Rising consuption, rising influence how asian consumerism will reshape the global electronics industry

Trend 1: Asia will leapfrog many stages of technology development, driving new forms of electronic Trend 2: Asia’s urban population will increase, driving demand for new types of electr

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global electronics industry

A report from the Economist Intelligence Unit

Trend 1: Asia will leapfrog many stages of technology development, driving new forms of electronic

Trend 2: Asia’s urban population will increase, driving demand for new types of electronics products,

Trend 3: While rising incomes drive consumerism in Asia, they also undermine its strengths in low-cost

manufacturing This will cause a rethink about the nature of branding, both for Asian and non-Asian

Trend 4: The growing influence of Asian design and innovation will push electronics in new directions—

Rising consumption, rising influence: How Asian consumerism will reshape the global electronics

industry is an Economist Intelligence Unit report, sponsored by DHL Supply Chain The EIU

conducted interviews independently and wrote the report The findings and views expressed here are those of the EIU alone Justin Wood was the author of the report and Sudhir Vadaketh was the editor Gaddi Tam was responsible for design The cover image is by David Simonds

We would like to thank all interviewees for their time and insights

Preface

Executive summary

The electronics industry has been an important driver of Asian growth and development, creating

millions of jobs and supporting the construction of essential infrastructure For much of its history,

however, Asia’s electronics sector has been geared towards producing exports for the rest of the world

Only some of the goods have been consumed within Asia

That trend is changing quickly, as economic growth in Asia outstrips that of developed Western

markets, and ever-richer Asian consumers buy more electronics goods Income in Asia (ex-Japan) is

rising twice as fast as in America As the region catches up, demand in Asia for electronic products has

significant room to grow

Given the unprecedented rise in income levels in emerging Asia, important questions arise about

the impact that greater consumerism will have on the region’s electronics industries How will demand

change in the years ahead? Will Asian consumers want products and services that are different to

those preferred by their counterparts in the West? How will Asia’s rise feed into product development?

How will it influence the shape of new technologies? How will Asian consumerism change patterns of

production and distribution that have historically been dominated by exports to other parts of the

globe?

This briefing paper identifies four trends that will shape the electronics industry in Asia over the

coming five to ten years Taken together, these four trends will completely change the nature of the

global electronics industry:

•Asia will leapfrog many stages of technology development, driving new forms of electronic

hardware, software and services The late arrival of many parts of Asia to the digital age will enable

the region to leapfrog certain development stages As a result, Asia will find itself in the driving seat,

steering the ways that new technologies are implemented and exploited This will create opportunities

for firms to sell innovative new products to Asia’s consumers

•Asia’s urban population will increase, driving demand for new types of electronics products,

but rural markets will also become increasingly attractive Asia is still predominantly rural, but is

urbanising at a rapid pace This migration to the cities will lead to demand for new types of electronic

products in areas such as raising consumer safety levels, improving resource usage and reducing environmental impacts Just as important, Asia’s vast rural communities will become increasingly plugged into the digital age, driving a raft of new opportunities for electronic products and services.

•While rising incomes drive consumerism in Asia, they also undermine its strengths in cost manufacturing This will cause a rethink about the nature of branding, both for Asian and non-Asian companies As production costs in Asia rise, margins are being squeezed at contract

low-manufacturers and other low-cost producers To survive, and to capture the opportunities arising from rising consumerism, these firms will shift strategies and start to build brands This move will present

a threat to the current dominant players in the electronics sector In response, non-Asian firms will increasingly adjust their own brands to take on more Asian characteristics

•The growing influence of Asian design and innovation will push electronics in new directions— and see the rest of the world take on Asian ideas As Asian electronics companies build brands and get

closer to their customers, they are playing a bigger role in the design of new electronics products Just

as important, Asian companies will continue to push deeper into the upstream end of the value chain, producing new components and technologies The result of these two trends will be a much greater role for Asia-based innovation and design in the electronics industry Increasingly, Asian ideas will flow into other markets

The electronics industry has been crucial to Asia’s growth and development Starting in the 1960s,

Western electronics firms began moving their manufacturing to Asia to avail of the region’s

cheap labour In the decades since, those initial investments have blossomed, turning Asia into a

manufacturing powerhouse that now produces two-thirds of the world’s electronics products

Calculating the contribution of the electronics industry to Asia’s rapid rise and development is

tricky Some products, such as TVs, telephones and computers, are easily recognisable as electronics

goods But the industry also plays a critical role supplying parts for everything from cars and airplanes

to factories and power stations What’s more, almost every type of service industry, including hotels,

financial services and healthcare, continues to grow ever more reliant on electronics

What is clear, however, is that the investment that has poured into the electronics industry over

the past 50 years has driven the industrialisation of Asia, creating millions of jobs and supporting the

construction of essential infrastructure The region has rapidly absorbed technological know-how and

managerial capabilities from its foreign investors, and many of the sector’s biggest companies are now

Asian-owned and run

For much of its history, Asia’s electronics sector was geared towards producing exports for the

rest of the world While some of the goods were consumed within Asia, the majority were shipped to

Europe, the US and other destinations where consumers were wealthy enough to afford them

Given Asia’s rapid economic growth, however, incomes and wealth in the region are rising

substantially Research from CLSA1, a Hong Kong-based investment brokerage, estimates that the

middle class in Asia ex-Japan will rise from 570m in 2010 to 945m by 2015, with 90% of the increase

coming in just three countries—China, India and Indonesia The research defines middle class as a per

capita annual income of US$3,000 or higher, the point at which consumers no longer spend all their

income on the necessities of life, but have money left over for discretionary items

This rising wealth is already fuelling a surge in consumerism across emerging Asia, and creating

deep pools of domestic demand within the region While exports to other parts of the globe will

continue to be an important part of Asia’s development story, the opportunities within the region

itself are growing ever more exciting and will exert even more influence on the future of the electronics

industry

1 Mr & Mrs Asia, CLSA, Spring 2010

This briefing paper aims to explore these opportunities by identifying trends that will shape the electronics industry in Asia over the coming five to ten years Before discussing trends further, however, it is important to understand the scale of Asia’s rising consumption of electronics products.

Asia’s rising consumption of global

electronics output

Following the global financial crisis of 2008 and 2009, growth in the mature economies of the OECD

has slowed substantially Record levels of consumer and government debt need to be reined in and

repaid As this deleveraging process unfolds, levels of spending will be constrained Emerging markets,

by contrast, are in much better shape, and growing vigorously Among emerging markets, economic

growth in Asia is the most exciting of all

The Economist Intelligence Unit (EIU) forecasts that real GDP growth in the global economy will be

3.1% this year (measured at market exchange rates) In the US it will be 2.7%, in Japan 1.6% and in

the euro zone, 1.5% In Asia (ex-Japan), however, growth will be 6.8% (see Chart 1)

Incomes in emerging Asia are still significantly below those of mature economies In 2010, for

example, while the US had a per capita GDP (measured using purchasing power parity) of US$47,560,

the equivalent figure in China was just US$7,740, and in India US$3,480 But given the different

2000

Asia (ex-Japan) OECD World

Source: Economist Intelligence Unit

growth rates, income in Asia (ex-Japan) is rising twice as fast as in America As the region catches up, demand in Asia for electronic products has significant room to grow.

Take demand in Asia (ex-Japan) for telecoms and IT equipment Back in 2000, the value of demand stood at nearly US$700bn, or just over 14% of the world market By 2014, the EIU forecasts that demand will be worth US$4.1trn, or 36.8% of global demand (see Chart 2)

Chart 2 Market demand for telecoms and IT equipment in Asia (ex-Japan)

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

5 10 15 20 25 30 35 40 45 Greater China

South Korea

India and South Asia South-east Asia

Share of world market demand, % (right-hand scale)

(US$ bn, left-hand scale)

(Greater China is China, Taiwan and Hong Kong; South Asia is India, Sri Lanka and Pakistan; South-east Asia is Indonesia, Thailand, Malaysia, Singapore, Philippines and Vietnam) Source: Economist Intelligence Unit

Chart 3 Market demand for domestic electrical appliances in Asia (ex-Japan)

0 30 60 90 120 150 180

2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

5 10 15 20 25 30

Share of world market demand, % (right-hand scale)

(Greater China is China, Taiwan and Hong Kong; South Asia is India, Sri Lanka and Pakistan; South-east Asia is Indonesia, Thailand, Malaysia, Singapore, Philippines and Vietnam) Source: Economist Intelligence Unit

Greater China South Korea

India and South Asia South-east Asia (US$ bn, left-hand scale)

Chart 4 Market demand for household audio and video equipment in Asia (ex-Japan)

0 10 20 30 40 50 60

2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

5 10 15 20 25 30

Share of world market demand, % (right-hand scale)

(Greater China is China, Taiwan and Hong Kong; South Asia is India, Sri Lanka and Pakistan; South-east Asia is Indonesia, Thailand, Malaysia, Singapore, Philippines and Vietnam) Source: Economist Intelligence Unit

Greater China South Korea

India and South Asia South-east Asia (US$ bn, left-hand scale)

It’s a similar story with domestic electrical appliances, such as fridges and washing machines Back

in 2000, demand in Asia (ex-Japan) stood at US$18.6bn, or 10% of the world market By 2014, the EIU

expects that it will reach US$159bn, or 22% of world demand (see Chart 3) In the household audio and

video equipment sector, Asia (ex-Japan) will climb from 12.5% of the world market in 2000 to 29% by

2014 (see Chart 4)

Where electrical products are embedded into other products, the rise in Asian demand is just as

evident Take cars In 2009, China overtook the US as the world’s biggest car market Across Asia

(ex-Japan), the region’s share of global car sales will rise from 8% in 2000 to 41% in 2014, according to the

EIU

This rising demand for electronic goods in Asia will exert significant influence on the electronics

industry in the years ahead The nature of this rising influence is discussed in the following chapters

Trend 1: Asia will leapfrog many stages of technology development, driving new forms

of electronic hardware, software and services

The late arrival of many parts of Asia to the digital age has been traditionally viewed as a

disadvantage It may well turn out to be a positive, however, in that it enables the region to leapfrog certain development stages and look to the future with a relatively open mind In many senses, Asian markets face greater freedom in the direction of their investments For example, there is no need to wring extra returns out of past, legacy investments, and no reluctance to invest in new technologies

As a result, Asia will find itself in the driving seat, steering the way that new technologies are implemented and exploited

Nowhere is this more evident than in the telecommunications sector While countries in the West have invested billions of dollars building out fixed-line phone networks, many parts of Asia will never have to do so Instead, they will move directly to owning mobile phones India, for example, has 36m fixed line connections, but 700m mobile subscribers.2

Many observers argue that the same leapfrogging effect will happen with personal computers Instead of buying PCs, Asia’s citizens will increasingly access the Internet for the first time over mobile devices Research from McKinsey & Co3, a strategy consultancy, shows the picture in India Today, only 24% of India’s 81m Internet users access the Internet via a mobile phone But by 2015, when the Internet population will have swollen to 450m, some 79% will access the Internet via a mobile device.Jayant Murty, Asia Pacific director of strategy and integrated marketing at Intel, a US computer chip maker, argues that Asia’s ability to leapfrog stages of technology development will make the region much more open and flexible in the face of new technologies He also sees that flexibility causing a blending of different technologies that will redraw the lines between separate parts of the electronics industry Sure, low-income Indians might use their phones to get online, but, says Mr Murty, “It is going to be increasingly hard to differentiate between what is a mobile phone and what is a computer

2 Economist Intelligence Unit

3 Can India lead the

mobile-Internet revolution?,

McKinsey & Co, February

2011

When you can Skype from a tablet PC, is that a phone or a computer? Devices come in every size these

days and with varying levels of connectivity.”

Research from Gartner, an IT research firm, confirms that technology leapfrogging is already

happening In March, Gartner reduced its global forecasts for sales growth of PC units in 2011 from

15.9% to 10.5%4, as consumers embrace what some are calling a “post-PC world” “We expect growing

consumer demand for mobile PC alternatives, such as the iPad and other media tablets, to dramatically

slow home mobile PC sales,” says George Shiffler, a research director at Gartner

Peter Coffee, director of platform research at Salesforce.com, an Internet services company,

believes mobile devices will dominate electronics in the years to come “It doesn’t matter whether

you’re a consumer or a business person, everyone wants to access information via mobile platforms,”

notes Mr Coffee “In Asia, which is arguably ahead of the rest of the world in its adoption of mobile

devices, this is even more true, because the traditional keyboard environment of desktop computers

doesn’t suit Asian languages.”

He also sees a trend towards greater provision of “cloud-based” services such as those offered by

his own company This is where users access software and services over the Internet by using a browser

rather than having it installed on their own devices The benefits of cloud-based services have long

been extolled by proponents of the idea For one, consumers do not need to upgrade their software;

this is done at the cloud’s centre by the central service provider For another, consumers do not need to

buy expensive data storage, servers and IT systems because, again, the service provider manages these

things What’s more, with mobile access, consumers can get their data and access their services from

any device that has a web browser

In Asia, Mr Coffee believes the region’s lack of legacy investments in software will mean it embraces

cloud-based services much more readily And this adoption of cloud services will have a significant

impact on the course of the region’s consumer electronics

It means that consumers will no longer need to own expensive electronic devices to access

sophisticated services Instead, they can use just a simple “edge device” that offers little more than a

web browser The computing power that used to reside in the consumer device is now aggregated with

the service providers who run their services in the cloud

“For the past two decades, the trend in consumer IT hardware was to push ever more computing

power out to devices The price would stay the same, but the computing power would get faster and

better every year,” says Mr Coffee “In a cloud-based world, the emphasis shifts You no longer need to

put computing power out at the edge, you need it at the centre That means consumer devices can be

significantly cheaper.”

In Asia, although incomes are rising swiftly, they remain relatively low by global standards But with

the availability of cheap consumer electronics devices, many more of the region’s citizens will be able

to access the Internet and consume sophisticated cloud-based services

Of course, for these cloud-based models to take hold, the penetration of Internet access and the

quality of the connection need to improve substantially At present, Internet access is relatively

undeveloped in much of the region The Philippines, for example, has a mobile phone penetration rate

of 81%, but Internet penetration of less than 10%5 (see chart 5, below)

4 Forecast Alert: PC forecast is

lowered as consumers diversify computing needs across devices, Gartner, March 2011

5 International cations Union

Broadband Internet penetration is even lower still But numerous efforts are under way to improve access in Asia In 2010, the GSM Association calculated that worldwide investment in wireless broadband was US$72bn, of which 47% was in Asia Wealthy markets like Japan and South Korea have long been keen advocates of broadband technology and are moving swiftly to upgrade to the latest wireless standards, such as 4G But now the less wealthy markets such as China and India are pushing into wireless connectivity too.

In China, the government is aggressively promoting wireless broadband, not only because of the benefits it brings to consumers and businesses generally, but because China believes the size of its domestic market gives it an opportunity to become a standard-setter for the world in broadband technology (see trend 4, page 20) In India, the push into broadband Internet is also striding ahead In June 2010, the country auctioned off the spectrum needed to support wireless broadband services This will offer a much cheaper alternative to existing wired broadband that serves only city dwellers PricewaterhouseCoopers, a consultancy, estimates that the number of mobile broadband subscribers in India will rise from 100,000 today to 107m by 2015, of which 26m will be in rural areas, predominantly using 3G handsets to access the Internet6 As the country-wide roll-out of wireless broadband accelerates in the years after 2015, more and more communities will gain access to the Internet and the opportunities that it offers

This deepening penetration of broadband services will drive not only significant demand for telecoms hardware and investment, but also open up huge opportunities in rural markets, as the next chapter explains

Chart 5 Internet users per 100 inhabitants

0 20 40 60 80 100

North

rea

MyanmarBangladesh Cambodia Afghanis

tan India Laos Indonesia

Sri Lanka Philippines

Pakis

tan Thailand VietnamChina Mala

ysiaSingapor

e Hong Kong TaiwanAu

alia Japan New Zealand Sout

h Korea

Source: International Telecommunication Union, 2009

6 Mobile Broadband – Outlook

2015,

PricewaterhouseCoop-ers, 2010