Substantial foreign investment in China is raising the country's technology and manufacturing capabilities to globally competitive levels, and this trend should continue. It seems likely that much of the manufacturing and technical base will continue to shift to mainland China as foreign corporations transfer their leading-edge technologies. Despite the fast-approaching 1997 return of Hong Kong to the PRC, Hong Kong's capitalist economic and trade systems, the free movement of goods and capital, and the free port and separate customs territory are supposed to continue via a concept the Chinese call "one country, two systems." In spite of the high turnover of factory personnel in China, the Chinese have proven that high-quality, high-technology products can be produced in China with little difficulty because of workers' strong discipline and training. As China continues to develop an infrastructure for the electronics industry, Hong Kong is expected to continue to perform an important interface between mainland China and the outside world. Its lifestyle offerings and business support activities will continue to be important.
Both optimism and anxiety can be expected to continue in Hong Kong before the actual political transformation is complete. Hong Kong companies are now trying to determine their core competencies for the future. They need to determine what in-house capabilities can provide future competitive advantages as China's capabilities increase. Companies are trying to identify products and markets that offer future growth opportunities. There is a search for technologies that are required to build next-generation products and gain market position. Because of the focus on taking advantage of China's cheap labor, HK firms delayed funding their own technology development. Fewer than 60% of firms in Hong Kong spend over 3% of revenues for R&D. The lack of R&D and technology investment has left Hong Kong behind Korea, Taiwan, and Singapore in electronic technologies. Wafer fabrication or IC packaging facilities seem to be moving to mainland China rather than to Hong Kong.
Hong Kong-based companies have been very successful at finding low-cost manufacturing sources for firms desiring to cut their production costs. One source is Wong's International (Holdings), Ltd., a parent company for electronics-product-related companies accounting for 5,500 employees and sales revenues of $315 million in 1995. Wong's Circuit (P&E) produces single-sided PCB for low-cost, high-volume consumer products with manufacturing in Hong Kong and in Huizhou (a joint venture with the city government) and Dongguan, China. Wong's Circuit (PTH) produces double-sided, up to 14-layer PCBs with factories in Hong Kong and a joint venture with the Huizhou city government. Wong's Electronics Co., Ltd. (WEC), assembles PCBs in Hong Kong, China, and Malaysia. Season Industries produces plastic molded parts next to WEC's PCBA factory in Shenzhen, China. A joint venture with Japan's Tomiyama makes precision sheet metal stamping. At the time of the panel's visit, the group had 7 factories totaling 1.1 million ft.2 of manufacturing space.
WEC manufactures high-end electronics products and systems. Sales are divided between computers (35%), peripherals (25%), telecommunications (25%) and other office equipment, medical electronics, and industrial products (15%). WEC tries to offer customers a total manufacturing solution. WEC offers a "three-step" cost-reduction program that uses its vertically integrated PCB supply, plastics and metal parts supply, and electronics assembly, combined with global manufacturing, procurement, and sales:
In China, WEC produces Pentium PCBA subassemblies for NEC, hard disk drives for Conner, and cordless and cellular telephones for Toshiba. WEC also makes power supplies for ABB in Europe and PCB assemblies for Xerox office equipment worldwide.
Lead times required for new product designs are typically six months. Companies like WEC and WKK provide on-site prototyping capabilities for their customers. WEC provides a prototyping SMT line at its Hong Kong facilities in order to make certain that production processes and product designs are proven before sending them to its factory in China. One of WKK's major customers does its actual prototyping in WKK's factory. In other cases, small outside firms handle prototyping of small volumes of a product for use in reliability testing and low-volume market testing.
WEC and WKK both have limited ability to develop new designs for their customers. The short life cycles of most computer-related products makes it difficult for a company to keep up with the changes taking place in the market. At the time of the WTEC visit, WEC had designed some notebook computers for several Japanese customers and had recently supported the design of NEC's new Pentium motherboard. WKK had recently designed a component stereo set for a Japanese customer. With a relatively small number of engineers, WKK has to select its projects carefully.
Legend's QDI, with a staff of 57, had the most extensive design capability for computers that panelists observed. QDI is one of the top-ten suppliers in the world for design, manufacture, and distribution of motherboard and add-on cards, mostly for VGA and MPEG video cards. In 1994, QDI sold 1 million motherboards and 3 million add-on cards and had the capacity to produce 300,000 motherboards or 580,000 add-on cards per month. Sales grew from $10 million in 1991 to $249 million in 1995. QDI representatives indicated the company was looking for new customers:
We are now looking for new OEM customers to fill our excess capacity. At the Hanover fair in Germany, we introduced our OEM capabilities. We have contacted IBM, HP, NEC, and other PC makers. We offer cost-reduction opportunities through our strong sourcing and purchasing power, effective manufacturing, PCB supply, and simple organization. Our OEM group offers a single window to our customer, is very responsive, and has effective communication through electronic mail and international offices. We are ISO 9001 certified since 1994. We have won many awards for our product quality. It is our policy to never be late, try to beat our delivery commitments by MRP management, and continuously reduce our manufacturing cycle time. We also offer strong R&D and engineering support teams. It takes between 8 and 12 weeks to design a board. We are considering ODM business since we can help to design boards for U.S. companies.
The trend several years ago was for advanced Japanese and U.S. electronics companies to shift production to Korea or Taiwan where advanced manufacturing capabilities are available. Today, advanced production capabilities are also available in China. For example, Nam Tai Electronic (Shenzhen) Co., Ltd., produces miniaturized products like calculators, databanks, personal organizers, electronic dictionaries, IC card readers, LCD modules, and COB and SMT assemblies for customers like Canon, Sharp, Seiko Instruments, and Texas Instruments. Nam Tai utilizes the relative advantages of China's low labor cost, Japan's advanced assembly technology and management methods, and Hong Kong's gateway to China. Nam Tai's CEO noted to panelists that the company introduced the most advanced technology and production equipment in Southeast Asia, including wire bonding, SMT, OLB (outer lead bonding), and fine-pitch heat seal. It competed to produce high-tech products that require SMT, OLB, high-speed assembly, or next-generation chip-on-board. Nam Tai was looking to produce multimedia products using LCD displays. It was also developing MPEG 2 and MPEG 4 software for products five years into the future. A new $25 million factory that opened in April 1996 doubles previous capacity. Nam Tai obtained ISO 9002 in 1993 and ISO 9001 in 1996.
Nam Tai's new factory incorporates high-density micro assembly technology, including wire bonding in a class-10,000 cleanroom. The fourth floor has SMT and OLB. The third floor is for final assembly. New COB facilities and processes allow 130 Ám fine pitch with high-speed and accurate coating and semiautomated die attach machines. By 1997, it was planned that the factory would wire bond 100 Ám fine-pitch ICs. OLB will allow for 281 pin/240 Ám pitch TAB. Assembly will allow 500 pin count/200 Ám pitch TAB parts and BGA. SMT will allow for 500 Ám fine pitch in the new factory, and 300 Ám pitch by 1997. In 1997, chip on glass (COG) technology and multichip module (MCM) assemblies using BGA, CSP, and flip chip were planned. Table 3.4 shows Nam Tai's electronics technology roadmap.Table 3.4
According to Nam Tai's CEO:
We are using 140 micron pad pitch wire bonding, but will use finer and longer wire in the future with higher pin counts. By 1997, we will use 130 micron pad pitch wire bonding by using higher level ASM wire bonders. The new equipment's limit is 100 micron pitch and 1,000 pin count. Computers require more pins. The products that must be thin and light will use this approach. Pocket-sized products must be thin and light. Computers can use large formats. We will be using OLB technology, COB technology, and SMT technology. The next step is COG technology for the LCD module connection system. After that, we need flip chip technology. The basic technologies are COG and OLB. By 1997, we will be producing flip chip.
VTech Corporation, with 1995 global sales of $631 million, is Hong Kong's largest manufacturer. It has been especially successful in integrating computer and telecommunications technologies in its new products. VTech effectively merged technologies from computers (30% of its sales in PCs) and telecom (23.7% of sales) into its electronic toys and learning aids (46.3% of sales). VTech made proprietary ASIC designs and was the first company in Hong Kong to design ASICs for PCs. VTech's Toys & Electronics division makes compact ASICs for use with more primitive microprocessors like the 8088 or 68000. Learning aids look like notebook computers or cars or telephones. Over 50% are sold in the United States.
VTech invests about $20 million in R&D annually, with 350 engineers in Hong Kong, 300 in China, and 100 overseas. Electronics products are dependent on key components like motherboards, video cards, and sound cards. VTech makes the ASICs and electronic assemblies that go into its products. Translation products use a proprietary CD ROM, which sells under the VTech name. In telecom products, VTech adds RF technology. Wireless modems that code data into radio signals are expected to be integrated into PC products. With expertise in developing key electronics components, VTech is able to rapidly transfer PC and telecom technologies into its toy and learning aid business. As the world leader, VTech has over 100 design engineers in Hong Kong and over 30 new product designs on the drawing boards. It takes about six months to get new designs into production.
Legend's QDI also has extensive design capabilities for circuit boards, including 57 staff members. Most design staff are from famous universities in China. The product development group has 29 people, including 7 people in motherboards and diagnostics, 6 in VGA boards, 4 in IDE I/O, 4 in CAD for layout, and 7 in the BIOS and driver development area. QDI has the source code to allow for BIOS and driver modifications. Of 8 people in the product quality control group's product support department, 4 people are located in Shenzhen, 2 in Hong Kong, and one in Taiwan to aid in sourcing and preparation of manuals and documentation. The chip sets and BIOS come from Taiwan. The manufacturing engineering support group has 3 people to provide the interface between R&D and manufacturing and load the MRP for products. The administrative staff includes 4 members, and there are 3 staff in accounting.
QDI's product development process has ISO 9001 certification. The product design process includes specific steps for placement, placement approval, release of the Gerber file, prototyping, release of the bill of materials, and handling customer complaints. Fig. 3.3 shows the process.
Fig. 3.3. Legend QDI's product design and test flow chart.
As one QDI official explained (February 1996):
We do the product quality control [PQC] here and build our own test boards. After product development debugs its own product, it is passed to product QC. PQC checks the product carefully to find bugs. They will then send it back to product design to fix the product. Most problems are fixed after one review. After [the product] passes this process, it is tested further and then released for production. If [the product is passed], it is released to manufacturing. We make sure it is compatible with all the popular software drivers. We use the standard tests set up by outside organizations. This group also provides the documentation.
We are the only beta test site for Intel in Hong Kong. There is no other equivalent company in Hong Kong. We see our competitors as being in Taiwan, not in China or Hong Kong. This is the product design flow chart. From the new product study phase; design, debugging, testing, to release takes from one to two months. Some motherboards take more than three months because of the time needed for debugging and testing. We produce over 150,000 motherboards per month and over 250,000 VGA cards per month. We are one of the largest producers of VGA cards in Asia. We have several 486 boards, and three Pentium boards in production. We have just finished the P-6 motherboard. Not many companies can do this. We will begin production of the Pentium Pro board in May 1996. It includes BGA packages. We released the BGA information to manufacturing to get ready for that. We have an ICT test pad that checks the leads coming out from this chip. We created our own software for motherboard tests. We use Trident chip sets. Whatever chip sets they produce, we make the card.