Japan has been the undisputed leader in the Asian electronics manufacturing industry. With eminent components and equipment capabilities, Japan provides much of the technology needed for the manufacture of advanced electronics components and products. As shown in Fig. 2.2, Korea and Taiwan are much smaller second- and third-place followers in electronics. Singapore, China, Hong Kong, Malaysia, and Thailand follow, in that order. Each of these countries' governments plays an important role in defining and focusing economic development plans based in substantial measure on growing their national electronics industries.
Beginning in the mid-1980s, rising costs prompted Japan to transfer its electronics manufacturing base to the newly industrialized economies of Asia (Korea, Taiwan, Hong Kong, Singapore, and Malaysia), and that transfer process has continued in the region. As part of the Asian countries' development processes, they have worked out various kinds of cooperative agreements among themselves. Deregulation of international trade has been central to the development of cooperative "growth triangles" across Asia, which have been an integral part of the high levels of technology transfer and the corresponding rapid economic growth of the various national partners. Japanese overseas direct investment between 1986 and 1990 set the stage for much of the technology transfer that has taken place. During that time, Japan invested over $27 billion in the countries of the Association of Southeast Asian Nations (ASEAN), whose original members were Singapore, Malaysia, the Philippines, Indonesia, and Thailand. Indonesia received $11.5 billion, Singapore $6.5 billion, Thailand $4.4 billion, Malaysia $3.2 billion, and the Philippines $1.5 billion. Japan also invested $2.8 billion in China.
The earliest beneficiaries of Japan's technology transfer, Korea, Taiwan, and Singapore, now find themselves facing cost problems similar to those of Japan in the early 1990s. As rapidly rising incomes and living standards pushed up labor costs, initial attempts to maintain the manufacturing base in Korea and Taiwan led to heavy investment in factory automation and capital-intensive industries. Labor-intensive manufacturing, as mentioned earlier, is rapidly moving to China, the Philippines, Thailand, and Indonesia. As the current benchmark for low-cost manufacturing, China is forcing the NIEs to move into higher-value-added products, development of proprietary technologies, and investment in capital-intensive businesses such as IC wafer production, IC packaging, or precision manufacturing.
Fig. 2.2. Evolution of Asia's electronics industry (BCG 1994).
The shift from basic assembly, which has the lowest level of value-added, requires production of critical components and parts like semiconductors, LCDs, and precision assembly equipment. National policies have been established to subsidize R&D and encourage capital investments in automation and manufacturing facilities. Development of component technology and manufacturing ability provides for higher levels of value added and greater opportunities to gain market positions in global markets. The success of Asian industrialization is based on such value-added developments.
The long-term strategies of many of Asia's newly industrialized countries include (1) increasing their self-sufficiency, thereby reducing reliance on foreign, mostly Japanese, materials, components, and equipment imports; and (2) rapidly transferring labor-intensive operations into neighboring countries with lower labor costs, mostly to (but not limited to) China, which has over 1.2 billion people with average incomes under $400 per year. This movement has facilitated development of the regional economic trade and development zones known as economic polygons or triangles. At the same time, availability of advanced components and equipment on the open market allows China's (or other countries') firms to easily upgrade their production capabilities to sustain long-term competitiveness. The competitive pressures to upgrade technological capabilities directly challenge Japanese and U.S. high-technology leadership. Development of the Internet provides for even more rapid transfers of technology than in the past and will challenge even the best firms to keep pace.
The four major business segments in the electronics industry are (1) consumer electronics, (2) computers and peripherals, (3) telecommunications, and (4) parts and components. Table 2.2 shows the values of Asia's electronics industry segments in the early 1990s. Japan's production values in computers, peripherals, parts, and components accounted for 74% of its electronics production value; Korea's industrial products and parts and components accounted for 81% of electronics industry output; Taiwan's parts and components accounted for 50% of output, and computers and peripherals accounted for another 30%; Singapore concentrated on computers and peripherals (48%) and parts and components (30%); China produced mostly low-cost consumer electronics (45%) and related low-cost parts and components (38%); Malaysia concentrated on the parts and components business (57%); Hong Kong was balanced between consumer electronics (38%) and computers and peripherals (37%); and Thailand was focused on computers and peripherals (42%) and the parts and components business (30%). The recurrent emphasis on parts and components indicates the importance countries place on being able to locally supply their own parts and components, essential to being able to provide higher-value-added products and to limiting trade deficits due to importing the components required for final product assembly. Strong brand names do little to develop a strong economy if most components and end products are imported.Table 2.2
Source: BCG 1994, 151-200.
Shortage of skilled labor in electronics businesses is a chronic problem across Asia. China has well-educated but inexperienced engineers. Only Japan and Taiwan have adequately skilled technicians. Shortages are most acute in Thailand, Korea, Malaysia, and Singapore. Lack of experience limits countries' capabilities in R&D and product design. According to the Boston Consulting Group (1994, 189), "Besides Japan, whose electronics industry is highly capable in all respects, only Taiwan and Korea can boast a significant sector of the industry with high-level capabilities in product innovation and design. Singapore is working hard toward this end, but is yet to reach the overall standard of these industries." While all countries have some value-adding capabilities, the majority of cost-based competitors are found in Thailand, Malaysia, China, and Hong Kong.
Production of electronics-based products has been growing in strength as a basis for industrial development throughout Asia. Japan and the United States have provided much of the technology needed for Asia's economic development in electronics businesses. This technological strength comes from long-term investments in R&D. Japan now invests 3% of its GDP in R&D, and the United States invests 2.7%. As a result, the majority of technology has come from Japan and the United States, with Korea and Taiwan only recently building technological strength. Korea and Taiwan are committed to building their technological strength as they increase their R&D investments, respectively, to 2% and 1.7% of GDP. Only France, Germany, and Britain have a comparable or a larger percentage of GDP invested in R&D than Korea. Other Asian nations still invest less then 1% of GDP in R&D.
In the area of fundamental research and development, Japanese electronics industries lead the world in technological innovations and new product introductions. The 1994 BCG study for the Hong Kong government assessed the areas of research and development, design, manufacturing, and marketing and sales capabilities for Asian nations (Table 2.3). Japan set the benchmark for these comparisons and was considered "leading edge" in all skill areas. According to the BCG study, Korea was ranked strong in R&D, design, and manufacturing, but only moderate in marketing and sales capabilities; Taiwan has capabilities similar to those of Korea (strong in design and manufacturing), but with only moderate R&D, marketing, and sales capabilities; Singapore was considered to be still weak in R&D, marketing, and sales, but with strengths similar to Korea and Taiwan in design and manufacturing (BCG 1994, 189).Table 2.3
Source: BCG 1994, 189.
Japanese, Korean, Taiwanese, and Singaporean strategies in electronic-based industries are focused on building value-based capabilities. Value-based competition is defined in the equipment and components capabilities of a country; Japan, Korea, Taiwan, and Singapore have invested heavily in these sectors. These strengths that require up-stream developments of technology are closely related to research and development of advanced manufacturing processes. Development of advanced materials and manufacturing processes are required in order to support leadership in components. Japan continues to be the primary source of many key components and equipment that are essential to the manufacturing of electronics products in Asia.
Governments in Korea, Taiwan, Singapore, and Malaysia have developed policies of technological self-sufficiency in basic materials and component areas. With support from the Korean government, Samsung Electronics, Goldstar, and Daewoo Electronics account for 45% of Korea's total sales and 20% of the domestic workforce in electronics. They are approaching world standards in their research capabilities. The Taiwanese government has been investing heavily in research in IC design, and Taiwan is approaching world standards in this area. Taiwan has made semiconductors a major priority and plans to have over 20 wafer fabs by the year 2000. Singapore also plans to expand in the fab business with 20 facilities by 2005. The Singaporean government is encouraging MNCs to locate R&D facilities in Singapore. Other countries, like Indonesia and Thailand, have little ability to develop new technology; to build basic capabilities they rely on imports of major components and equipment and on joint ventures with foreign firms.