This report helps to explain why locating electronics manufacturing operations in Asia is so attractive and why the resulting electronics manufacturing migration to the Pacific Rim may have a devastating impact on U.S. competitiveness. Panelists believe it is imperative that U.S. government and industry officials understand the trends and consider policies that will slow the outflow of capital and technology, if not reverse the trend. There is concern that it may be too late. The results of a survey of 300 leading manufacturers (Sachs 1996) found that "40% of their products were entirely made offshore; 42% were a combination of made in the USA and offshore; and 18% were 100% made in the USA…The latter group (18%) included a very high proportion of non-high-technology accessory products like fixtures, cabinets, shipping cases, and mounting brackets in contrast to electronic and digital products." The companies also said they "cannot get many key components of domestic origin because the items are either no longer made here, or if they are, they are not price- or quality-competitive compared to goods made off-shore." Of the manufacturers that assembled their end-products in the United States with imported components, virtually all reported that desired chips, resistors, capacitors, and potentiometers were not available domestically. Other scarce U.S.-made items include logic ICs, camera modules, liquid crystal display parts, mechanical/electrical devices, VCR parts, MOSFETS (metal oxide semiconductor field effect transistors), and digital signal plug connectors -- all are critical components of electronics products. Understanding the implications of this finding is critical to maintaining the economic base of the United States. According to one major electronics company, the value added from key components generates 65% of total value added as compared to only 12% for final assembly. For every key component produced outside the United States, not only are jobs lost, but also higher incomes and tax base.
As this study was underway, the five tigers already were becoming less dependent on technology transfers from the United States, Japan, and Europe. As these newly industrialized Asian nations expand their own research activities and attract the R&D activities of global electronics players, local technology availability is increasing at a rapid rate. While next-generation technologies are being developed in the West and Japan, much of their implementation is taking place in Korea, Taiwan, Singapore, Hong Kong, and Malaysia. As these countries develop their unique economic development strategies and target specific emerging industries, they also are providing investment incentives to develop infrastructures that can support long-term success. These nations are becoming increasingly sophisticated, and they are investing heavily to upgrade their own technical capabilities and move into product design to add greater value to their processes.
Even as their living standards and technical capabilities increase, the four countries covered in this report and Korea continue to be cost-competitive by shifting labor-intensive operations to neighboring countries with lower-cost labor. This has given rise to creation of regional economic trade and development zones known as economic "triangles" or "polygons." Singapore, Johore in Malaysia, and the Riau Islands in Indonesia established an early triangle (SIJORI), where Singapore provided technology and management expertise and Malaysia and Indonesia provided low-cost labor and local facilities. Such cooperative economic relationships across borders support domestic long-term economic growth while further developing the region. The growth in regional economic cooperation has accelerated the transfer of technology among participants and attracted important new investments. China has become a major focus of such cooperative efforts. The title "newly industrializing" is now shifting to China, Indonesia, Thailand, and the Philippines, and the process is continuing to cross borders into other Southeastern Asian nations (Laos, Cambodia, Vietnam, and Myanmar) as the search for lower-cost labor continues. Even Thailand, with wage rates as low as $5.75 per day, now finds itself less than competitive in the cost-driven electronics marketplace. In China, some factory workers work for $1.50 per day for a 12-hour day. Acceleration in competition between Asian nations, combined with their free trade and open borders, strengthens not only the members of Asia's largest alliance, the Association of Southeast Asian Nations (ASEAN), but also counties participating in the smaller triangles.
The market potential of Asia is enormous. As the search for low-cost labor drives economic development across Asia at an increasing rate, development drives growing consumer purchasing power and expanding markets for electronics as well as other goods. Growth in living standards and consumer purchasing power among Asia's population of 3 billion provides significant market opportunities. By 2010, the middle class of Asia (excluding Japan) is expected to top 700 million people, thanks in large part to the contributions of manufacturing to each country's GDP. Such projections of inevitable market growth are driving multinational corporations to invest in Asia in hopes of capturing an early market position. In China today, less than 5% of the people own a dishwasher, clothes washer, vacuum cleaner, microwave oven, or car; there is one telephone for every 25 people, one fax for every 200 people, and one PC for every 400 people. At the same time, statistics published by Forbes (Tranzer, 1996) identified among the world's wealthiest business families 123 Asian families, of which 82 were non-Japanese. Wealth creation is likely to continue as Asian countries win major shares of their own newly developing markets. Recognition that technology transfer and increasing production capacity are expediting the creation of a very large Asian middle class may be more relevant to policymakers than the information presented in this report on the changing picture of technology transfer, the new sources of production being established throughout Asia, or the listings of component and product capabilities that the panel found.
Demand for all forms of infrastructure investments is driving corporate and national strategies. "East Asia is now capturing over 60% of the world's private capital flows to developing countries, an inflow worth $100 billion in fresh capital every year -- not to mention managerial and technical expertise (East Asia central banks collectively hold more than $600 billion of foreign reserves)" (Tranzer 1996). The Asia-Pacific region, excluding Japan, is expected to spend a trillion dollars on infrastructure in the next decade, an investment that will shift Asian economic growth from a limited number of urban cities to a much wider geographical area. The most striking change will come from improving the telecommunication infrastructure. Indonesia, with its 13,000 islands, planned to invest $73 million in 1996-7 to improve its information infrastructure. Singapore's IT 2000 committee called for the creation of a national information network that will have all homes, schools, businesses, and government agencies interconnected in an electronic grid. Singapore is already one of the most highly networked societies in the world. China plans to spend more than $40 billion installing the equivalent of a Bell Canada-sized network each year until 2000. Besides helping to bring Asia into fuller involvement with the world community of nations, the telecommunication infrastructure being established there will foster greater collaboration among the Asian countries and offer new opportunities for them to capture the major share of local markets.
The information contained in this report demonstrates that Asia has mastered not only every electronic component technology but the systems design and integration technologies as well. It is also evident that Asian companies are adept at responding to changing needs of customers and the pressures of decreasing development cycle times. Their strategy of controlling all of the component technologies has provided them with added ability to meet cost, performance, and timing constraints. Asian countries that previously demonstrated success in electronic packaging and assembly are now actively engaged in research and development related to fusing technologies and acquiring the core competencies needed to excel as system integrators. Electronic components are increasingly being integrated onto the chip, flat panel display technology is being integrated with the electronic drivers, optics and electronics are becoming tightly coupled, and hardware and software are being integrated to produce optimal system solutions.
Much has been written about the globalization of the electronics industry, but it would be more accurate to speak about the concentration of the electronics industry in the Pacific Rim. In the past, U.S. companies like Intel, TI, Motorola, and IBM established facilities in Asia to exploit the opportunities for low-cost assembly and manufacturing. U.S. contract manufacturers such as Solectron and SCI now are establishing new facilities in Asia to be closer to their customers and to take advantage of infrastructures that are favorable to electronics manufacturing. In fact, all U.S. electronics companies are increasing their Asian investments in R&D to take advantage of favorable industrial-government partnerships and engineering workforces that are highly motivated and well trained (frequently in the United States). While the Asian economies are admirably meeting the needs of foreign investors in the short term, their own long-term goal is to be able to call their own shots. So, as electronics technologies, products, and systems are undergoing explosive growth worldwide, the structures necessary to efficiently produce them are nowhere being as systematically and enthusiastically implemented as in Asia's emerging economies.
The dynamic changes taking place in Asia were very apparent to this WTEC panel on electronics manufacturing in the Pacific Rim; several panelists also participated in the 1994/5 JTEC study on electronics manufacturing and packaging in Japan. In the period between the two studies, there has been an accelerating shift in electronics manufacturing from the United States and Japan to Korea, Taiwan, Singapore, Malaysia, and China. Simultaneously, the infrastructures within these countries have continued to mature so that each country is now capable of participating in the full electronics product realization process. These countries have rapidly moved up the technology "food chain." Their firms have the capacity to produce name-brand products for their overseas customers while simultaneously marketing comparable products under their own names. As these five Asian nations continue to mature technically, the United States and Japan are increasingly dependent on their capabilities. It is also important to reiterate that the technology transfer process is continuing on to Indonesia, Thailand, the Philippines, and other Pacific Rim countries for the reasons described in this report.
Manufacturing continues to be internationalized, with the objective of global rather than domestic business success. In some instances, the criteria for selecting manufacturing sites have shifted from low-cost labor to skilled-labor availability; from technology creation to processes used in technology exploitation; and from proximity to market to availability of transportation. Cost continues to be the primary consideration, but it is the cost of the total process from product conception to end-of-life that is the basis for management decisions.
The ability of nations to compete globally is not a function of size, as Korea, Taiwan, Singapore, Hong Kong, and Malaysia demonstrate. A primary source of wealth in these countries comes from the education and skill of their workers. In today's globally competitive environment, the best jobs go where the best-educated and most highly skilled workers are available. They are, in Lester Thurow's words (1992), "the dominant competitive weapon." On a more somber note Thurow writes, "In a global economy a worker has two things to offer -- skills or the willingness to work for low wages." The countries of this study have worked hard to rapidly improve the education levels and skills of their workforces, enabling them now to engage in R&D, design, production, and marketing functions. Companies operating in these countries are generating economies of scale in the global market and designing products that are customized to the requirements of each market and an ever-changing mix of consumer preferences. They are globally successful businesses.
In order to gain greater access to the growing Asian market and take advantage of Asia's electronics competencies and attractive business climate, U.S., European, and Japanese companies are increasing their investments in Asia. This report identifies the following key factors that attract foreign investment to Asia:
What role will U.S. industry play in future development in Asia? The United States is an important trading partner in Asia, but the nature of that trade is changing. Whereas the United States once dominated the world markets for technologically advanced components and products, Asian nations have been aggressively acquiring from the United States intellectual and technical assets that empower them to compete strongly in those markets. Korea, for example, has 27 R&D facilities in the United States (Japan has 225); of these, 23 are focused on computers and electronics, and most of their research is applied and product-oriented. In addition, U.S. companies are moving research and development activities to Asia. Singapore ranked tenth for U.S. R&D investments abroad in 1993, and Hong Kong was sixteenth. Where Asian companies used to merely provide U.S. firms with cheap labor for labor-intensive component production and assembly, many are now becoming full system integrators and are selling their own brand name products. In Taiwan, Acer is one of the more notable among those companies that have successfully made this transition from contract manufacturer to original equipment manufacturer. It is a global federation of highly autonomous companies that makes almost everything itself and does assembly at 35 sites around the world.
Lewis M. Branscomb (1993) identifies the issues well:
A leadership position in a technology, however exciting and important, does not, of itself, assure prosperity, a strong defense, or a clean environment. First, technologies must be mastered, reduced to practice, supported by cost-effective production processes, and introduced to the market. Then that market position must be sustained by appropriate complementary assets, by effective channels of distribution, and by responsive customer service. Even that, however, is not enough, for many innovative products have found strong initial markets, only to see other firms - sometimes in other nations - capture the lion's share of market growth through incremental functional improvements, cost reductions, quality superiority, and better marketing and service….
The evolutionary and dynamic changes among the countries in East Asia are very accurately reflected in Branscomb's statement.
The United States and Japan will continue to play dominant roles in Asia as long as they provide technology and provide significant markets for their products. Asian countries, however, are engaged in national planning and the implementation of long-term strategies that will make them less dependent on the United States and Japan and more capable of competing for an increased share of the global electronics market.
In every corporate boardroom, the question is being asked, "Where can we get the best deal?" In the electronics industry, the answer is "Asia." This report helps to understand why and suggests that in order to improve the attractiveness of the United States as a country of choice for electronics manufacturing, U.S. leaders might benefit from the experience of the countries of this study in the following specific areas:
The following chapters provide information that will permit government and industry leaders to understand the need for improved collaboration to meet the global challenges to U.S. competitiveness, prosperity, and security that are presented by exponentially escalating Asian competence in electronics manufacturing. In the words of Winston Churchill we must come to realize that, "It is not enough to do our best; sometimes we have to do what is required." Readers of this report will hopefully better understand what is necessary to meet the associated challenges and then do what is required.