Across Asia, competitive strategies and technologies are driven by consumer product requirements. In assessing the levels of capabilities of electronics manufacturers in the countries that the WTEC panel visited, the following measures of capabilities proved to be useful: product design, process automation, next-generation technologies, communications, and capital.
The firms visited during this WTEC study include contract manufacturers like WKK in Hong Kong, OSE in Taiwan, and NatSteel in Singapore; ODMs like GVC and Inventec in Taiwan; and OEMs like Legend in China, Acer in Taiwan, and Samsung in Korea. Contract manufacturers in Asia are experienced low-cost producers. However, rising labor and infrastructure costs are forcing contract manufacturers in Taiwan, Singapore, and Korea to increase their value-added activities. In their move to become ODM vendors, contract manufacturers like WKK and Wong's Electronics in Hong Kong are developing product designs in cooperation with their customers. More advanced ODM suppliers, like GVC and Inventec in Taiwan, design ready-to-go products. OEMs like Acer, Samsung, and Legend supply their own brands into the market. The movement from contract manufacturer to ODM is a long-term transition that requires significant upgrading of engineering talent and related design and materials technology. Inventec, for example, has used its technology to become the largest maker of electronic dictionaries in Taiwan and China, selling under its own "Besta" brand name.
The growth in competition based on low-cost labor requires increased automation and related capital investments by firms located in higher-cost countries. Sources of low-cost manufacturing have shifted over the years from the United States to Japan to the newly industrializing economies (NIEs) of Asia. Korea and Taiwan were the low-cost sources of labor in the 1970s, to be replaced in the early 1980s by Singapore and Malaysia, and in the late 1980s and 1990s by China and other less-developed countries of Asia.
As Hong Kong's labor costs increased, contract manufacturers moved their facilities into China in the mid-1980s, particularly for those labor-intensive processes where inexpensive manual labor is most cost-effective. For example, in China, most PCB assembly of through-hole components is done manually because Chinese factory workers earn such a low average wage. However, production of more advanced electronics products requires more sophisticated manufacturing technology and equipment than what can be produced solely with manual labor. Today's electronics products require surface mount devices (SMD) to achieve smaller product size and lower weight. While capital equipment investment is costly, SMD assembly cannot be done manually, so today, surface mount technology (SMT) is used throughout Asia. In the mid-1980s, Wong's Electronics was the first Hong Kong contract manufacturer to install surface mount assembly equipment in China. With increasing product sophistication, the amount of labor-intense through-hole assembly has declined. It is still used for most electronic toys and products not driven by miniaturization requirements.
Production in countries like Japan and the United States must be machine-intensive to minimize the content of high-cost labor. Increasing machine intensity requires using designs that minimize the number of through-hole components and/or using equipment with vision systems for placement of through-hole parts. Companies in Korea, Taiwan, and Singapore are making the transition from labor-intensive to machine-intensive operations. To stay cost-competitive, Taiwanese electronics manufacturers have installed capital-intensive "long-lines" (i.e., two chip-mounters and one chip-placement machine) for SMT assembly. Long lines are 50% more efficient than short lines. Final assembly remains labor-intensive, but through-hole assembly is minimized and automated. The most automated companies, like Inventec in Taiwan, are machine-intensive. For example, Inventec reduced the use of through-hole components using Universal placement equipment for its remaining through-hole placements that incorporates the equipment needed for remaining through-hole spot flow soldering. Throughput was increased by over 40%. Nan Ya Plastics' PCB fabrication facility has been fully automated with computer integrated manufacturing, except for visual inspections where cosmetics are critical to customer acceptance. Table 2.1 shows the general relationship between labor-intensive and machine-intensive production in countries capable of varying capital investment.Table 2.1
VTech's assembly of electronic toys in China was virtually 100% manual at the time of this study. More advanced computer, telecommunication, and consumer electronics products were being assembled with SMT equipment. VTech, WKK, QDI, and Wong's Electronics all used SMT "short-lines" (i.e., one chip-mounter and one chip-placement machine) for advanced PCB assembly. SMT lines operated 24 hours per day using two 12-hour shifts, six days per week. It is by leveraging low labor costs with a minimum level of equipment investment that China maintains a minimum cost structure. To stay cost-competitive in China, Wong's Electronics is investing in dedicated SMT lines for high-volume customers. Yamaha, Fuji, Panasert, and Universal SMT equipment is available across Asia. WKK is the agent for Yamaha SMT equipment in Hong Kong. Due to rapid growth in the Asian electronics industry, engineers are in short supply. China's close proximity to Hong Kong has allowed engineers to work in China during week days and return to Hong Kong and their families on the weekends. When technical problems occur, engineers can quickly be summoned within a day to help. WKK has provided a wide support system for its customers in Hong Kong and China. Once a process has been established, it can be operated by locally trained engineers in China, who earn about $260 per month.
Most Hong Kong SMT operations are being transferred to China. The concern for the future of jobs in Hong Kong has caused the government to provide incentives for local firms to upgrade their technologies and increase their process capabilities. China's continuing attraction of companies with advanced technologies is a serious threat to Hong Kong's competitiveness.
Taiwan is the largest market for SMT equipment and receives special discounts amounting to around 20%. Taiwanese firms have moved manufacturing of most of their more labor-intensive products, like desktop motherboard assemblies, to countries like China, Malaysia, and the Philippines. At the time of the WTEC visit about 25% of Taiwan's factory labor came from the Philippines. Increasingly, new facilities are being transferred to the Philippines to utilize its Taiwan-trained workforce.
While SMT technology is mature and globally available, more advanced TAB and "direct chip attach" assembly technologies are not as widespread. Notebook computers, PDAs, and PC cards use TAB technology for miniaturization. The more advanced "direct-chip-attach" technology allows for further miniaturization. TAB technology was first used by Inventec in Taiwan in the assembly of Apple's Newton PDA. Hitachi recently announced that its next generation of thin and lightweight notebook computers will be produced in Japan using direct-chip-attach technology. TAB and direct-attach technologies require more sophisticated engineering capabilities. BGA packages were also being used for new Pentium chip sets at the time of the WTEC visits.
Access to advanced TAB and BGA components and assembly equipment determines the gap between production capabilities across Asia. These newest processes are engineering-intensive in their startup phase. Oriental Semiconductor Electronics (OSE) in Taiwan licensed TAB technology from Intel. OSE's engineers were trained at Intel, and then Intel's engineers provided on-site help at OSE. Due to early quality problems, these new technologies are generally established as independent engineering operations that require intensive levels of inspection and adjustments. NatSteel in Singapore uses SBB direct chip attach technology. Nam Tai in China uses TCP and inner lead wire bonding for direct attachment of chips.
While Taiwan once had the highest ratio of engineers to production workers of Asia's rapidly industrializing economies, Singapore now matches Taiwan, with about 16 new engineering graduates per 1,000 manufacturing employees. Korea is third with 10, and Hong Kong and China have under three engineers per 1,000 manufacturing employees.
To achieve the kind of technological leadership provided by Japan, countries must also develop the materials and components used in next-generation products. That requires much higher levels of R&D than is typically found in Hong Kong, China, or Malaysia; however, Korea, Taiwan, and Singapore are increasing domestic R&D in order to develop key electronics technologies. Future miniaturization requirements include direct chip mounting and multichip modules. In Taiwan, OSE is packaging MCMs and establishing four lines to produce BGA chip set packages as it climbs the technology ladder. Taiwan's Industrial Technology Research Institute (ITRI) has a research project for fine (.25 Ám) line process technology. To meet finer pitch assembly requirements, Matsushita Kyushu and Toshiba have developed SMT and TAB equipment capable of assembling 0.15 mm-pin chips. Such fine pitch placement allows 800 pins on a 32 mm package, 1,000 pins on a 40 mm package, or 384 pins on a 16 mm package. Ceramic multicomponent modules (CMM) that integrate passive and active components are little larger than encapsulated ICs (Keizer and de Wild 1994).
No printed circuit board assembler can expect production to last over six months for today's products. Short life cycles are forcing firms to be more responsive in providing product quotes to and communicating with their global customers. Standard design software allows for rapid transfer of design data files between clients and vendors by electronic mail. Leading firms across Asia use leased lines and intranets between their operating units around the world to facilitate communications.
One barrier to competition is often capital; however, many of the countries of this WTEC study find themselves with excess financial resources to invest. Early investments in China allowed for sustained profit margins in high-growth industries like computers, telecommunications, and related parts and components. With growing competition, more capital-intensive strategies are now being pursued. In Taiwan, petrochemicals and semiconductor fabrication operations (fabs) are two industries with heavy investment requirements. Formosa Plastics, Taiwan's largest conglomerate and a world leader in high-quality textiles, is currently building a complex that will include an oil refinery, two naphtha cracking plants, and 27 chemical plants. The Singapore and Taiwan governments are providing additional incentives to build wafer fabrication facilities (fabs), where historical profits have been about 35%. By 2002, Singapore and Taiwan together plan to have over 40 wafer fabs, compared to 10 in 1995. At an estimated cost of around $1 billion per fab, these are truly capital-intensive investments. Hong Kong has discouraged such investments due to limited land availability.