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Rising consumption, rising influenceHow Asian consumerism will reshape the global electronics industryA report from the Economist Intelligence Unit

© The Economist Intelligence Unit Limited 2011 1

Rising consumption, rising influenceHow Asian consumerism will reshape the global electronics industry

Contents

Preface 2

Executive summary 3

Introduction 5

Asia’s rising consumption of global electronics output 7

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

hardware, software and services 10

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

but rural markets will also become increasingly attractive 13

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

companies 16

Trend 4: 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 20

Conclusion 23

© The Economist Intelligence Unit Limited 20112


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 low-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 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.



Introduction

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

Chart 1GDP growth(% real change per annum)

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

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

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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 Telecommuni-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 5Internet users per 100 inhabitants

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6 Mobile Broadband – Outlook 2015, PricewaterhouseCoop-ers, 2010



Trend 2: 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. Of the region’s 3.7bn citizens, almost 61%—or 2.2bn people—live in rural communities. In many countries, the rural population is far higher, such as in Laos and Sri

Lanka, both of which are 85% rural (see chart 6, below).But over recent decades, Asia’s residents have increasingly been moving to the cities, and this trend

will continue as rural workers abandon their homes in search of a better life in the cities. This rural-urban migration will continue for the foreseeable future, swelling Asia’s cities in the years ahead. However, high birthrates in rural areas will ensure that Asia’s rural populations do not decline in

Chart 6Rural population as share of total(%)

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absolute numbers, but instead stay at similar levels to today. For electronics companies this picture presents compelling opportunities—both in urban and rural areas.

For a start, growing pockets of wealthy consumers that are concentrated in urban areas will represent ever more attractive markets. Given the density of people, infrastructure is more easily installed in cities than in rural areas. Just as important, distribution chains for delivering products are more easily managed.

But it isn’t just the market size and concentration of cities that are exciting. These burgeoning cities will present growth opportunities for new types of electronic products. At Philips, a Dutch electronics giant, this trend is interpreted as a new market for “consumer safety”. Urbanisation inevitably means many more people living in ever closer proximity to each other. That puts great pressure on resources such as air and water, and raises the risks of pollution, especially in poorer countries. The rising lifestyle aspirations of the middle classes in these cities are likely to outstrip the ability of governments to upgrade their infrastructure and improve environmental and safety standards to meet those aspirations.

Antonio Hidalgo, executive vice president and chief technology officer of Philips, says his firm is developing numerous products with Asia’s expanding urban markets in mind. One new product line centres on air filters. Quite apart from the pollution generated by factories and traffic, urban dwellers often suffer from poor quality building materials.

“In China, new apartments have very high levels of volatile organic compounds in the air such as formaldehydes that are present in the glues used for wooden flooring,” explains Dr Hidalgo. “The usual solution is to leave an apartment unoccupied for three or four months after buying it, with the windows open. But that doesn’t actually work, and the air is often still highly toxic.”

Since launching its range of air filters in China, Philips has seen demand rocket. Other areas of focus for its consumer safety products are water filtration systems and food safety products.

Another opportunity linked to urbanisation is rising demand in Asia for products and services that are more environmentally-friendly. Rising wealth and soaring consumerism will have a negative impact on the environment—an impact felt most keenly in urban areas. For their part, consumers will recognise this and start to demand electronic products that are as environmentally-friendly as possible. Just as important, governments will also fret over the region’s carbon footprint, its use of resources, and its quality of life. The net effect will be that electronics companies will need to think much harder about how to address these concerns.

For Rohit Girdhar, head of corporate development in Asia Pacific for Infineon Technologies, a German semiconductor business, these trends represent a significant opportunity. His company makes chips for a number of industries, from cars to trains to power generators to home appliances. But across all these industries, Infineon is focused on producing electronic technology that promotes energy efficiency.

“Governments and consumers in Asia are increasingly demanding greater sensitivity to the environment,” says Mr Girdhar. “This is a trend that is driving our product development.”

Amongst other things, Infineon is creating systems for running smart grids in cities that use digital technology to reduce electricity wastage. It is designing chips that run air-conditioners more



efficiently, and which go into computer servers to reduce the energy needed to run them. In transport, it makes chips that go into electric cars and high-speed electric trains that cut down on the use of fossil fuels.

Just as important as emerging urban opportunities, rural areas will grow increasingly exciting for electronics companies. Traditionally, such areas have been of scant interest because rural communities generally have lower purchasing power and are widely dispersed, making them hard to reach. But as mobile broadband access is rolled out, as cheaper-access devices such as smart phones and tablet PCs are developed, and as cloud-based computing models grow, so Asia’s rural markets will feature ever more prominently on the radar screens of electronics firms (see previous chapter).

“Cloud-based models, with simple cheap access devices at the edge, will push Internet access down to the common man in Asia,” says Mr Coffee at Salesforce.com. “Rural villages will have access to the same level of computing power open to governments and multinational companies by connecting through their village Wi-Fi relay station.”

While this development is driven by rising consumerism, it will also drive further consumerism in turn. “At this stage, rural markets in Asia are really only about fast moving consumer goods (FMCG), like shampoo,” says Mr Murty at Intel. “But in the next three to five years we will see an explosion in rural markets for electronic goods and services. It will happen much more quickly than people think.”

He sees rapidly changing demand for the services that rural citizens use. Today, he says, it is less of an indulgence than it is for Western consumers. “For wealthy markets, the Internet is often about Facebook and Twitter and games. For rural markets, the services people use are more about finding advice on crop rotation and the market prices for their goods,” he explains. “But as Internet access moves from being a shared community resource, like a village kiosk, to a personal one in the home, so the use will switch to entertainment and music and social networking.”



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 companies

Consumerism in Asia is rising because incomes are growing. While that is positive when it comes to selling goods and services, it also means that labour costs are climbing. That in turn is

undermining the business models of many Asian electronics companies that have grown up as contract manufacturers producing goods on an outsourced basis for other companies such as Apple, Dell and HP—the ultimate owners of the brand and intellectual property.

In the past, these contract manufacturers have competed by being the cheapest producer. In the future, they will switch their focus away from relentlessly managing costs downwards, to building and owning brands. For their part, Western electronics firms will respond by making their own brands more Asian in character. While the trend to localise brands has been in place for some time now, in Asia it has largely been FMCG and low-value products that have made the shift. Now, as incomes rise, higher-value consumer durable brands are making the shift too.

There is much evidence that worker incomes, and hence production costs, are rising across Asia. Consider China. Data shows that the wages of Chinese migrant workers employed in the country’s factories rose by 17.3% in real terms in 2009. At Hon Hai, a Taiwanese contract electronics manufacturer, a high-profile labour dispute in Shenzhen in China led to a pay-rise of 67% in 20107. The Chinese workforce will stop expanding in 2013, says the EIU, as the nation’s one-child policy begins to bite. Soon after it will start to contract, adding further pressure to wages. A rising currency makes

7 The puzzle of migrant labour shortage and rural labour sur-plus in China, John Knight, Deng Quheng and Li Shi, Department of Economics, Oxford University, July 2010



matters even worse for exporters—the EIU forecasts that the renminbi will rise from an average of Rmb6.47 to the US dollar in 2010 to Rmb5.7 in 2015.

Such rising costs are outstripping productivity improvements, inevitably squeezing margins. If manufacturers try to pass on the costs to their customers—the brand owners—they risk losing the business to factories in cheaper locations elsewhere in the world. Some contract manufacturers will continue to do well, by concentrating on growing their economies of scale in a bid to maintain their margins. Others, though, will decide to move into different parts of the value chain. They face two choices, depicted by Stan Shih, founder and retired chairman of Taiwan’s Acer, a computer company, as “the smiling curve” (see Chart 7).

Chart 7Stan Shih’s “Smiling curve”

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Manufacturers can either move upstream, by designing and building the components, such as computer chips, and intellectual property that go into products. Or they can move downstream into brands and managing the relationship with end-customers. Both ends offer much bigger opportunities for adding value than being stuck in the middle as a mere product assembler. The manufacturing portion of the value chain has become less attractive in recent years because competition has increased as more and more countries opened their borders to international trade. What’s more, the barriers to entry for new companies are relatively much lower than in the upstream and downstream activities.



Many Asian manufacturers have already ventured deep into the upstream part of the value chain, but few have ventured into the downstream, branded end. Of course, Asia does have globally-recognised electronics brands. Panasonic and Sony in Japan and LG and Samsung in South Korea need no introduction. But in the less developed parts of Asia, precious few brands have emerged. Now, with rising incomes, local markets in such countries are becoming wealthy enough, with sufficient purchasing power, to support the development of local brands.

Making the transition to brand management, however, will be challenging. It requires a complete change in mindset in how companies are run. Being cheapest, or pursuing the latest technology, is no longer the primary consideration. Instead, firms need to become more people-focused and market-driven in order to develop true user insights that serve as the starting point for product development. It isn’t enough for a manufacturer simply to stick a logo on its products and buy some advertising.

What’s more, brands represent a promise between a company and its customers. That promise must stand for reliability, quality and consistency so that customers come to trust the brand and grow loyal to it. Issues such as after-sales and repair services become critical parts of a brand’s character.

Emerging Asia does have successful examples of electronics companies that have made the transition from contract manufacturer to brand-owner. Acer is widely respected in laptops, and Huawei of China has built a strong brand in telecoms equipment. But many other companies have struggled.

Case Engelen, president and founder of Titoma, a Taiwan-based electronics design firm, believes Chinese companies will continue on the path to brand development, but progress will be slow. “The Japanese and Koreans succeeded in building brands because they had a culture of gradual improvement. They worked constantly on issues of quality and reliability. They took a long-term approach to improve every year,” he says. “The Chinese and Taiwanese are a bit more short-term in their thinking and more opportunistic. They sell toasters one year, then fridges the next, wherever the opportunities are. In China, the focus is still very much on price rather than quality.”

One short-cut to the hard slog of building a brand is to buy an already established name. This was the route taken by China’s Lenovo when it bought the PC business of America’s IBM in 2005. Some observers expect more such deals in the years ahead.

“Companies in China and India are sitting on a lot of cash. We’ll see them use it to buy international brands because it just takes too long to build them from scratch,” says Mr Murty at Intel. What’s more, he adds, “China has country of origin issues, where Chinese brands are sometimes perceived to be poorly made.” Buying a foreign brand allows Chinese firms to overcome this perceptional challenge.

For their part, non-Asian electronics brands will recognise the increasing competition from these local brands. Partly in response to this threat, and partly in a bid to get ever closer to Asia’s consumers, these American and European companies will try to take on a more Asian character.

Of course, Western firms have been adapting their brands to suit local markets for many years now. But in Asia, where incomes are low, these adaptations have largely been confined to FMCG and low-value products.

Laurent Philippe, a former president of Greater China for Procter & Gamble, a US consumer goods firm, said in an interview in 2004 with McKinsey Quarterly: “We do not see our brands in China as global brands; we see them as Chinese brands… known in China by their Chinese names.”



Now it is the turn of electronics brands to follow the same path, as incomes in emerging Asia rise to levels where consumer durables and electronics goods are affordable. At Philips, for example, Dr Hidalgo says he wants “Philips in China to be a Chinese company”. To that end, he is moving more of the firm’s global leadership to Asia, and embedding Philips engineers into Chinese families—where they live with their customers—to build a deeper understanding of the local markets.



Trend 4: 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 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.

Robert Haak, managing director of Insight InterAsia, an electronics consultancy based in Singapore, says that the West, and the US in particular, still dominates in the design of high-end electronics products. “There is a widespread belief that the American market, because it is large and wealthy, is the best place to design the latest and greatest products,” he says.

But, adds Mr Haak, Asia will increasingly carve out niches where it leads the design field. Japan, for example, dominates the design of digital cameras. South Korea has established itself as the leading design centre for televisions. “China could emerge as the leading centre for the design of affordable smart phones, given that it is the world’s biggest mobile phone market,” he says.

Certainly as Asia becomes richer, its consumers and their tastes and preferences will be an ever more important part of the design picture. For Western firms, it will no longer be enough to design products in a central location and then adapt them for different markets. They will instead need multiple innovation points that take local consumers—and increasingly Asian consumers—as the starting point for design rather than the end point.

Among the new design directions will be a focus on affordability by using the principles of “frugal engineering”. While incomes in Asia are rising, they are still low, so designers are taking established



electronics products, deconstructing them, and then re-designing them with Asian consumers in mind. Engineers at GE, an American conglomerate, have developed a hand-held electrocardiogram (ECG) called the Mac 400 that sells for US$800, less than half of what a typical ECG would cost. The Mac 400 was developed at a GE laboratory in Bangalore in India with rural communities in mind. Given the cost pressures on health systems the world over, however, it is now selling successfully in the West too.

But it isn’t just the unique needs and tastes of Asia’s consumers that will draw the region ever further into the design and development of products. At Titoma, Mr Engelen believes the region’s deepening involvement in component design will also play a part.

“It is getting harder for non-Asian companies to do electronics design outside Asia,” he argues. Asian companies are producing components that are not only ever more sophisticated, but also part of wider Asian-designed component sets and systems that all fit together—such as Chinese computer processors that integrate seamlessly with locally-produced memory drives, ports and the like. If Western companies want to incorporate these components and systems into their product designs they need to be close to these companies in order to understand the evolving technology and how different component suppliers work together.

This is often already the case, with Western firms relying heavily on the in-house design capabilities of their contract manufacturing partners in Asia. The result is an increasingly globalised innovation network, with engineers and designers across the globe working together on new products and services. Nonetheless, the part played in these networks by Asia-based designers will grow as the region rises.

At Intel, Mr Murty says innovation in electronics hardware has already moved significantly to Asia, but that the software innovation that goes into the products is still largely concentrated in the West. That will gradually change, he argues, as R&D teams become organised along more global lines. “Innovation is no longer restricted to home markets, but comes from all over the place, “ he says. “As Asia rises, it will contribute more ideas.”

At Infineon, the influence of Asia is already clear. The firm has 21 R&D centres around the globe, of which two are now in Asia—in Bangalore and Singapore. Just as important, to get closer to its clients, the firm has set up four customer research centres, in Beijing, Shanghai, South Korea and Taiwan.

Philips has also moved more of its development teams to Asia where they are designing products specifically with Asian consumers in mind. Interestingly, many of the ideas that come out of Asia are now finding their way into products designed for other markets too. Work that Philips has done in China on rice cookers, for example, has influenced the design of paella and risotto cookers in Europe.

In India, meals often require lengthy time spent grinding down spices. The machines used for the grinding can be extremely noisy, so the Philips India team developed new technologies around sound insulation and vibration control. Those new sound-dampening technologies are now finding their way into the company’s line of vacuum cleaners in the West.

Importantly, as Asia’s markets grow deeper and richer, the technology that arises from them will see Asia dictate ever more of the global electronic standards that define future technology directions. An example of this is in China, where the government and local technology firms have developed their own standard for 3G wireless broadband services. Given the size of the Chinese market, this new standard



may well be adopted beyond China’s borders, and so give China and its technology companies ever more clout in the world of electronics.

Meanwhile Taiwan has emerged as the pre-eminent centre in the world for developing WiMAX, an alternative broadband technology. The government views WiMAX as a big chance to lead the next stage of electronics development globally.



Conclusion

Asia’s rapid economic growth will have a profound impact on the global electronics industry. First, Asia will leapfrog many stages of technology development, driving new forms of electronic

hardware, software and services. This will create opportunities for electronics firms to sell innovative new products to Asia’s consumers. Second, as Asia’s urban population increases, it will drive demand for new types of electronics products. At the same, Asia’s rural population will increasingly be plugged into the Internet, and will start to consume new products and services.

Third, rising incomes will undermine Asia’s traditional strengths in low-cost manufacturing. This will result in a whole generation of new companies emerging onto the global scene, as Asian electronics manufacturers push into brand ownership and management. These firms could eventually pose a threat to traditional behemoths such as Apple, the American technology company. In response, non-Asian firms will increasingly adjust their own brands to take on more Asian characteristics.

Fourth, Asian design, preferences and habits will increasingly influence electronics innovation. This will have an impact on the nature of electronics R&D as well as the end products sold and used globally.

Taken together, these four trends will completely change the nature of the global electronics industry. As much as Asia’s rise poses a threat to the incumbents in the electronics sector, it also presents fabulous opportunities for growth. Never before have so many people entered the middle class so quickly. Given the scale of this shift, there are bound to be one or two suprises along the way too.

Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out herein.

Cover image - David Simonds

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