Red Makes Green

The arrival of India’s Mars Orbiter is an achievement on many levels. Much will be made of the fact that it is the first Asian satellite to reach the red planet’s orbit. That they accomplished it on their first try will open some eyes to India’s hardware capability as well, given than the success rate for the rest of the world is just 40%.

What I’d like to focus on is the price: India spent a reported $74 million on the Mars Orbiter Mission. That’s barely 10% of what NASA spent on the Maven mission.

Coincidentally, the F-22 Raptor saw action for the first time this week. But the fighter has been under fire for years for what critics call a bloated price tag and unmet performance objectives. The DoD has spent $67 billion for 188 planes, and no more will be produced.

Wall Street Journal

Should the US government wake up and realize that a huge price tag does not necessarily translate into performance, what will be the impact on the electronics supply chain, especially in the US where so much of it relies on military spending?

Is A New Vision Needed?

China’s industry minister has put forth an aggressive goal of building five to eight giants in the electronics industry with $16-plus billion in sales in the next two years through consolidation and overseas acquisitions and alliances. The Ministry of Information and Technology’s blueprint wants to move the country away from low-cost electronics manufacturing toward higher-yield, higher technical segments such as Lenovo and Huawei Technologies.

We believe that China will reduce the mining of rare earth metals to increase margins and offset recent price declines while using these materials as leverage in foreign dealings. The country is still far behind the rest of the world in chip design and manufacture, so we can expect major moves in that arena. The China Development Bank will put $20 billion behind ZTE to help it reach the $16 billion goal. The Haier Group, one of China’s bigger electronics companies, spent $700 million to buy a New Zealand company to increase access to Australia and Europe while increasing its technology base.

One has to wonder how the rest of the world will compete with this massive government supported approach. (China has a stated similar goal for automotive calling for 10 companies to have 90% of its industry concentration by 2015.) One has to speculate who will join forces with China’s electronic industry forays. How greatly does it threaten open markets and free competition elsewhere? How serious a role does industrial espionage play in this new game with newly stated ambitious goals? How big a role will defense issues and security have? Does America need a new vision for the future?

Another Tidal Wave Hits Japan

Old friend Dominque Numakura comes back from the annual JPCA Show with a stunning announcement: Japan’s PCB industry seems to be on life support.

From a series of dull presentations to the outsourcing of manufacturing to a general lack of optimism, the mood is dour, Numakura says. More ominous, some veterans are comparing the trend to the decimation of the US PCB industry in late 2001.

As late as 2000, the US and Japan were neck-and-neck in annual PCB sales, with the US dominating the large board space and Japan leading in HDI. Despite the problems experienced in the US, Japan continued to be the technology leader in PCBs, leading some to surmise that its vast investment and wise decisions on which technologies to focus on made Japan impervious to the cost pressures that sunk the North American industry. Numakura’s essay suggest that’s not the case, leaving one to wonder what this means for the circuit board industry for the coming decade.

Boston Bulls

To the list of those bullish on the prospects for US manufacturing, add the Boston Consulting Group.

The consultancy group has issued a report that, in essence, gives China about five years before the gap between the two nations is closed.

The report contains few surprises. BCG points to steady increases in China’s wage rates and logistical costs, coupled with higher productivity in the US, as reasons for its optimism. Automation in China will have a deleterious affect on manufacturing there, as it will further reduce any labor rate advantage.

Moreover, any shift to other lower-cost nations such as Vietnam or Brmitl will be mitigated in part by those nations’ weaker infrastructures.

Pointing to past successes in fending off Taiwan and Japan, BCG says that US manufacturing sector in well into a period of adjustment and retrenchment, and “conditions are coalescing” for another American factory resurgence.

Worth a read.

Researchers’ Take on Trade Wars Hard to Swallow

A group of researchers are asserting that onshoring low-cost manufactured goods back from China would not solve the US’s current economic woes.

The cost of an Apple iPad, they point out, includes about $10 for the workers who assemble it (and that may actually be high, from what I’ve heard). Meanwhile, each device sold helps maintain thousands of higher-paying design, software, management and marketing jobs.

OK, that’s all believable. But it’s the next part is harder to stomach. “Without China, Apple couldn’t be so successful and Apple products wouldn’t be so affordable,” said Yao Shujie, professor of economics at the University of Nottingham in England.

Not so fast. Apple’s margins are by far the highest in the industry. With lower margins, Apple might not be so profitable, but the affordability (an Apple comes at a premium for no other reason than consumers are willing to pay it) is a whole different bag of potatoes. Apple could pay a significantly higher price for onshore EMS work, yet given the fairly low labor content of an electronics assembly, could do so with no effect to the end-product price.

And it says here, those design, software, management and marketing jobs would exist regardless of where the product is manufactured.

Furthermore, the researchers extrapolate from this the idea that the effects a big change in the price of the yuan would have on US manufacturing would be fairly limited in scope. “Multinational firms that think currency appreciation is going to have a big effect on their export capacity from China to the United States are going to shift to other countries, not to the United States,” one researcher said.

Good point. But I would counter that the monies pouring from US consumers into Chinese hands serve to boost the latter’s national coffers, from which its military is deriving great benefit. Cuts in purchases of Chinese-made goods would help reduce China’s ability to assert itself militarily around the world. That would be a positive, too.

Should the US wean itself from its Chinese teat, the benefits would be seen in multiple, if somewhat less obvious, ways.