Asia's CEMs Branch Out -- Once assemblers of simple items,
these growing companies are on a collision course with U.S.
rivals
By Mark Lapedus And Sandy Chen
May 11, 1998, TechWeb News
Although nearly all the major PC OEMs are emulating its
build-to-order strategy, Dell Computer Corp. already has a
secret weapon to stay ahead of the competition-Asia-based
contract electronics manufacturers (CEMs).
In the mid-1990s, the high-flying PC maker set up its own
assembly operations in Penang, Malaysia, in order to cut
costs. At about the same time, it quietly forged significant
deals with CEMs in Japan, Taiwan, and other countries in
Asia.
Dell spent between $600 million and $800 million in
product procurement and contract manufacturing services
in Taiwan alone last year, and plans to double that figure
this year, according to Max Fang, regional director for the
company's Asia-Pacific international procurement
operation, based in Taipei.
"Asia plays a significant role for our business," Fang said.
"About 70 cents out of every dollar we spend in product
procurement and contract manufacturing services is in
Asia."
Like Dell, other OEMs are increasingly turning to Asian
CEMs - much to the chagrin of their U.S. rivals.
Not long ago, U.S. OEMs had little to do with Asian
CEMs. Asian contractors emerged in the 1960s, but for the
next three decades they presented no challenge to their
U.S. rivals. While some U.S. contractors were building
military systems and other complex products for OEMs,
Asian contractors were usually tiny outfits that assembled
inexpensive toys, transistor radios, and other simple items.
In the late 1980s and early 1990s, however, many OEMs
began to expand their ties with Asian CEMs significantly.
At about that time, many Asian CEMs graduated from
making toys and began building the same products as U.S.
companies-PCs, communications equipment, and other
complex items.
Now, Asian CEMs are on a collision course with their
U.S. rivals. Already strong in Europe and the Americas,
U.S. CEMs have in recent years set up factories in Asia to
serve customers in that exploding region.
At the same time, Asian CEMs are treading on their U.S.
counterparts' home turf. Many Asian CEMs, which already
have low-volume, prototypelike production sites in the
United States, are beginning to open full-fledged
manufacturing plants in Europe and Mexico.
U.S. CEMs are keeping a close eye on their Asian rivals
but don't seem to be too worried-yet. "Asian contract
manufacturers mostly offer PC-oriented [manufacturing]
services and provide regional support only," said C.J.
Huang, Asia marketing manager at Solectron Corp.'s
Asia-Pacific headquarters in Taipei. Solectron, in
Milpitas, Calif., was the world's second-largest CEM in
terms of revenue last year, trailing only SCI Systems Inc.,
Huntsville, Ala., according to the Manufacturing Market
Insider, Needham Heights, Mass.
It is unlikely that Asian CEMs will displace the
$1-billion-plus giants like SCI, Solectron, and other U.S.
concerns-for now. Still, Asian CEMs are gaining ground.
Two out of the world's top 10 CEMs in total sales last
year were from Asia, including two from Singapore:
NatSteel Electronics and Venture Manufacturing
(Singapore) Ltd.
NatSteel was the world's sixth-largest CEM last year, with
$800 million in revenue, while Venture Manufacturing was
in 10th place, with $513 million in sales, according to the
Manufacturing Market Insider.
Apart from Singapore, some significant CEMs are based in
China, Japan, the Philippines, South Korea, Taiwan, and
other Asian countries.
Competition aside, Asian and U.S. CEMs face some
common problems. Asia's ongoing economic crisis,
coupled with sharp declines in many of the region's
currencies, sometimes encourages a mind-set that its
CEMs are willing to offer customers bargain-basement
prices, said Romy Luciano, purchasing manager at
Electronic Assemblies Inc., a large CEM based in Manila,
Philippines.
Another problem is a possible slowdown in the
worldwide CEM business. "It's weird out there," said
Gary Ashford, chief executive of Vtech OEM Inc., the
Campbell, Calif.-based subsidiary of Hong Kong's Vtech
Holdings Ltd., a large CEM. "The contract manufacturing
industry is still growing, but there are indications of a
slowdown," he said. "Some of the bigger [CEMs] are
having inventory problems."
CEMs with plants in Asia face a potentially more serious
issue: The region is no longer the only place to find cheap
labor. "Seven to 10 years ago, the Far East was one of the
most competitive locations to find low-cost, high-volume
manufacturing," said Pamela Gordon, president of
Technology Forecasters Inc., a market research firm based
in Alameda, Calif. "Today, there are several emerging
regions in terms of cost-competitive manufacturing, such as
Eastern Europe and Latin America."
So, has Asia lost its luster in low-cost manufacturing? Yes
and no.
China is arguably the world's lowest-cost country for
electronics manufacturing, one analyst said. Following
China in cost-competitiveness in the Asia-Pacific region is
Thailand, followed by Indonesia and Malaysia. Singapore
and Taiwan are the most expensive locations in the region.
In comparison, Mexico, the CEM industry's new hot spot,
fits somewhere between Thailand and Indonesia in terms
of labor rates in manufacturing, the analyst said. Eastern
Europe is also becoming competitive.
"China is still a cheap source of labor, but you won't find a
lot of technically oriented products being built there
today," said Rich Freiberger, vice president and general
manager at the San Jose subsidiary of GSS/Array
Technology Public Co. Ltd., which is headquartered near
Bangkok. The company, Thailand's largest CEM,
specializes in making computer products, communications
equipment, printed-circuit boards, and other products. Its
sales are expected to jump to $300 million this year from
$274 million in 1997.
Being the world's lowest-cost production site is becoming
a moot point among CEMs and their customers. "The
industry is becoming a regional business," Freiberger said.
"Contract manufacturers with factories in Asia will serve
Asia, CEMs with plants in the U.S. and Mexico will sell
into those regions, and so on."
GSS/Array is not in Mexico yet, but the company is taking
a hard look at setting up shop there. Other Asian CEMs
investigating Mexico include Wongs Electronics Co. Ltd.,
one of Hong Kong's largest CEMs, with sales of about
$500 million last year.
"We provide box-build and other services, mostly in our
factories in China," said Lawrence Tan, vice president of
marketing at Wongs' U.S. subsidiary, Wongs Holdings
Ltd., Mountain View, Calif. "We feel China is still very
cost-competitive."
Other Asian CEMs have already invaded Mexico. Hong
Kong's Vtech does the bulk of its production in China, but
it recently opened a "rework" factory in Guadalajara,
according to Ashford. Vtech specializes in the production
of RF-based equipment such as cellular phones and other
products.
Other Asian CEMs are expanding around the globe.
Currently, NatSteel has manufacturing plants in China,
Indonesia, Malaysia, and Thailand, as well as in its home
territory, Singapore. Recently, the company opened a
factory in Guadalajara and another in Hungary.
The expansion will position NatSteel to compete against
the giant U.S. CEMs. "Solectron has the size, but it caters
to a certain group of larger customers," said a spokesman
for NatSteel's U.S. sales office in San Jose. "We provide a
lot more flexibility in our manufacturing services than
[U.S. CEMs like] Solectron."
Copyright (c) 1998 CMP Media Inc.
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