan leads the United States in electronic manufacturing technologies, although the United States has several equipment makers that are producing leading-edge products. Japanese firms dominate the equipment market in Asia. The United States, with its strong brand names, continues to dominate global marketing and sales even as it continues to outsource a growing proportion of its design and manufacturing needs.

These comparisons with Japan are fairly well understood in the United States. What is less well known is how successfully Korea, Taiwan, and Singapore are competing in the marketplace for electronics products and components, or how intent China, Hong Kong, and Malaysia are on challenging the dominance of long-time leaders by rapidly increasing their competence in a wide range of electronics manufacturing fields.

Table E.1
Electronics Industry Capabilities of Asian Countries


Note: More "X"s are better.

Table E.2 shows the panel's overall appraisal of Asian players' packaging technology capabilities, along with those of the United States and Japan.

Table E.2
Technology Leadership in Electronic Packaging


It is important to recognize that the current status of electronic competitiveness is changing rapidly. The United States and Japan are likely to continue to be technological leaders. But with the rapid transfer of operations of U.S and Japanese firms into East Asia, the lag time in technology transfer is shrinking. Asian countries are moving upstream in the technology "food chain" by manufacturing more key components like semiconductors. They have already begun to produce new product designs and are becoming original design suppliers to global brand leaders like Compaq. Taiwanese and Korean producers like Acer and Samsung are already establishing their own brand names in the U.S. and Japanese markets.

As corporations assess their opportunities for expansion and investment, Asia is the most attractive alternative. As growth in local Asian markets increases the attractiveness of investing in the Pacific Rim, the U.S. economy cannot help but be affected. The United States is competing against countries with clearly articulated industrial strategies, long-term plans supported by appropriate investments, growing numbers of partnerships, and increasingly sophisticated and skilled workforces. The future standard of living of the U.S. workforce is integrally tied to the industrial dynamics that are reshaping the Pacific Rim. It is the hope of the authors of this report that the information provided here will serve to enlighten those making decisions in industrial boardrooms as well as the government officials who are making the policy decisions that affect the destiny of the nation.

REFERENCES

Boulton, W.B., ed. 1995. Electronic manufacturing and packaging in Japan. Baltimore, MD: Loyola College. NTIS Report #PB95-188116.

Boulton, W.B., ed. 1997 (upcoming). Electronics manufacturing in Korea and China. Baltimore, MD: Loyola College.

Pecht, M., J. Bernstein, D. Searls, M. Peckerar. 1997. The Korean electronics industry. Boca Raton, FL: CRC Press.

Tranzer, A. 1996. The Pacific century. Forbes (July 15): 108.


Published: May 1997; WTEC Hyper-Librarian