Some U.S. OEMs outsource design because local or regional designers have a better handle on regional requirements. "London, Seoul, and Tokyo are good examples of handset-design hotspots right now," notes Mawston. One reason for the attention on design at this point, says Mawston, is that contract electronics manufacturers have overbuilt production and are aggressively searching out new customers in Japan and other Asia/Pacific countries to fill under-utilized capacity. "This could fuel the proliferation of a growing mass of third-tier reference-design handset vendors," he says. Semiconductor revenue in the Asia/Pacific region already tops all other areas of the world (see the table).
Meanwhile, a recent survey by investment house Bear, Stearns & Co. suggests that 87% of electronics industry OEMs will increase their outsourcing in the coming year as they attempt to cut costs and capital spending. Contract manufacturers captured 20% of the electronics and information technology (IT) total available market (TAM) in 2001, according to a study just released by market analyst International Data Corp. (IDC). The TAM for contract manufacturing services reached $560 billion for the year. "Increasingly," says Kevin Kane, program manager for IDC's Contract Manufacturing Services, "contract manufacturers are becoming a more important part of product development," adding their own well-honed expertise in a number of areas, including design.
IDC says electronic manufacturing is currently tending toward mainland China, with Taiwanese design firms a key part of the trend. High-end projects remain in Taiwan as lower-end production moves to China. Because of the soft economy, offshore production centers have not escaped layoffs. Malaysia's high-tech industrial centers have reportedly lost up to 16,000 jobs, including engineers, to China. Investment formerly directed to Malaysia's technology centers is now going to China. Singapore has also lost ground to the growing investment in China.
CHINESE CHIPS
China may be the biggest threat to U.S. chip companies. "By 2005," says George Scalise, president of the Semiconductor Industry Association (SIA), "more than half of the world's semiconductors will be made in Asia," with more design centers springing up in China, reducing that country's reliance on foreign chip design.
Andrew Chun Chen, a consultant, and Jonathan Woetzel, director of the Shanghai office of McKinsey & Co., a global management consulting firm, agree. They expect China to become a global semiconductor power by 2010. China's labor costs remain low; on average, senior design engineers receive an annual wage of not much more than $20,000 (see the figure). Also, the Chinese government now provides the country's semiconductor industry favorable tax treatment. But to achieve world-class status, the analysts believe that China must emphasize chip design rather than the capital-intensive manufacturing approach that helped Taiwan become an offshore manufacturing leader.
By 2010, according to an extrapolation of projections for 2000 through 2004 developed by the Gartner Group, a market research organization, China-based design houses and China-based design branches of global semiconductor OEMs, like Motorola, will design chips for which Chinese electronics-goods manufacturers will pay more than $10 billion. The McKinsey analysts believe that the Gartner estimate is conservative. With pure-play foundries typically providing chip manufacturing services for design companies and integrated device manufacturers, they expect the total consumption of chips in China to reach $45 billion by 2010.
Against this backdrop, U.S. semiconductor houses may find it increasingly difficult to sustain in-house technical leadership. That could be the greatest challenge of all.
Obviously, contract manufacturing is here to stay. Its many cost and competitive benefits assure its place in the business world. The only real question becomes: Is there enough room remaining for innovation in design and manufacturing to stave off the advancing tidal wave of contract manufacturing?