Electronic Companies Find Sparks Offshore
BY JAMES DETAR / INVESTOR'S BUSINESS DAILY
Monday, November 17, 2003
U.S. electronics officials are worried. Some manufacturers are rushing to set up factories on the other side of the globe. And U.S. jobs are going with them.
Analysts say it's no secret there's a trend toward making goods in lower-labor-cost regions, mainly in Asia.
ISuppli Corp. analyst Jeff Bloch says there's a huge shift. "That's where the companies and industry are concentrating," he said.
Bloch says in 2000, 70% of electronic companies made their goods in what he calls high-cost locations - mainly the U.S. and Western Europe. Only 30% took place in lower-cost areas like China and Mexico.
He says today that ratio is reversed, with 70% of electronic goods made in those low-cost countries.
Just what effect this is having on the U.S. electronics industry is still a question mark. There's disagreement even within the ranks of industry officials as to what the long-term effects will be.
The Electronic Industries Association is concerned. The EIA feels so strongly about it that it's doing a series of forums to stimulate discussion on the topic.
EIA President Dave McCurdy says U.S. high-tech industry might be in danger. Some emerging countries would like to get more American know-how. And that could pose a problem, he says.
McCurdy says the group wants to raise awareness of what's happening. "We're raising questions about the trend toward offshore outsourcing of the jewels of the knowledge economy - such as R&D, engineering, design and integration," he said.
Asked if he sees this trend as dangerous to U.S. high tech, McCurdy said, "You got it. That's our know-how. When I'm in China, Chinese officials make it clear they're not content to be the manufacturing center of the world. They want to go up the value chain."
Other emerging nations want the same thing. "India has a focus on the software niche. And they've done that extremely well. But they are not content with that. They want to go up the food chain," he said.
As they do, that could pull jobs from American high-tech industries.
The EIA is a trade group that includes more than 80% of all the U.S. electronics industry. EIA says U.S. electronics sales amount to $430 billion a year.
Other industry officials and some analysts figure the U.S. will likely continue to lose jobs to nations where labor costs are lower.
But the pace is not as fast as EIA and others think, says Chris Lewis, chief financial officer for Jabil Circuit. Jabil is a contract manufacturer that makes products for electronics companies. "We're not seeing some big, large-scale move to China or Asia," Lewis said.
Jabil has a large and growing footprint overseas. In the past year and a half, it's bought a bunch of factories in Asia and Europe.
Rival Sanmina-sci Corp. (SANM) also has a global footprint. President and Chief Operating Officer Randy Furr says the company wants to be near its customers. "Quite simply, we are where our customers want us to be," Furr said at the company's annual analysts day on Oct. 29.
But the trend toward offshore manufacturing shows up big time in the contract manufacturing sector. Three of the largest and fastest growing companies in that group are in Asia.
Nam Tai Electronics Inc. (NTE) is in Hong Kong. Foxconn Electronics Inc. is in Taiwan. And Flextronics International Ltd. (FLEX), the world's biggest contract manufacturer with revenue north of $13.5 billion, is in Singapore.
Nam Tai makes things like the EyeToy USB camera for Sony Corp.'s (SNE) Playstation game player. On Nov. 10, Nam Tai said it has boosted output of EyeToys in response to rising sales. It went from 50,000 units a month to 750,000 units.
Based on rising production, Nam Tai's revenue rose from $145 million in 1999 to an estimated $373 million this year. IBD gives its stock a Relative Strength Rating of 97, meaning its stock has outperformed all but 3% of all stocks in the past 12 months.
Similarly, Foxconn in Taiwan is growing fast. ISuppli's Bloch says Foxconn has quietly emerged as the world's fourth largest contract manufacturer. He says Foxconn's revenue jumped from $4.5 billion in fiscal 2001 to $7.6 billion in 2002.
Finally, Flextronics seems to be back on the growth track. Sales rose 5% in the September quarter to $3.5 billion vs. the same period a year ago. Earnings jumped 13%. |
