Trends in the organization of electronics manufacturing
Increased complexity of 'outsourcing'

As we pointed out in the beginning of this chapter, the production process of the IT industry is organized globally, sometimes leading to regional clusters of specialized activity. Most IT products consist of components that have been purchased on a global scale. Electronic parts are relatively lightweight for their cost, allowing international shipments to be cost effective. Few products, even those made in Japan or the U S A, are assembled from components sourced entirely from the local or national industrial supply- base.

Over the past ten years, global out-sourcing arrangements have grown to become extremely complex. Companies are not only able to procure components on a worldwide basis, but they are now able to buy custom sub- assemblies and fully assembled products from outside companies. IT compa- nies located in the Europe and North America regularly buy from companies that have specialized in manufacturing products for other companies. These manufacturers provide products ranging from circuit board sub-assembly to final products. Sometimes these products are custom built according the company's detailed designs. In other cases, suppliers manufacture products according to general specifications. In still other cases, suppliers sell ready- made manufactured products to other customer companies. Customer companies then package these products and sell them under their own brand names to end users.

This is why we often refer to customer companies as 'brand name' companies in this report. Figure 6 outlines four major forms of product or sub-assembly sourcing arrangements widely used in today's IT industry. Because of the complexity and global nature of inter-company sourcing arrangements in the IT industry, it is very difficult to tell by what company a particular product has been manufactured. Consider the following examples:

To give an example that includes the Vietnamese supply-base: A color television set sold in HCM City bearing the Japanese brand name "JVC" is al- most certainly to have been manufactured at the CKD level on a franchise basis (Figure 6, sourcing type lb) by one of the state-run Viettronics com- panies located in the HCM City area. Franchise manufacturing will be further discussed in Chapter 15. In-house manufacturing (Figure 6, sourcing type 4), although it still makes up approximately half of all final product-level manu- facturing, is becoming less common in the IT industry today. (1)

Figure 6

Product-level sourcing arrangements in the IT industry

Sourcing Type Definitton/Explanation
1) Franchise Manufacturing Products built to the design of brand name companies. Components supplied by brand name co. Franchise is responsible for selling products.
a) SKD
  • No circuit board assembly done by franchise.
c) IKD
  • Some components supplied by franchise.
b) CKD
  • Circuit board assembly done by franchise.
2) Contract Manufacturing Products built to the design of brand name companies. Contractor assembles circuit boards. Contractor is not responsible for selling products.
a) Consignment
  • Brand name company supplies components.
b) Turnkey
  • Contractor supplies components.
3) OEM Manufacturing Products built to the design of the OEM manufacturer. Brand name company is responsible for selling products.
a) Customized
  • OEM designs are modified to meet brand name company specifications.
b) Off-the-shelf
  • Unmodified OEM designs are used by brand name companies.
4) In-house Manufacturing Products are designed, manufactured, and sold by brand name company. Components may be globally sourced or manufactured in-house.
SOURCE: BRIE (Berkeley Roundtable on the International Economy), University of California, USA.

Today, in the mid-1990s, the trend in the IT industry is moving strongly toward the dis-aggregated organization of production outlined above. The emergence of a wider variety of sourcing arrangements (Figure 6, sourcing types 1-3) has opened up new development opportunities for latecomers such as Vietnam that were not available ten or twenty years ago.

It follows that Vietnam should devise a national IT industry strategy different from those by Singapore and South Korea of the 1960s and 1970s. Both of these countries followed strategies that reflected the dominance of in- house manufacturing. Singapore developed its IT industry by supplying parts and services to globally operating companies that had established in-house manufacturing facilities in the country. South Korea built-up its IT industry by copying ('reverse engineering') products already on the market and manufacturing them in Korean companies. However, it is unlikely that these old strategies would work for Vietnam today; the economic and technological circumstances are different.

Policy makers in Vietnam must consider how a Vietnamese IT industry will fit into the global system of production outlined above. Figure 7 shows which stages of production are associated with the various sourciIlg arrangements summarized in Figure 6.

Figure 7

How 'sourcing' relate to product-level electronics production

PRODUCTION
ORGANIZATION
DIS-AGGREGATED
Stage of Production
CONCEPTUALIZATION END USE
Manufacturing-Related Functions
Sourcing Arrangement Product
Design
Mfg.
Design
Component
Purchasing
Manufact. Marketing
Sale, Service
Franchise Manufacturing
- SKD 0 0 0 X'
- CKD 0 0 0 X
-- IKD 0 0 X X'
Contract Mf.
- Consignment 0 0 0 X 0
- Turnkey 0 X X 0
OEM Manufacturing
- Customized X X X 0
- Off-the-shelf X X X X 0
In-house Manufacturing X X X X x'
PRODUCTION
ORGANIZATION
AGGREGATED

X = Manufacturing company has responsibility for this stage.
0 = Manufacturing company does not have responsibility for this stage.
/ = Responsibility often shared at this stage.
X' = Final assembly only, no circuit board assembly.
X' = Products sold on domestic markets only.
X' = Products sold on international or domestic markets.
SOURCE: BRIE (Berkeley Roundtable on the International Economy), University of California, USA.

Today, Vietnamese electronics manufacturers are engaged solely in franchise manufacturing of consumer electronics products (see Chapter 15). As such they manufacture entirely to the specifications of the 'brand name' firms. Vietnamese manufacturers do not participate in the product design or manu- facturing design stages of production. Because they manufacture products using kits of components supplied by 'brand name' companies, Vietnamese manufacturers have very limited experience in component purchasing activi- ties. Since they only sell their products on the local market, they are gaining no expertise in international marketing, sales, and service. And finally, since consumer electronics require no systems integration (see Figure 5, stage 6), Vietnamese manufacturers have very little opportunity to advance through user-producer interaction.

We recommend that policy makers in Vietnam focus on upgrading the capabilities of local manufacturers to include more of the stages of final product assembly, such as component purchasing and manufacturing design. One way to do this would be to develop turnkey contract manufacturing services in Vietnam. In the next chapter, we will introduce strategies to achieve these goals in the context of Vietnam's current situation.


Foot Notes:
  1. What forces have combined to drive the the organization of the electronics industry to such as state of complexity? The emergence of fierce international competition in the electronics industry has eroded once secure national markets for electronics. Over the past ten years, internationally operating electronics companies have been forced to restructure the way they do business in the face of intensified competition. This has shocked many older companies out of complacency. Faced with a bevy of new competitors, the major electronics companies have instituted the following four changes in the way they do business: They are trying to (1) increase product quality; (2) reduce lime-to-market; (3) reduce costs of doing business; and (4) ppursue international markets. One of the principal methods of achieving one these four goals has been to disaggregate various company functions (e.g. design, manufacturing, testing, marketing). Instead of' performing all functions in-house at one single location, companies have 'outsourced' many activit.ies -- to suppliers outside of the company -- and located many in-house aclivities at new locations, where the conditions (in terms of material supplies. labor rates, skill availabiility, and/or market access) are the most favorable.


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