Changes Ahead as Electronics Value Chain Evolves

As noted in a previous blog, Frost & Sullivan and EBN recently completed a survey to identify a roadmap for the future of electronics and the implications for electronics supply chain participants. The results of the survey were unanimous -- technology and product differentiation will yield the ultimate and sustainable success for original equipment manufacturers (OEMs). (See: The Road Ahead: How Electronics Is Evolving.)

This bodes well for electronics contract manufacturers as well as manufacturing equipment vendors. OEMs will increasingly rely on their supply chain partners to support both design of the product and manufacturability.

As roles and responsibilities evolve, the electronics value chain will continue to transform. In order to keep pace with rapidly advancing product and technology evolution, companies throughout the electronics supply chain will require open communication to identify successful research and development (R&D) projects and budget allocations. This will speed up product development, the transition to manufacturing, and the time to market for products.

For both contract and equipment manufacturers, the implications are significant; evolving product design, increasing artificial intelligence, and product functionality will necessitate smart and efficient manufacturing techniques. Contract manufacturers, for example, will benefit from increasing responsibilities and overall opportunities as OEM reliance rises. In particular, contract manufacturers will also play a greater role in generating products at minimized costs, with a faster turnaround time, as well as in supporting product design, thus adding value and leaner supply chain management.

However, according to the survey results, all does not appear rosy, especially bearing in mind increasing economic concerns. There are numerous variables that will affect the speed at which technology and product innovation hit the market. There is a growing trend of companies curtailing their future earnings outlook (as seen recently by semiconductor companies such as Applied Materials, Tokyo Electron, Advanced Micro Devices, and other leading competitors).

This has created a seemingly bleak outlook for innovation and technology spending for the latter part of 2012 and even perhaps during 2013. Regardless, most OEMs continue to maintain an optimistic outlook for their internal growth. Nevertheless, smart companies will utilize internal flexibility to align their R&D budgets with disruptive technology and address new competitive requirements to succeed in new economic challenges.

Additionally, there are growing concerns about China's dominance in electronics manufacturing and the after-effects of its slowing gross domestic product (GDP). The electronics manufacturing strategy related to low-cost manufacturing is also undergoing a paradigm shift. The rush to capitalize on cost-competitive locations has slowed in the last three years. Companies are finally calculating the overall hidden costs, proximity to local markets, and overall growth and profitability. Strategic regional manufacturing is expected to increase during the next two to five years.

What are your thoughts? Will the new challenges and lowering profit margins encourage innovative strategies or business models? Historically, companies that have continued to invest in R&D in a downturn have benefited from faster rebound and revenue growth. Also, what will be some of the regulatory requirements, especially those related to product-usage benefits and risks?