The Case for a Top Down Model for the Electronics & Electrical Sector

The Electronics and Electrical (E&E) industry is a significant sector for economic growth in both developed and developing countries. In 2013, countries in East Asia and South East Asia like China, Taiwan, Singapore, Malaysia, Vietnam, Thailand and the Philippines recorded a combined US $910.5 billion in E&E equipment exports. Figure 1 shows the 10 years E&E equipment export trend for China, Taiwan, Singapore, Malaysia, Vietnam, Thailand and Philippines.

Figure 1. 10 years E&E equipment export data for China, Taiwan, Singapore, Malaysia, Vietnam, Thailand and the Philippines. (Data source: http://www.trademap.org/)

China is the largest E&E equipment exporter in the list. This is followed by Singapore, Taiwan, Malaysia, Vietnam, Thailand, and the Philippines. In terms of growth, Vietnam is the highest growth achiever. The 10-year growth rate, calculated using least-squares method, for Vietnam is 36.8%, followed by China (14.8%), Taiwan (7.3%), Thailand (4.5%), Singapore (4.3%), Malaysia (3.3%), with the Philippines registering negative growth (-2.8%).

Many developing countries expand their E&E sector by targeting Foreign Direct Investments (FDI). Typically this involves enticing investors with low labor costs, incentives for foreign investors, export oriented economic strategy and liberal economic policies. This is, however, not sustainable as competitive advantage of low labor cost diminishes over the long run.

As such, some developing countries strive to address this by moving up the value chain. This is done through investing in Research and Development (R&D) and having a flexible business model.  However, it requires heavy capital investments, transformation in the education system and long gestation period for results.  The product life cycle of electronics goods continues to decrease due to rapid technological innovation.  Large companies in mature E&E industry struggle to keep up with in-house R&D.  They supplement their Intellectual Property (IP) portfolio through acquisitions.

The conventional way of downstream players moving up the value chain is described here as the “Bottom Up” approach. It first involves building the downstream manufacturing and supporting industry locally, then slowly advancing to product development via R&D to complete the ecosystem. The limitation of this approach is that in Integrated Circuit (IC) market, the core technologies in both hardware and software are dominated by a handful of key players. During the initial development stage, the progression of local downstream players is highly reliant on a roadmap set by the foreign upstream market leaders. Thus, the risk for local downstream players to invest in costly R&D activities is high.  Research work also shows that the success rate from this approach is relatively low.

An alternative model to growth is the emergence of the open-license based microprocessor architecture business model by ARM Holdings.  By dominating the world’s smartphone market (95%), and capturing 50% of both the mobile computing (handheld computers, tablets and laptops) and Set-Top-Box market, they have changed the landscape of the industry dramatically. Companies from China and Taiwan, such as Rockchip, Allwinner, Spreadtrum and MediaTek have greatly benefited from this growth. These relatively new players have dominated China’s tablet and smartphone markets, accounting for 75.7% and 63% of those markets respectively. The demand for their products has created a new ecosystem. This in turn has directly boosted the demand for local downstream manufacturing and supporting business.  This is the “Top Down” approach. It is the local innovation from the top of the supply chain that spurs development at the bottom. The advantage of this approach is that the development of the entire ecosystem can happen concurrently, instead of waiting for the downstream players to move up the value chain progression, which is highly dependent on foreign upstream market leaders.

The “Top Down” approach could be adopted by Malaysia to move-up the value chain in the E&E sector.  Research for this is undertaken at the university level in collaboration with industry.  Cost for this may total upto USD15 billion but will generate a new ecosystem with strong valueadd to GDP and employment.