It’s a good thing the earth is round. If we keep going west, we’ll finally get back to where we started. The migration of manufacturing appears to be following a westward track in it’s search for low-cost manufacturing hubs and ready-made consumer markets. For many China is already passé. Companies are already moving further west into new territories filled with tech-hungry consumers.
Much speculation centers around how, where and when this next shift will occur. A number of Japanese companies have laid claim to Vietnam. And in November, perhaps in response to stalled SEZ policy negotiations in India, Intel shocked many by announcing it will invest $1 billion in two fabs in a science park outside Ho Chi Minh City, Vietnam. Still, it seems unlikely that this will be the next Mecca for electronics giants looking for bigger consumer markets.
Some global players including Nokia, Solectron, Flextronics, AMD, Samsung and Jabil Circuits have already made substantial investments in India, banking on this being the next stop on the westward bound electronics engine. Their supporting infrastructure of PCB designers and fabricators, including facilities for Aspocomp, AT&S and others, are following right behind them. What’s the draw, you might ask?
One analyst comments the primary reasons for OEMs and their EMS/PCB partners to expand into India is to tap into anticipated high demand for consumer electronics. Predictable reasoning. The current Indian middle class (household income: $4,500/year or more) projects at 18 million households (or 100 million people), and is expected to double over the next five years.
The second strategic reason is that building product in India nets an easier, less-expensive market access. India has high import duties on electronics and many contractual requirements favor local manufacturers in big business deals. The last pearl is India’s manufacturing cost is very attractive. While on par with China’s indirect/skilled labor cost, direct labor is still about 35% lower in India than in China.
One of the biggest potential investment programs planned for India has been dubbed FabCity. This proposed multibillion dollar semiconductor fab complex is the outgrowth of an agreement AMD and SemIndia inked in 2005. Project details were rolled out in February 2006 but construction has been delayed because there is no policy framework in place to support semiconductor industry expansion.
The lack of policy guidelines have led to speculation late last year that the $3 billion FabCity project plans are in jeopardy as major investors threatened a pullout. Policy guidelines have been stymied because the federal finance ministry is unconvinced of benefits from their support of semiconductor fabrication in India. They are especially concerned that the semiconductor fab investors want the government to take a 25% equity stake in the project.
Speaking on “Sustainability of SEZ” at the 10th Nirma International Conference on Management in January, World Bank senior economist Marina Wes said, “The role of SEZs in employment generation is marginal.” This view could be part of the problem and in direct conflict with the India Semiconductor Association’s projection that 9 million jobs will be created over a 10-year span, should FabCity become a reality.
Changes are needed in Indian government policy to support SEZs, especially for highly capitalized ventures like semiconductor fabs. The model currently in place relies heavily on the private sector to invest on its own, without government support. A good model for more mature markets, but better incentives are needed to encourage foreign investment in higher risk environments.
If not India, what will be the next step west? While investing in India Flextronics has also added the Ukraine to its development strategy. Its design subsidiary there has established a presence in that region. Flextronics’ reasoning is based on matching customer demand for entry into new retail channels with the cost of doing business in a region and the existing infrastructure support. Considering these factors, moving further west (or east, depending on your point of reference) into the Ukraine offers a familiar set of opportunities.
The question this year, then, is just how far are we willing to venture in search of the perfect combination of manufacturing cost, market potential and regional stability? And will the markets we seek bring us right back to where we started?
