asia competition barometer - precision engineering (economist intelligence unit. 2010)
DESCRIPTION
Supported by Singapore’s Economic Development Board (EDB), the Economist Intelligence Unit has developed the Asia Competition Barometer with the aim of understanding the changing market dynamics in key sectors and assessing the intensity of competition in them. Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness in Asia for select industries between 2004 and 2009.TRANSCRIPT
Asia Competition BarometerPrecision engineeringAn Economist Intelligence Unit report
Supported by
© The Economist Intelligence Unit Limited 2012 1
Asia Competition Barometer:Precision engineering
Contents
Preface 2
Executive summary 3
Asia’s growing importance for corporate performance and global competitiveness 5
Competition and profitability at Asian firms 7 Competition: Marginal increase 7
Profitability:Areturntothepeak 9
Case study: World Precision Machinery 11
Positioning for success in Asia 12 SustainedgrowthinAsia 12
Semiconductorsandsolar:Asiangrowthstories 13
Case study: Applied Materials 15
Outlook 16
Barometer methodology 18
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SupportedbySingapore’sEconomicDevelopmentBoard(EDB),theEconomistIntelligenceUnithasdevelopedtheAsiaCompetitionBarometerwiththeaimofunderstandingthechangingmarketdynamicsinkeysectorsandassessingtheintensityofcompetitioninthem.Drawinguponcompany-leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.
ThisreportfocusesontheBarometerfindingsfortheprecisionengineering(PE)sector.Assessingauniverseofover200PEcompaniesthatarepubliclylistedineightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapeforthesector.
Otherreportsinthisserieslookattheinformationtechnologyservices,petrochemicalsandchemicals,pharmaceuticals,andtransportandlogisticssectorsinAsia.
January2012
Preface
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Executive summary
WhatdoestheemergenceofAsiaasamajorengineofglobaleconomicgrowthmeanforcompaniesoperatingintheregion?Asia’srobusteconomicoutlook—coupledwithdiminishedgrowth
prospectsinmanyotherpartsoftheworld—hasattractednewinvestmentintothemarketbothfromregionalplayersandWesternmultinationals.Asaresult,competitionintheregionisexpectedtointensify.Giventhedarkeningglobaleconomicoutlook,andtheexpectedimpactonsomeeconomiesandsectorsintheregion,growthandprofitabilitylookuncertaininthenearterm.Butoverthemediumtolongerterm,Asia’sstrongeconomicfundamentalswillensureconsistentgrowthacrossarangeofindustries.HowarecompaniespositioningthemselvestocapitaliseonAsia’sgrowthoverthenextfewyears?
TheAsiaCompetitionBarometerassessestheintensityofcompetitionandchangingmarketdynamicsinseveralkeysectors.Thisreportexaminestheprecisionengineering(PE)sector,whichincludesthefollowingsub-segments:instrumentsandappliancesformeasuring,testingandnavigation,irradiation,electromedicalandelectrotherapeuticequipment,opticalinstrumentsandphotographicequipment,power-drivenhandtools,metal-formingmachinery,othermachinetools,otherspecial-purposemachinery,airandspacecraftandrelatedmachineryandmedicalanddentalequipmentandsupplies.
Amongthekeyfindingsofthisreportarethefollowing:
• Over the past decade, Asia’s emergence as a manufacturing powerhouse has led to a boom in demand for PE products.PEcomponentsandmachineryformthebackboneofmanyindustrialprocesses,includingintheautomotive,aerospaceanddefence,consumerelectronics,solarenergyandmedicaldevicesectors.AsmanufacturingfirmsinAsiamoveupthevaluechaintoproduceevermoresophisticatedproducts,theywillfurtherboostdemandforPEproducts.
• Profitability in Asia’s PE sector has continued to grow, despite the global financial crisis.Profitabilityplummetedin2005,butsincethenhassteadilyincreased.Theaveragegrossmarginofpublicly-
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1Weassessedatotalof296publicly-listedITservicesfirmsinAsiabetween2004and2009.In2009,therewere279whowerelistedandpublishedfinancialstatements.
listedAsianfirmsdeclinedfrom43.1%in2004to27.6%in2005.Thiswasduelargelytoanincreaseincompetitionandaspikeinmaterialcoststhatyear.Theaveragegrossmarginthenrosesteadilytoreach37.4%by2009.OfthefivesectorsthattheEconomistIntelligenceUnitanalysedforthisBarometer,PEistheonlyonewhereprofitabilitycontinuedtogrowuninterruptedthroughthelastglobaleconomicslowdown,partlyduetostrongregionaldemand.CombinedoperatingrevenuesincreasedfromUS$26.6bnin2007toUS$35.1bnin2009.
• Rising private consumption in Asia has boosted demand for PE products and services, but whether it can replace demand in the West remains to be seen.TheriseofAsia’smiddleclasshasbeenaccompaniedbyanincreaseindiscretionaryspending,particularlyongoodssuchascars,mobilephonesandcomputers.Thishas,inturn,drivengrowthintheregion’sPEsector.Still,itremainstobeseenifthisindigenousregionalgrowthwillbeabletooffsetthelikelyslowdownindemandintheWestoverthenextfewyears.PEfirms’successoverthenextfewyearswilldependonhowaccuratelytheyhaveplannedforandmanagedthisshift,particularlygiventhebroaderglobalmacroeconomicuncertainty.
• The PE industry is evolving rapidly, as low-cost Asian producers and high-technology Western firms seek to acquire each other’s competitive advantages.GlobalPEfirmshavebeenmovingintoAsiatotapitsburgeoningmarket,andtolowertheirproductioncostsbyshiftingcapacityfromhigher-costcountriestoAsia.Meanwhile,Asiancompanieshavebeenadaptingtothiscompetitivethreatbyplacingagreateremphasisontechnologicaladvancementinordertomoveupthevaluechainandproducemoresophisticatedmachinery.AsianPEfirmsareeagertotransformfrombeingsimplecontractmanufacturerstoprovidingproductionandsupplychainmanagementcapabilities.Thisemphasisisreflectedinafive-foldincreaseinAsianfirms’totalR&Dexpenditurebetween2004and2009.Asaresult,Asia’sPEindustryhasbeenwitnessingtheconfluenceoftwohithertodistinctbusinessmodels.
• The number and size of players in Asia’s PE sector is growing.Thenumberandsizeofpublicly-listedfirmsinthePEsectorinAsiahasincreaseddramatically.Thetotalnumberoflistedcompaniesintheindustryincreased57%between2004and2009,from131firmsto206.Overthesameperiod,thetotalcombinedrevenueofpublicly-listedPEcompaniesmorethantripledfromUS$9.8bntoUS$35.1bn;thesefirms’combinedtotalassetsrosefromUS$13bntoUS$63.3bn.
• Competition has increased only marginally, with the industry’s biggest players continuing to expand their positions.CompetitioninthePEindustrygrewsignificantlybetweentheyears2004and2006,largelyduetoaninfluxofnewplayersintothesector.However,between2006and2009,thelargestfirmsintheindustrybegantosteadilyincreasetheirconcentration,partlybyexploitingeconomiesofscale.Arelatedtrendthathasbenefittedlargefirmsisgreaterverticalintegration,asPEcompaniesseektodiversifytheirproductofferingsandprovidemorecomprehensiveend-to-endservicestotheircustomers.InthefuturethesectorislikelytobecharacterisedbyfiercecompetitionbetweenbigAsianandnon-Asianplayers,whomayincreasinglyresembleoneanother.
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Asia’s growing importance for corporate performance and global competitiveness
Overthepastdecade,Asiahasrapidlygrowninimportancetotheglobaleconomy.ItsshareofglobalGDP,measuredinpurchasing-powerparityterms,increasedfrom26.8%in2001to33.8%in2010.1
By2016,theEconomistIntelligenceUnit(EIU)expectsthisproportiontoriseto38.9%.ThereareseveralbroadtrendsthathavebeendrivingAsia’sprecisionengineering(PE)sector.2 The
firstisAsia’semergenceasaglobalmanufacturingpowerhouse.Overthepastdecade,Asia’sshareofglobalmanufacturingoutputhasincreaseddramatically,ledbyChina(seeFigure1).ThishasboosteddemandforPEproductsthatareusedtomanufactureavarietyofgoods.
Thesecondtrend,whichishelpingtounderpinthefirst,relatestorisingprivateconsumptioninAsia,whichisboostingregionaldemandformanufacturedgoods.DuetoAsia’srapideconomicgrowthoverthelastfewyears,theregionisnowhometoahugeandgrowingmiddleclass.TheAsianDevelopmentBank(ADB)estimatesthatbetween1990and2008developingAsia’smiddleclasspopulationmorethantripledfrom565mto1.9bn.Asashareofthetotalpopulation,themiddleclassgrewfrom21%to56%overthatperiod.3
1AsiahereincludesBangladesh,China,HongKong,Indonesia,India,Japan,SouthKorea,Malaysia,Myanmar,Philippines,Pakistan,Singapore,SriLanka,Thailand,Taiwan,andVietnam
2 The precision engineering sectorincludesthefollowingsub-segments:instrumentsandappliancesformeasuring,testingandnavigation,irradiation,electromedicalandelectrotherapeuticequipment,opticalinstrumentsandphotographicequipment,power-drivenhandtools,metal-formingmachinery,othermachinetools,otherspecial-purposemachinery,airandspacecraftandrelatedmachineryandmedicalanddentalequipmentandsupplies.
3“TheriseofAsia’smiddleclass”.AsianDevelopmentBank.2010
Figure 1: Share of world manufacturing output(%, constant 2000 US$)
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IndiaTaiwanSouth KoreaASEANChina
2000 2009
Source: UNIDO
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Thesenewconsumershavebeenspendingonproductssuchascars,mobilephonesandcomputers.Between2001and2010,mobilephonepenetrationinAsiaandAustralasiarosefrom10.9%to70.6%whilepersonalcomputerpenetrationincreasedfrom4.4%to18.7%(seeFigure2).Overthatsameperiod,thestockofpassengercarsper1000peopleintheregiongrewfrom34.2unitsto54.1.Asiahassomeofthefastestgrowingautomobilemarketsaswellassomeofthelargestautomobilemanufacturersintheworld.In2009,ChinaovertooktheUnitedStatesastheworld’sbiggestcarmarket.Between2011and2015,theEIUexpectsAsiatosee157.5mmorepassengervehiclesand54.7mmorecommercialvehiclesonitsroads.
Importantly,allthreemarketscontinuedtoexpandrightthroughtheglobaleconomicdownturnin2008-09,reflectingtheresilienceofAsianprivateconsumption.TheEIUforecaststhatby2016,therewillbe84.8carsper1000people,whilemobileandcomputerpenetrationwillhavereached112%and32.5%respectively.
ThethirdtrenddrivingAsia’sPEindustryisthegrowingglobalinterestinrenewableenergy,duetoconcernsovertheenvironmentanddeclininghydrocarbonstocks.Thisisboostingdemandfor,amongotherthings,solarphotovoltaic(PV)cells,whichusesemiconductorsmadewithPEproducts.AsianmanufacturersdominatetheglobalindustryintheproductionofsolarPVcells.CombinedPVproductioninChina,TaiwanandJapanincreasedfromlessthan700MWin2004to16,800MWin2010,accountingforsome70%ofthe24,000MWglobalproductionthatyear.4RussellTham,regionalpresidentofAppliedMaterialsSouthEastAsia,saysthatalthoughAppliedMaterialsenteredthesolarbusinessonlyin2006,ithasbeenthefirm’sfastestgrowingsegment,andnowcontributesabout20%ofitsrevenues.AppliedMaterialsalsonowrunsasolarR&DcentreinXi’an,China.
Figure 2: Asia and Australasia consumption
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120PCs (per 100)Mobiles subs (per 100)Cars (per 1,000)
2016201520142013201220112010200920082007200620052004200320022001
Source: Economist Intelligence Unit
4EarthPolicyInstitute,2001.
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Competition and profitability at Asian firms
Thenumberandsizeofpublicly-listedfirmsinthePEsectorinAsiahasincreaseddramatically.Thenumberoflistedcompaniesincreased57%between2004and2009,from131firmsto206.Over
thesameperiod,thetotalcombinedrevenueofpublicly-listedPEcompaniesmorethantripledfromUS$9.8bntoUS$35.1bn,whiletheircombinedtotalassetsrosefromUS$13bntoUS$63.3bn.Meanwhile,whilethereisnoauthoritativedataonforeigndirectinvestmentinthePEsector,mediareportsandindustryinterviewsindicatearapidincreaseininvestment.Theinfluxofnewplayers,bothAsianandnon-Asian,intotheregion’sPEsectorhasledtoamarginallymorecompetitiveoperatingenvironment.
Competition: Marginal increaseWithmanycompaniesraisingtheirexpectationsofAsiatodelivergrowthandprofits,itisreasonabletoexpectcompetitionintensityintheregiontoincrease.TocapturethisintensitywehaveusedtheHerfindahl–HirschmanIndex(HHI),whichmeasuresthemarketconcentrationofanindustry’slargestfirms.HHIvaluescanrangefrom0(extremelyfragmentedmarket)to1.0(monopoly).Herewehavemultipliedthevaluesby100toachieveascaleconsistentwithprofitabilityindicators(seebelow).TheHHIforAsia’sPEindustrydecreasedfrom10.39in2004to9.30in2009,afterhavinghitalowof5.87in2006(seeFigure3),signifyingthatthe50biggestfirmsintheBarometersawamarginaldecreaseinconcentrationbetween2004and2009.4
CompetitioninthePEindustrygrewsignificantlybetweentheyears2004and2006.TheHHIdroppedfrom10.39to5.87overthatperiod,signifyingthatthemarketshareofthe50biggestfirmsdeclinedsubstantially.Thisislargelybecauseofaninfluxofnewplayers—inthosetwoyears,40newAsiancompaniesenteredtheindustry,capturingmuchoftherapidlygrowingmarket.
However,between2006and2009,thelargestfirmsintheindustrybegantosteadilyincreasetheirconcentrationonceagain.TheHHIrosefrom5.87to9.30overthatperiod.Therearetworeasonsforthis.
5Ameasureofthesizeofcompanies in relation to the industry,andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseofover200listedcompaniesassessed.FormoreinformationontheBarometermethodology,pleaserefertothelastsectioninthisreport.
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Figure 3: Herfindahl–Hirschman Index
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Source: Economist Intelligence Unit
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Herfindahl—Hirschman Index (HHI) 10.39 8.63 5.87 7.73 8.44 9.30
First,from2007to2009,onlyahandfulofnewcompaniesenteredthesector,hencetheincumbentswereabletogrowtheirmarketshare.
Second,overthepastfewyears,PEfirmshaveengagedinfiercepricecompetition,drivingdowncostsbyimprovingtheefficiencyoftheirproductionprocesses.Inthisenvironment,thelargercompanieshavebeenbetterabletoexploiteconomiesofscale,improvingtheircompetitivepositionandwinningmarketshare.Arelatedtrendthathasbenefittedlargefirmsisgreaterverticalintegration,asPEcompaniesseektodiversifytheirproductofferingsandprovidemorecomprehensiveend-to-endservicestotheircustomers.
Thefivelargestcompaniesby2009turnover—Larsen&Toubro,ChinaCSSCHoldings,Xi’anAircraftInternational,TaiyuanHeavyIndustryandChinaErzhongGroup(Deyang)HeavyIndustries—aresignificantlybiggerthantheirpeers(seeFigure4).
IndustrytrendssuggestthattherewillbeincreasedpriceandtechnologycompetitioninAsia.Non-Asianfirmshaveenteredtheregionoverthelastfewyearstolowertheirproductioncostsandbecloserto
Figure 4: Top ten companies by turnover
Company Country of origin 2004 turnover (US$bn) 2009 turnover (US$bn)
Larsen&Toubro India 3.39 9.89
ChinaCSSCHoldings China N.A. 3.80
Xi'anAircraftInternational China 0.15 1.24
TaiyuanHeavyIndustry China 0.28 1.21
ChinaErzhongGroup(Deyang)HeavyIndustries China N.A. 1.13
ShenyangMachineTool China 0.47 0.90
KNMGroup Malaysia 0.56 0.61
Hi-PInternational Singapore 0.44 0.59
DahengNewEpochTechnology China 0.43 0.49
AlstomProjectIndia India 0.19 0.46
Note:ThesearethetenbiggestcompaniesbyturnoverthatwereanalysedintheBarometer,whichconsideredonlypubliclylistedfirmsineightcountries:China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam
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keyclients.Meanwhile,Asiancompaniesthathavehithertocompetedmainlyonpricearenowfocussedonlearningnewtechnologiestomoveupthevaluechain,saysShaoJianJun,executivedirectorandCEOofWorldPrecisionMachinery,anintegratedmanufacturerofprecisionmetalstampingmachines.Asaresult,thesetwopreviouslydistinctPEbusinessmodels—broadly,thehigh-technologyWesternmodelandthelow-costAsianone—arebeginningtomeld.
Profitability: A return to the peakTomeasuretheprofitabilityofthePEsector,wedevelopedacompositeindexoffiveratiosthatmeasuredifferentaspectsofacompany’smargins(formoredetails,seethenoteonmethodologyattheendofthisreport).AccordingtoourBarometer,withtheexceptionofgrossmargin,allotherprofitmarginshaverisenrelativeto2004(seeFigure5).
TherewasasharpfallintheProfitabilityIndexin2005,whichcanbelargelyattributedtoasharpfallingrossmarginfrom43.1%to27.6%.6Grossmarginalsodeclinedmarginallyin2006to27.2%.Thefallingrossmarginintheyears2005and2006canbeattributedtoanincreaseincompetitionandhighermaterialcosts.First,theincreaseincompetitionin2005and2006(seeFigure3)couldhavehadanegativeimpactongrossmargins.Second,in2005materialcostsmorethandoubledtoUS$3.5bnfromUS$1.6bnin2004.Overthatsameyear,combinedoperatingrevenuesincreasedonly25%toUS$12.3bn.Thishurtgrossmarginsin2005.
Sincethatyear,however,AsianPEcompanieshaveseenasteady,albeitgradual,increaseinoverallprofitabilityresultinginthesamelevelsofprofitabilityin2009asin2004.Thiscanlargelybeattributed
Figure 5: Profitability Index
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200920082007200620052004
Source: Economist Intelligence Unit
2004 2005 2006 2007 2008 2009
Profitability index 126.1 100.0 102.2 111.8 117.5 126.1
EBITDAmargin(%) 11.7 12.0 12.1 14.0 13.0 14.4
Grossmargin(%) 43.1 27.6 27.2 30.5 34.2 37.4
Returnoncapitalemployed(%) 10.2 13.3 14.8 13.5 13.4 12.6
Returnonequity(%) 7.5 11.9 14.3 13.6 13.8 13.2
Returnonassets(%) 2.7 4.4 5.1 5.5 5.3 5.3
Herfindahl—Hirschman Index (HHI) 10.39 8.63 5.87 7.73 8.44 9.30
6ThecompositeProfitabilityIndexismadeupoffiveratios that each represents adifferentaspectofacompany’sprofitability.FormoreinformationontheBarometermethodology,pleaserefertothelastsectioninthisreport.
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tooperatingrevenuesincreasingfasterthanmaterialcostsfrom2006to2009,contributingtohighergrossmargins.
Indeed,ofthefivesectorsthattheEIUstudiedforthisBarometer,thePEindustryistheonlyonewhereprofitabilitycontinuedtogrowuninterruptedthroughthelastglobaleconomicslowdown.CombinedoperatingrevenuesincreasedfromUS$26.6bnin2007toUS$33.5bnin2008andUS$35.1bnin2009.ThissuggeststhateventhoughmanufacturingexportstodevelopedWesterncountriesdeclinedduringthisperiod,thiswassomewhatoffsetbyindigenousAsiandemandaswellasgrowthinnewmanufacturingsegments.Forinstance,Asia’sproductionofsolarPVcellsincreasedsignificantlyinboth2008and2009.Additionally,AsianmanufacturersmayhavecontinuedtoinvestinPEmachineryinanticipationoffuturedemand.
Inthecomingyears,MrThamatAppliedMaterialsexpectstosee“growthopportunitiesinthesemiconductorindustrypropelledbythewirelessandmobilemarkets,asconsumersdemandanincreasinglynetworkedsocietywithvisuallyrichandinteractivedevicesanytime,anyplace”.Heexpectsasurgeinconsumptionfromtheemergingworld’smiddleclassasproductsbecomemoreaffordable.However,profitabilitywilldependnotonlyonglobaleconomicgrowth,butalsooncostsandtechnology.MrThambelievesthatcompanieswillneedtocontinueinvestinginR&Dtoproducenewertechnologiesatcheapercosts.
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Case study: World Precision Machinery
World Precision Machinery: Moving up the technology ladderWorldPrecisionMachinery(WPM),anintegratedmanufacturerof
precisionmetalstampingmachinesbasedinJiangsu,China,hasseenitsrevenuesmultiplyfive-foldbetween2005and2010.Inthefirstninemonthsof2011,thefirmhadrevenuesofRMB947.9m(US$150.1m),amountingtoyear-on-yeargrowthof30%.
ShaoJianJun,thecompany’sexecutivedirectorandCEO,saysWPMderivesmorethan95%ofitssalesfromChinacurrentlyandthatAsia’sstandingastheworld’smanufacturinghubwillcontinuetopresentbusinessopportunitiesforthecompanyas“thestampingindustryformsthebackboneofmanymanufacturingindustries”.WPMiscurrentlyoneofthethreelargestmanufacturersofmetalstampingmachinesinChina.Itmostlysuppliesmanufacturersinhomeappliances(34%ofrevenues),automobiles(32%)andelectronics(15%),whileitearnstherestofitsrevenuefromseveralothersectors.
MrShaoattributestheprofitabilityintheindustryto“aboominmarketdemand,[therisingvalueof]brandnames,pricecompetitivenessandtechnologyinnovation”.However,headds
thattheintensityofcompetitioninthesectorinAsiahasincreasedconsiderably.“MoreandmoremanufacturingplantshavemovedintoAsia,”hesays.Manynon-Asianfirmshavesetupplantsintheregioneitherindependentlyorthroughjointventures.Forinstance,globalplayerssuchasKLA-TencorandAppliedMaterialshaveinvestedinmanufacturingplantsandresearchandsupportcentresindestinationssuchasChina,India,Malaysia,SingaporeandTaiwan.
MrShaoexpectsstiffcompetitioninthePEsectoroverthenextfewyears.HesaysthatAsianfirmshavestartedtomoveupthetechnologyladder,whilenon-AsianfirmsthathaveanAsianpresencehavestartedloweringproductioncosts.
Inthefaceofthisrisingcompetition,akeypartofWPM’sstrategyisverticalintegration:thecompanyhasthecapabilitytodesign90%oftheequipmentitproduces.AccordingtoMrShao,overthenextfiveyears,profitabilityinthePEindustrywillbedrivenbymarketdemandontheonehand,andcostcontrol,productionefficiencyandpricecompetitivenessontheother.Technologyinnovationwillalsobeimportant,hesays.ThisisreflectedinWPM’sdecisiontoemploymorethan200R&DandtechnicalstaffintwoChinesecities,DanyangandShanghai.
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Figure 6: Private consumption(% real growth p.a.)
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Source: Economist Intelligence Unit
Positioning for success in Asia
Sustained growth in Asia
Giventhelong-termstructuralproblemsinmanyWesternmarketsandemergingAsia’slargelybullisheconomicfundamentals,theshiftintradeandinvestmentfromtheWesttoAsiawillcontinue.Asia’s
economicgrowthisexpectedtocontinueoutpacingthegrowthofOECDcountries.TheEIUestimatesthatby2016theeightAsiancountriesinthisstudyalonewillaccountfor28.9%ofglobalGDP(measuredinpurchasing-powerparityterms),upfrom23.2%in2010.
AcriticalquestionforAsia’smanufacturingandPEindustriesiswhethertheriseinAsiandemandcanoffsetthesluggishgrowthindevelopedWesternmarkets.China’smerchandiseexportstoEuropefell7.5%month-on-monthinSeptember2011and9%inOctober2011whileitstotalexportsdeclinedby7.2%inthatmonth.China’spurchasingmanager’sindex,aproxyformanufacturingsectorperformance,declinedforthefirsttimeinthreeyearsinNovember2011,registeringasub-50reading,denotingacontractioninfactoryactivity.Itstayedbelow50inDecember2011andJanuary2012.Meanwhile,thecrisisintheeurozonecountriesandtheslowrecoveryintheUSsignificantlyraisetheriskofaglobal
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Figure 7: Device penetration levels(%)
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PCs (per 100)Mobile subs (per 100)
Source: Economist Intelligence Unit
recession,accordingtotheEIU.Weestimatethereisagreaterthan40%chancethattheglobaleconomywillfallintorecessionsometimeinthenexttwoyears.
Nevertheless,ourcoreforecastassumesthatprivateconsumptioninAsia,particularlyChina,willcontinuegrowingstrongly(seeFigure6).
Still,itremainstobeseenifthatgrowthwillbeabletooffsetthelikelyslowdownindemandintheWestoverthenextfewyears.ThereisalsoariskacrossmanysectorsinAsia,fromrealestatetoshipbuilding,ofanoverinvestmentincapacityoverthepastfewyears.IfmanufacturershavesimilarlyoverinvestedinPEmachinery,thePEindustrymayhavetocontendwithseveralyearsofslowgrowth.
WhilestillvulnerabletoaslowdownintheWest,Asia’sPEindustryhasbecomeincreasinglydependentonrisingprivateconsumptionintheregion.IfAsia’seconomiesshouldstumble—hurtingemploymentandincomegrowth—thatwouldhaveanegativeimpactontheregion’sPEindustry,asconsumersarelikelytoquicklycutbackondiscretionarypurchases,suchasnewmobilephonesandbettercars.
Semiconductors and solar: Asian growth storiesThegrowingdemandforpersonalcomputers,mobilephones,tabletsandotherconsumerelectronicsinAsiahasbeenamajordriverofthesemiconductormarket.Asiaex-Japan’sshareofglobalsemiconductorsalesincreasedfromabout40%in2004tomorethan50%in2009,accordingtotheSemiconductorIndustryAssociation,highlightingthegrowingimportanceofAsiatothissegmentofthePEindustry.7
In2010,theglobalsemiconductormarketgrewbyUS$72bnor31.8%,withAsiaaccountingformorethanhalfofthatgrowth(salesintheregionincreasedbyUS$40.4bntoUS$160bn).Despitethedarkeningglobaleconomicoutlook,andtherelatedmoderationofAsia’sgrowthforecasts,theEIUexpectsthemarketsforconsumerelectronics,mobilehandsets,smartphonesandpersonalcomputersinAsiatogrow,albeitpossiblyatamoregradualrate(seeFigure2).
Indeed,comparedtodevelopedregions,thepenetrationofthesedevicesinAsiaisstilllow(seeFigure7).
Thissuggeststhatthereisstillplentyofroomforcatch-upgrowth.ThusthesemiconductorindustrycanexpecttoseecontinuedgrowthinAsiaand,byextension,socansemiconductorequipmentmanufacturers.Asiahasbecomethemostimportantmarketforcompaniesinthisspace.
Additionally,semiconductormanufacturersrelentlesslyinvestinnewtechnologyinordertolowertheunitcostsofprocessingpower.“Consumerend-demandforelectronics,mostrecentlyinsmartphonesandtabletcomputers,hashistoricallydrivencompetitioninourindustrytomakefaster,morecomplex,andcheapersemiconductorsinlinewithMoore’slaw,”saysMrThamatAppliedMaterials.8 HecitestheiPodasanexample.AniPodbuiltinthe1970satthecost-per-transistorthenwouldhavecostUS$3.2bnandwouldhavebeenthesizeofahouse;however,withinnovationinlinewithMoore’slaw,todayaniPodcostsUS$250andfitsintoapocket.
7GlobalSalesReport.SemiconductorIndustryAssociation.Variousyears
8Moore’slawisnamedafterGordonMoore,co-founderofIntel,acomputerchipmanufacturer,whopredictedthatcomputerprocessingpower—measuredbythenumberoftransistorsonanintegratedcircuit—wouldriseexponentially,doublingevery18monthsorso.
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Whatistruehereofsemiconductorsisalsotrueofsolarpanels,saysMrTham.“Astheindustryreducesthecost-per-wattresultingincheapersolarpanels,competitionwilldrivepricepressuresandpotentiallyresultinconsolidation,”hesays.Despitetherecenthiccupsintheindustry,MrThamexpectssolarenergytobecomeaviablealternateenergysource.“InnovationsbyPEcompaniescreatemanufacturingsolutionsthathelpPVproducerspushdownthecost-per-watt,andwilleventuallymakesolarenergycostcompetitivewithtraditionalenergysources.”
InMrTham’sview,mostglobalplayershaveacknowledgedtheimportanceofAsiaasanimportantsemiconductorandsolarmanufacturingbaseandthereis“anemergingpreferenceoftheindustrytohavealargerandmoresignificantpresenceinAsia”.
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Asia Competition Barometer:Precision engineering
Case study: Applied Materials
Applied Materials: Continued growth in AsiaAppliedMaterials,withrevenuesofmorethanUS$10bnin2011,is
theworld’slargestsupplierofmanufacturingequipmentandservicesforthesemiconductor,flat-paneldisplayandsolarindustries.“About75%ofourrevenuecomesfromAsia,upfromabout50%adecadeago.WehaveasignificantpresencethroughoutAsiainChina,Taiwan,Singapore,India,JapanandSouthKorea,andarecontinuingtogrowourfootprintintheregion,”saysRussellTham,regionalpresidentofAppliedMaterialsSouthEastAsia.
SinceestablishingitselfinAsiamorethan20yearsagowithsalesandtechnicalsupportfunctions,MrThamsaysthatthecompanyhasadded“strategicandoperationalrolestocatertoamarketbasethatisshiftingtoAsia,andtoimprovecostcompetitiveness.”
“CompetitiontokeepupwithMoore’sLaw,whichdrivesincreasinglyadvancedsemiconductors,hasresultedinatrendofconsolidationforoursemiconductormanufacturingcustomers,aswellaseverincreasingcapitalinvestmentrequiredtoachievetheprofitableeconomiesofscale,”MrThamsays,inexplainingthehighinvestmentbarriersinvolvedinthesemiconductorindustry.
HebelievesthePEsectoritselfisincreasinglycapitalintensive,particularlywiththedevelopmentoftechnologiessuchasthree-dimensionalintegratedcircuits,whichrequire“significantRD&E[research,developmentandengineering]resourcesandinvestmentthatareonlyavailabletoglobalplayers.”MrThamsuggeststhatcompetition-drivenconsolidationamongthePEindustry’scustomerscouldleadtoasimilarconsolidationinthePEindustryitself.InMay2011,AppliedMaterialsacquiredVarianSemiconductorforUS$4.9bnandinNovember2009,itpaidapproximatelyUS$364mtobuySemitool,anothersemiconductorcompany.Similarly,waferfabricationequipmentsupplierLamResearchagreedtobuyrivalNovellusSystemsforUS$3.3bninDecember2011.
Togainacompetitiveadvantage,saysMrTham,PEcompanieswillhavetoinvestinR&D“toaddressanincreasingnumberoftechnologyinflectionpointsinordertoenableMoore’slawandproducenewertechnologiesatevercheapercosts.”Headdsthattheseinnovationswillinvolvenewmaterials,uniqueintegratedcircuitdesignarchitectures,novelpatterningstructuresandlargersubstrates.“Thetrendofglobalisationhasalsoseencompaniesoptimisetheirglobalfootprintthroughthedevelopmentoflowercostoperationsandsupplychains,especiallyinAsia,”headds.
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Outlook
Overthepastdecade,Asia’sPEindustryhasexpandedintandemwiththeregion’smanufacturingsector.ThenumberandsizeofAsianPEcompanieshasincreased,whilemanyhavebroadenedthe
scopeoftheiroperationsbyenteringnewsegmentsaswellasbyintegratingvertically.SeveralAsiancompaniesrecordedlargeincreasesintheiroperatingrevenuesbetween2004and2009.Forinstance,theannualturnoverofLarsen&Toubro,anIndiantechnology,engineering,manufacturingandconstructionfirm,increasedfromUS$3.4bnin2004toUS$9.5bnin2009.
Fortheindustryasawhole,afteraslightdipinprofitabilityin2005-06,marginshaverisensteadily.Inparticular,bigcompanieshavebeenabletoexploiteconomiesofscaleandgrowrapidly,bothorganicallyandthroughmergersandacquisitions.Withongoingconsolidationintheindustry,itseemslikelythatthebiggerfirmswillcontinuetogrowtheirmarketshare.
Theindustry’soutlookoverthenextfewyearshingeslargelyontwotrends—themergingofAsianandnon-AsianPEbusinessmodels;andtheshiftindemandfromtheWesttotheEast.First,asAsia’smarkethasgrown,morenon-Asianglobalplayershaveenteredtheregion.“Overthenextfewyears,theAsianfirmsandnon-Asianfirmswillcompetewitheachotherintermsofpriceandtechnologycompetitiveness,costcontrolandproductionefficiency,”MrShaoatWorldPrecisionMachinerysays.Therefore,evenasAsia’slargestPEfirmsarewinningmarketsharefromsmallerAsianplayers,theyincreasinglyhavetocontendwithnon-Asiangiantswhoareloweringtheircostsofproductionandbroadeningtheirfootprintsacrosstheregion.TheindustryisthuslikelytobecharacterisedbyfiercecompetitionbetweenbigAsianandnon-Asianplayers,whomayincreasinglyresembleoneanother.
Second,Asianmanufacturers—and,byextension,thePEfirmstheydependon—areseeingademandshiftfromdevelopedWesternmarketstotheemergingworld,particularlyAsia.Risingdisposableincomesintheregionhavedrivenexponentialgrowthinthemarketsforarangeofconsumerproducts,fromautomobilestotabletcomputers.AsianPEfirmsarebecomingincreasinglydependentontheseboomingAsianmarketsfortheirgrowth.Theirsuccessoverthenextfewyearswilldependonhowaccurately
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theyhaveplannedforandmanagedthisshift,particularlygiventhebroaderglobalmacroeconomicuncertainty.Overthelongerterm,Asia’sseculargrowthstorywillensurethatitsPEindustrycontinuestogrowrapidly.
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Asia Competition Barometer:Precision engineering
Barometer methodology
Toassesstheintensityofcompetitionandunderstandthechangingmarketdynamicsinkeysectors,theEconomistIntelligenceUnithasdevelopedtheAsiaCompetitionBarometer.Drawinguponcompany-
leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.
Assessingauniverseofover200publicly-listedprecisionengineering(PE)companiesacrosseightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapeforthePEsector.
How do we define the precision engineering sector? ThePEsectorincludesthemanufactureof:
Instrumentsandappliancesformeasuring,testingandnavigation,irradiation,electromedicalandelectrotherapeuticequipment,opticalinstrumentsandphotographicequipment,power-drivenhandtools,metal-formingmachinery,othermachinetools,otherspecial-purposemachinery,airandspacecraftandrelatedmachineryandmedicalanddentalequipmentandsupplies.
Methodology TheBarometerhastwodimensions:profitabilityandmarketconcentration.
Profitability IndexToassesstheaggregateprofitabilityofthePEinAsia,theEconomistIntelligenceUnitdevelopedacompositeindexoffiveratiosthateachrepresentadifferentaspectofacompany’sprofitability:
• EBITDA margin (%):Ameasureofacompany’soperatingprofitability.Itisequaltoearningsbeforeinterest,tax,depreciationandamortisation(EBITDA)dividedbytotalrevenue.BecauseEBITDA
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excludesdepreciationandamortisation,EBITDAmarginprovidesaclearerviewofacompany’scoreprofitability.Anincreaseincompetitionmayputpressureonanindustry’sprofitmargins.
• Gross margin (%):Whenusedasamarketmeasureofcompetition,grossmarginmeasurestheprofitabilityconsideringonlythecostsofgoodssold.Thehigherthepercentage,themorethecompanyretainsoneachdollarofsalestoserviceitsothercostsandobligations.Anincreaseincompetitiontendstoreducefirms’abilitytoincreasepricesandtherebyincreaseitsgrossmargin.
• Return on capital employed (%):Ameasureoftheefficiencyandprofitabilityofacompany’scapitalinvestments.Returnoncapitalemployedalsoindicateswhetherthecompanyisearningsufficientrevenuesandprofitsinordertomakethebestuseofitscapitalassets.Anincreaseincompetitionmayrequirefirmstoemployadditionalcapitaltomaintainprofitability.
• Return on equity (%):Ameasureoftherateofreturnontheshareholders’equity.Itmeasuresafirm’sefficiencyatgeneratingprofitsfromeveryunitofshareholders’equity.Returnonequityshowshowwellacompanyusesshareholderfundstogenerateearningsgrowth.Ariseincompetitiontendstoputpressureonreturnsonshareholderfunds.
• Return on assets (%):Ameasureofhowprofitableacompany’sassetsareingeneratingrevenue,orhowprofitableacompanyisrelativetoitsassets.Returnonassetsdeterminesacompany’sabilitytoutiliseitsassetsefficientlyandeffectively.Highercompetitiontendstoputpressureonfirms’abilitytomaintainreturnonassets.
Weaggregatedcompany-leveldataformorethan200publicly-quotedPEcompaniesandexaminedtheirprofitabilityratios.Toenableobservationoftrendsovertime,acompositeProfitabilityIndexwasdeveloped(whereyear2005=100).EBITDAandgrossmarginaregivenahigherweightingintheindexastheyspeakdirectlytobottomlineprofitability,whilethereturnoncapitalemployed,returnonequityandreturnonassetsratiosspeaktohowacompanymakeuseofitsvariousresourcestodrivereturn(i.eefficiency/productivity).
Profitability indicator Weight in Profitability Index
EBITDAmargin(%) 35%
Grossmargin(%) 35%
Returnoncapitalemployed(%) 10%
Returnonequity(%) 10%
Returnonassets(%) 10%
Market concentration Toassessmarketconcentration,theEconomistIntelligenceUnitcalculatedtheHerfindahl-HirschmannIndex(HHI)forthePEsectorinAsiafrom2004to2009.Ameasureofthesizeofcompaniesinrelationtotheindustry,andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseofover200listedcompaniesassessed.9HHIvaluescanrangefrom0to1.0,movingfromanextremelyfragmentedmarket(0)toa
9Orsummedforallthefirmsin the case that there are fewerthan50.
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monopoly(1).HHIvalueshavebeenmultipliedby100toachieveascaleconsistentwithprofitabilityindicators.ArisingHHIindexgenerallyindicatesfallingmarketcompetition,whileafallintheHHIsuggeststhatcompetitionisincreasing.
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