Philippines focus on “Hard Hit” industrial sector; Plans “Revive” weakened electronics industry

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In 2008, as global demand continues to slide, semiconductor and electronics companies in the Philippines were bracing for mass layoffs.

  • And statements out of the Philippines then were grim. Yet Philippines is now targeting a revival, banked on and taking advantage, of 2011 and 1012 global electronics industry, recovery.

In a statement then, in 2008, the Semiconductor and Electronics Industries of the Philippines Inc. (Established in the 1970s, the SEIPI seeks to be the representative body for major players in the Philippine electronics industry and currently has some 240 members) said one of the hardest hit sector of the Philippines economy is the semiconductor and electronics industry.

That grim situation of the past few years was devastating. According to research firm iSuppli, the worldwide semiconductor industry  shrink by 9.4 percent in 2009. Revenue is estimated to decrease to US$241.5 billion, down from US$266.6 billion in 2008. Fear of layoffs was rampant. Intel was one of the first companies to announce mass layoffs, including Philippines operations.

But the Semiconductor Industry Association (SIA) points to improvements, as SAI said:

“All regional markets, namely the Americas, Europe, and Asia, with the exception of Japan, are projecting year-on-year growth for 2011. Japan’s contraction, it points out, is understandable in the light of the impact of the March 2011 earthquake and tsunami, with some of the growth in other regions increased as a result of supply-chain shifts that helped to alleviate disruption.”

” Additionally, double-digit growth in 2011 and 2012 is projected for sensor and micro I/C categories. Rising demand for consumer electronic devices and safety-related mandates specifically in the automotive sector are driving the growth in the sensor category. Micro I/Cs are projected to grow 11.7% year-on-year in 2011 and 13.1% in 2012, in part driven by the rapid increase in the tablet segment, as well as increased smartphone usage, especially in China, India, and other emerging markets.”

Semiconductor and electronics industry represents a significant segment of Philippines industrial base and export.

The Philippine electronics industry is made up of over 700 firms of which around 75% are foreign-owned and 25% domestically. Companies in the finished electronic products sector are classified into two: large companies that are either subsidiaries of trans-national or joint ventures, and small or medium Filipino owned firms. In the electronic components sector there are the third party subcontractors, which are mainly Filipino owned, and the multinational plants which cater to the requirements of their parent companies.

  • Market Analysis:

The entire semiconductor industry is tremendously vulnerable to downturns in the economy, because in all markets, from PCs to mobile phones, the sale of new products is predicated on global growth. There is no doubt that the semiconductor industry suffered heavily from the global downturn of 2008 as both businesses and consumers cut their discretionary spending. For businesses this meant cutting back on IT projects and for consumers it frequently meant economies such as not replacing last year’s mobile phone with this year’s latest model. The impact on sales was marked, with the sector recording its first year-on-year drop in sales at the end of 2008 since the dot.com crash of 2001.

However, from an industry perspective, electronics has spawned a vast range of specialist industries, from the IT industry (dominated by the likes of IBM and its competitors at the mainframe end, and Intel and AMD at the PC end) to the mobile-phone market. It includes TV-set manufacturers, video-game consoles, and, across an array of industry sectors, a vast army of specialist control-systems manufacturers, not to mention the aviation and automobile sectors, both of which could not exist in their present forms without massive input from the electronics sector. Then there is the medical devices market, and so on.

  • Asia, today, is regarded as the powerhouse of PCB and memory-chip production, yet it all began through a combination of some breakthrough research in Japan, and US companies outsourcing first PCB assembly, then PCB fabrication, to Asia to take advantage of cheap labor rates. Today, Asia’s dominance in motherboard and memory-chip manufacturing has reached the point where a US air force colonel, Charles Howe, was prompted to write a strategic study looking at the potential impact on US national security of having so much of the electronics industry outside the United States.

The point is not without irony, as the semiconductor industry began in the United States with innovations such as Texas Instruments’ invention of the integrated circuit in 1958, and Intel’s production of the first 8-bit microprocessor, the 8008, in 1972. Howe’s study gives a very clear account of the integrated circuit (IC) design process. The basic design process requires electronic design automation (EDA) software in the hands of experts. Fabrication involves “etching” or imprinting the designs onto silicon wafers.

Each new generation of chip tends to require either a totally retooled fabrication plant (“fab”), or a new plant built from scratch. Each plant costs around US$3 billion, which means that each new generation of chip represents a huge bet by the manufacturer that it can sell vast numbers of its chips to the various global markets.

Very few companies in the world can bet on that scale and get it wrong twice, so semiconductor chip manufacturing is a game with very high entry costs, and is played for very high stakes. Asian chip companies generally play a safer game, and focus on producing not CPUs, but peripheral components, such as motherboards and memory chips.

  • SIA Near-Term Forecast Details:

There is no doubt that the semiconductor industry suffered heavily from the global downturn of 2008 as both businesses and consumers cut their discretionary spending. WSTS released its forecast for semiconductor sales going through to 2013.

Based on sales for the first half of 2011 the WSTS forecast growth of 5.4% for the sector in 2011, with total sales worth £314.4 billion. This represents a 1% increase on the WSTS forecast for 2011 issued in November 2010. The figures are generated by the WSTS from an extensive group of global semiconductor companies.

According to the US Semiconductor Industry Association, the WSTS forecast now looks exactly right, with the industry expecting moderate year-on-year growth through to 2013. This is being driven by steady global demand for high-end electronics, boosted by increasing demand from emerging economies. The WSTS is anticipating growth of 7.6% for 2012, with growth then moderating back to 5.4% for 2013, creating an expectation of compound annual growth of 6.13% from 2010 through to 2013. By way of comparison, the SIA says that total sales for 2008 amounted to US$248.6 billion, down slightly from the US$255.6 billion figure for 2007 (−2.8%). In 2009, sales fell once again, down by 9% to US$226.3 billion.

Additionally, double-digit growth in 2011 and 2012 is projected for sensor and micro I/C categories. Rising demand for consumer electronic devices and safety-related mandates specifically in the automotive sector are driving the growth in the sensor category. Micro I/Cs are projected to grow 11.7% year-on-year in 2011 and 13.1% in 2012, in part driven by the rapid increase in the tablet segment, as well as increased smartphone usage, especially in China, India, and other emerging markets.

  •  Background: The Asian Semiconductor Industry (Source: QFinance)

The Asian semiconductor industry began in the 1960s, with small pockets of foreign investment. Japan established a semiconductor industry in the 1970s, and in 1979 Fujitsu became the first company to mass-produce 64 KB memory chips, with Japan cornering the world market in memory chips by the mid-1980s, passing the United States in semiconductor production volumes. By the late 1980s, South Korea had developed a thriving memory-chip industry, with companies such as Samsung enjoying rapid growth. Taiwanese investment generated the world’s first “on-demand, fab-for-hire” plant, and Singapore, Malaysia, and China have all developed significant chip industries.

According to Colonel Howe’s study, the first US outsourcing investment in the sector was by Fairchild Semiconductor in Hong Kong in 1961. Outsourcing began with chip assembly (bringing the various components together to complete a printed circuit board), then moved to fabrication, and, later, in the 1980s, to chip design.

Asia now accounts for around 60% of global sales, and is home to many of the world’s leading chipmakers. According to SEMI, the global industry association serving the manufacturing supply chain for the micro and nano-electronics industries, investment in fab equipment in Southeast Asia grew by 108% through 2010, and SEMI is projecting 36% growth for 2011. “The sector is experiencing solid growth, with Southeast Asia contributing some 7% of global semiconductor fab capacity in 2010 at the 300 mm die level. The sector as a whole grew 21% in 2010.” The Singapore Economic Development Board says that electronics output grew by 60% through the first half of 2010, riding the recovery in global demand and boosted by capacity expansions by Singapore electronics companies. Singapore is the second-largest center of semiconductor output and manufacturing in Asia. Other regions in Southeast Asia reported similarly strong gains. According to Asia Electronics News, Taiwan is expected to emerge as the world’s largest semiconductor materials market in 2011. Total sales of semiconductor materials in Taiwan in 2010 were up 33% year on year, at US$9.11 billion.

Following the downturn seen in 2008 and 2009, Asian chipmakers have been experiencing something of a rebound in demand. Better-than-expected demand for personal computers and limited output by smaller players have boosted prices of dynamic random access memory (DRAM) and NAND memory chips, which began to benefit sector leaders such as Samsung Electronics, Hynix Semiconductor, and Toshiba towards the end of 2009, and this trend continued into 2010. However, the sector’s history is marked with volatile cycles of shortages and oversupply, and some analysts have warned the industry could be setting itself up for a supply glut. Memory chipmakers returned to profit in late 2009 after several quarters of losses, as prices rebounded and PC demand grew, aided by strong growth from China.

According to the Electronic Industries Alliance (EIA), a national trade organization that includes the full spectrum of US electronics manufacturers, national paranoia about where semiconductor work is done, or who “owns” what, has the potential to be hugely counterproductive to the sector. As a sector that thrives on R&D and innovation, the greater the number of participants, and the freer and more open the semiconductor “universe” is, the better it will be for the sector, and for the global economy, the EIA argues.

In an initiative titled “The Technology Industry at an Innovation Crossroads,” the EIA argues strongly against what it sees as the possibility of protectionist policies stifling innovation in the sector. “The core value of a knowledge-based company or society should be innovation,” it says. The United States and other Western countries should not be worrying about the possibility of China or India dominating the semiconductor industry in years to come; they should be working to develop a vision and a strategy for the sector, the EIA says.

This opens up one of the really important themes for the sector. Electronics has enabled the globalization of business, and the electronics sector has itself, in turn, been shaped by globalization. “The resulting reorganization of manufacturing (in all sectors) along global lines, plus the creation of new, globally competitive service and knowledge-based industries (of which the semiconductor industry is a prime example) poses unprecedented challenges…” the EIA says.

Countries with weak science and mathematics education, and with a dearth of R&D funding, will fall behind countries that prioritize these areas. Similarly, countries that stay open to what the EIA calls “the brightest foreign minds,” and that allow their companies to recruit the best from around the world, will prosper, while those that seek to restrict highly paid knowledge jobs to their own nationals will fall behind.

The semiconductor industry has already enabled software designers to go some way down the road to “virtualizing” our world, creating immensely powerful tools for solving real-world problems far faster than ever before, and enabling new products, new drugs, and new forms of entertainment (of which the video-games console and the mobile phone are two stunning examples) to be brought to market extremely rapidly.

It is a safe bet that this sector is going to change life as we know it almost beyond recognition over the coming decades. As such, it is certainly a sector worth watching.

  • The following is from Philippines Daily Inquirer:

Philippine govt eyes revival of industry sector

Riza T. Olchondra

Philippine Daily Inquirer

Publication Date : 26-12-2012

The Philippines’ chief economist expects to see a more vibrant industry sector in 2013 as the government focuses on key industries and strives to ease the processes and costs in doing business.

“Our key priority sectors, namely tourism, business process outsourcing or BPO, electronics, housing and real estate, agribusiness and forest-based products, logistics and shipbuilding, will be given more focus. We need also to consolidate the various industry roadmaps to further fuel the industry sector, especially manufacturing,” Economic Planning Secretary Arsenio Balisacan said.

He said that despite recent difficulties, including weak traditional markets in Europe and the United States, as well as supply chain disruptions in Japan and Thailand, the electronics industry could still contribute to the manufacturing sector.

“We see an improved manufacturing sector buoyed by the semiconductor and electronics industry as the world economy is expected to recover between 2013 and 2014,” Balisacan said. To be competitive amid challenging global conditions, the Aquino administration would focus on certain industries, including manufacturing, he said.

Trade officials agreed that the manufacturing sector could be revived, noting strong interest among foreign investors. Trade Undersecretary Cristino Panlilio said the government was also training manufacturers and exporters on how to take advantage of bilateral partnerships and free-trade agreements to boost profit and diversify their markets.

Manufacturing is widely believed to still hold promise for the Philippines even as its contribution to economic expansion fell through the years to just about a third of gross domestic product (GDP) in the first half of 2012 from a high of about 43 per cent in the early 1980s.

The services sector, fuelled by remittances and BPOs, has taken over as the main driver of GDP growth, which further fuels consumption, according to the recent Deutsche Bank report titled “Manufacturing: A New Growth Driver”.

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