Chapter 2
Microelectronics and the global 'IT industry'

In most countries, microelectronics has diffused into nearly every field of human activity. This miniaturized technology, including integrated circuits and the more recently invented microprocessor, is having a strong impact on socio-economic development. The increasing scope has been the principal mechanism by which the electronics production or the 'IT industry' has grown and is probably the reason it now generates more revenue than any other industry in the global economy.

Which are the different uses or applications for electronics products? How are these products used in society? What sub-industries are encompassed by the term 'microelectronics'? These and similar questions cannot be answered before the 'IT industry' is further defined. For policy-making and for the creation of appropriate industry strategies, the Vietnamese decision- maker has to con~ider the complexity as well as the dynamic nature of the IT industry and its electronic components.

Components buied on microelectronics, such as microprocessors, micro- controllers with built-in software, and LCD displays, electronic timers, have been designed into millions of new products, including home appliances, automated bank tellers, and telephones. The combination of microprocessor technology with electro-mechanical devices (e.g. electric motors and actua- tors) in products such as machine tools, farm equipment and motor vehicles have revolutionized these industries. It seems that the potential applications for office automation are only limited by the processing power of computers and networking hardware and the features of the software that runs on them. A complete list of technologies, products, and applications related to micro- electronics would be very long indeed, and the list is growing constantly as new possibilities are created through advancing technology.

As the size and heterogeneity of the IT industry have increased, espe- cially during the past ten years, it has become difficult to describe electronics markets in a simple way. In order to analyze the industry and set policies for its advancement, it must be broken into segments. Each industry segment may have a unique set of competitors, technologies, standards and markets. Policies that encourage the development of one segment of electronics may retard the development of others. Hence, from a government policy perspec- tive, it is important not to treat electronics production as a single, monolithic industrial entity.

In the global IT industry, many segmentation schemes are in use. Figure 1 shows six alternate schemes for segmenting the industry.

Figure 1

Six alternative ways of segmenting the IT industry

SEGMENTATION DEFINITIONS/EXAMPLES
SEGMENTATION No. 1: BY END-USER MARKET
CONSUMER ELECTRONICS Sold to the retail market.
COMMERCIAL ELECTRONICS Sold to companies.
GOVERNMENT SYSTEMS Sold to governments
SEGMENTATION No. 2: BY SUB-INDUSTRY
Computers and Data Storage From portables and PCs, to workstations and super computers.
Peripheral Equipment Such as printers, monitors, keyboards, scanners, etc.
Communications Equipment From telephone hand sets, to LANs, to central switches.
Automotive Electronics Including engine controls, sensors, displays, audio systems, etc.
Consumer Electronics Including audio, video, television equipment, etc.
Industrial Electronics Such as machine tool controls, robots, etc.
Medical Electronics Including diagnostic equipment, life support systems, etc
Instrumentation Such as frequency analyzers, electronic scales, testing equip., etc.
Military Electronics Such as remote sensing, guided missile controls, etc.
SEGMENTATION No. 3: BY PHYSICAL COMPOSITION
HARDWARE Such as:
  • Computers (micros, laptops, minis, mainframes, etc.)
  • Data Communications (modems, LANs, muxes, etc.)
  • Disk Drives (hard, floppy, optical, removable, etc.)
  • Graphics (digitizers, image processors, etc.)
  • Monitors (PC, Macintosh, etc.)
  • PC Accessories (mice, keyboards, printer accessories, etc.)
  • Printers, Plotters, and Hard Copy Devices
  • Scanners/Recognition Equip. (OCR, bar code, image, etc.)
  • Telecommunications Equipment (fax, voice, ISDN, etc.)
  • Tape Drives (cartridge, DAT, cassette, reel)
  • Terminals (display, special-purpose)
SOFTWARE Such as:
  • Applications Software (spreadsheets, word processing, Al, etc.)
  • Communications Software (email, networking, fax, EDI, etc.)
  • Systems Software (DBMS, Languages, Utilities, etc.)
SEGMENTATION No. 4: BY MANUFACTURING TECHNOLOGY
HAND ASSEMBLY Pin-trough-hole.
AUTOMATED ASSEMBLY Automated pin-trough-hole, SMT, COB, TAB, Multichip Module.
SEGMENTATION No. 5: BY LEVEL OF PACKAGING
COMPONENT Semiconductor, bare circuit board, disk drive head, connector, etc.
SUBASSEMBLY Assembled circuit board, disk drive, flat panel display, etc.
FINAL PRODUCT Personal computer, printer, LAN hub, television, VCR, etc.
SYSTEM Management information system, airline reservation system, etc.
SEGMENTATION No. 6: BY MARKET TYPE
VERTICAL Vertical markets are often referred to as niche markets, specialized, industrial, producer, commercial, or professional markets. Most often, these kinds of markets are made up of companies buying and selling to each other, and not directly to the general public. Sales to vertical markets are known as 'indirect sales'. Vertical markets are characterized by relatively slow but stable growth rates, because the absence of a retail market partially protects them from variations in consumer spending. Products sold into vertical markets tend to have what economists call a 'low elasticity of demand' -- in other words, they are so-called necessary items. Gasoline pump controllers and power generating equipment are examples of products with low elasticity of demand. Products sold into vertical markets tend to be highly functional and produced in low or medium volumes. These types of product tend to cost more and generate relatively high profit margins for the companies selling them. Wireless utility readers, automatic test equipment, and police radios are examples of products sold into vertical markets.
It is important to note that not all vertical markets have slow growth rates. For example it is estimated that sales of local area network (LAN) equipment have been growing at 25 per cent annually since 1990.
HORIZONTAL Horizontal markets are often referred to as mass markets, generalized, consumer, or home markets. Because these kinds of markets exist at the retail level, they are subject to a 'high elasticity of demand' because consumers can refrain from buying them during periods of poor economic conditions. However, because of their generalized appeal and large potential size, products sold into horizontal markets can also show exponential sales growth rates. Horizontal markets, then, have the potential to be much larger than vertical markets but are often unstable. Products sold into horizontal markets tend to be characterized by limited functionality, high volume production, and severe price competition. The production of this type of equipment generally results in very low profit margins for the manufacturing company. Televisions, video equipment, and cellular phones are examples of products sold in horizontal markets.
HYBRID Of particular interest are products that span both vertical and horizontal markets, such as the personal computer (PC). For example PCs and related peripheral equipment are sold to both firms (directly via the brand name company or through a systems integrator) and to the general public (in retail outlets). This is one reason why the PC market is one of the largest single markets in the world. Annual PC sales doubled between 1987 and 1990, growing from US$24 billion to US$48 billion. Most of that spectacular growth was in vertical markets (approximately 80%). Much computer peripheral equipment has followed this trend.
SOURCE: BRIE (Berkeley Roundtable on the International Economy), University of California, USA. All market estimates are from Dataquest, Inc., an electronics market research company in San Jose, California.

None of these alternative segmentation schemes describes the whole IT industry fully. They each use a different perspective, but overlap in ways that are important for developing a wide-ranging, but coherent set of policies. For example, a segmentation by manufacturing technology (Segmentation No. 4) could be helpful in devising a strategy for electronics production that used either hand assembly or automated assembly of electronics products as a foundation for growth. But first, the manufacturing technology used in the production of different hardware products outlined in the segmentation based on physical composition (Segmentation No. 3) would have to be researched. What kind of products would a Vietnamese IT industry based on hand assem- bly be able to manufacture? Likewise, what kind of products would a Vietnamese IT industry based on automated assembly be able to manufacture?

Another of the segmentation schemes presented in Figure 1 is based on industry sub-sectors (Segmentation No. 2). This segmentation lists the compu-ter, data storage, computer peripherals, and communications sub- industries. In Vietnam, these three sub-sectors of the IT industry are sometimes referred to as the "informatics" industry. A further elaboration of Segmentation No. 2 could help industry strategists identify sectors that are growing faster than others, possibly indicating a market opportunity for Vietnamese firms.

Similarly, an analysis of different types of markets (Segmentation No. 6) may suggest a mix of actions for optimal results. In terms of economic devel- opment, vertical markets may provide steady, stable growth, while horizontal markets may provide rapid growth. By combining different policy measures, the Vietnamese government should aim to develop an IT industry that serves high growth segments of both vertical and horizontal markets, while avoiding overly competitive or highly volatile segments.

Figure 2 presents the estimated factory revenues for the production of electronic equipment (along with growth forecasts) for six electronics sub- industry sectors. Data processing and communications generated an estimated 332 billion U.S. dollars in 1993. This figure represents revenue from equip- ment only; if the revenue generated from data processing and communica- tions services were added to the figure, the worldwide annual revenues generated might easily approach 1 trillion US dollars. In terms of growth rates, data processing (including computers, data storage, and peripherals) is estimated to be the fastest growing sub-sector, followed by consumer elec- tronics and then communications. In terms of strategic policy, it is important keep in mind that these sub-industry categories are highly aggregated. Each industry sub-sector is comprised of a wide variety of smaller sub-industries, some of which may be growing much faster than others (see Segmentation No. 5 in Figure 1 for an example of a less aggregated set of categories).

Figure 2
Worldwide factory revenues from electronics equipment production
1988-1993 estimates; 1994-1997 forecasts Figure 2
SOURCE: Dataquest Inc., San Jose (California), USA.

We have presented the IT industry in this complex way, not to confuse our readers, but to underline the major thrust of this report: A mix of policies, created through collaboration between all major actors in Vietnam, will be required to develop the industry in a dynamic way.

Policy-makers in Vietnam should learn to quickly and easily discern the characteristics as well as the policy requirements of different segments of the industry. At the earliest possible date, a team of highly motivated industry analysts should be brought together to provide market intelligence in the various fields of electronics. No single expert can understand all the current issues that exist in the industry, but individual analysts could specialize in particular industry segments and be equipped with the latest tools for infor- mation gathering and intelligence work. There are powerful new research tools available for this purpose, including CD-ROMs and on-line information services, as well as companies that specialize in providing electronics market and technical intelligence to government and industry.


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