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

Rising consumption, rising influence
How Asian consumerism will reshape the
global electronics industry
A report from the Economist Intelligence Unit

Sponsored by


Rising consumption, rising influence
How 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 2011

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

Preface

R

ising 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.

2

© The Economist Intelligence Unit Limited 2011


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

Executive summary

T

he 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
© The Economist Intelligence Unit Limited 2011

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

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 lowcost 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.

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© The Economist Intelligence Unit Limited 2011


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

Introduction

T

he 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.
© The Economist Intelligence Unit Limited 2011

1 Mr & Mrs Asia, CLSA, Spring

2010

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

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.

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

Asia’s rising consumption of global
electronics output

F

ollowing 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 1
GDP growth
(% real change per annum)
Asia (ex-Japan)

10

OECD

World

8
6
4
2
0
-2
-4

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: Economist Intelligence Unit

© The Economist Intelligence Unit Limited 2011

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

Chart 2
Market demand for telecoms and IT equipment in Asia (ex-Japan)
(US$ bn, left-hand scale)
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2000
2001

Greater China
South Korea

2002

2003

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

India and South Asia
South-east Asia

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

45
40
35
30
25

20
15
10
5
0

2014

(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)
(US$ bn, left-hand scale)
180

Greater China
South Korea

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

India and South Asia
South-east Asia

30

150

25

120

20

90

15

60

10

30

5

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

2014

(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 4
Market demand for household audio and video equipment in Asia (ex-Japan)
(US$ bn, left-hand scale)
60

Greater China
South Korea

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

India and South Asia
South-east Asia

30

50

25

40

20

30

15

20

10

10

5

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

(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

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).
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Rising consumption, rising influence
How Asian consumerism will reshape the global electronics industry

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 (exJapan), 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.

© The Economist Intelligence Unit Limited 2011

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Rising consumption, 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 hardware, software and services

T

2 Economist Intelligence Unit

3 Can India lead the mobile-

Internet revolution?,
McKinsey & Co, February
2011

10

he 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.
© The Economist Intelligence Unit Limited 2011


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

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).
© The Economist Intelligence Unit Limited 2011

4 Forecast Alert: PC forecast is

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

5 International Telecommuni-

cations Union

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

Chart 5
Internet users per 100 inhabitants
100
80
60
40
20

d
Ba
ng ia

la
de
s
My h
an
m
No
ar
rt
h
Ko
re
a

an
Ca

m

bo

a
di

ist

In

an

gh
Af

os
La

la
ys
ia
Ch
in
a
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et
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ai
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kis
Ph tan
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pp
in
es
Sr
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an

ka
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do
ne
sia

Ma

or
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ng
Si

ng

ap

n

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n

lia

Ta
i

tra

pa
Ja

Au
s

ut
So

Ne
w

h

Ko
re
a
Ze
al
an
d

0

Source: International Telecommunication Union, 2009

6 Mobile Broadband – Outlook

2015, PricewaterhouseCoopers, 2010

12

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.

© The Economist Intelligence Unit Limited 2011


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

Trend 2: Asia’s urban population will increase,
driving demand for new types of electronics
products, but rural markets will also become
increasingly attractive

A

sia 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 ruralurban 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 6
Rural population as share of total
(%)
100
80
60
40
20

es
i

Mo a
ng
No olia
rt
h
Ko
re
Ph
a
ili
pp
in
es
Ja
pa
n
Ma
la
ys
So
ia
ut
h
Ko
re
Ho
a
ng
Ko
ng

Si
ng
ap
or
e

Ch
in
a

do
n

In

ta
n

nd

kis
Pa

ar

la
Th
ai

a

di
In

an
m

My

Ne
p
Ca al
m
bo
di
Af
a
gh
an
ist
Ba
an
ng
la
de
Tim
sh
or
-L
es
te

Vi
et
na
m

s
La
o

Sr

iL

an
ka

0

Source: EIU and World Bank, 2008

© The Economist Intelligence Unit Limited 2011

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

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
14

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

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.”

© The Economist Intelligence Unit Limited 2011

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

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

C

7 The puzzle of migrant labour

shortage and rural labour surplus in China, John Knight,
Deng Quheng and Li Shi,

Department of Economics,
Oxford University, July 2010

16

onsumerism 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

© The Economist Intelligence Unit Limited 2011


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

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 7
Stan Shih’s “Smiling curve”

Intellectual property

Brands
Today

Value
added

1960s/70s

R&D, components,
and technology

Manufacturing and
assembly

Marketing and
sales
Supply chain

processes

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.
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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 globallyrecognised 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 marketdriven 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 lowvalue 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.”
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How Asian consumerism will reshape the global electronics industry

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.

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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

A

s 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
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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
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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.

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Conclusion

A

sia’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.

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