Chapter 2.9This is a featured page

Escape commoditization


Escape commoditization by: re-organizing the organisation; manufacturing in house as an edge

Make a clear distinction between:

1. moving to low-wage countries with own factories

2. moving to OEM


Matsushita’s CEO of the AVC division (at IFA in 2005) Fumio Ohtsubo points out that it has clear competitive advantages to have integrated production, from components to finished goods.

“In digital still cameras half of the value is in components and devices we make ourselves. This means we can manage 50 percent of the cost in house. That gives flexibility in pricing and product development.

David Steel, (March 10, 2005) Vice President Marketing Team Samsung’s Digital Media Business.

“Digital technology has really lowered the barriers of entry. And if companies can’t make it, they acquire it.”

“This year (2005), we’ll produce 85 percent outside Korea. That’s for a number of reasons. We’re having a business model where products are produce locally. It keep inventory levels down, it’s more efficient. We’re also sourcing components locally to keep the supply chain as short as we can. In Europe we produce in Hungary and Slovakia, and in North America in Mexico. In China we have 10 factories.”

“We do very little outsourcing. The reason is that we believe manufacturing is a core source of competitive value. It’s not just cost, but it also works on the sales side. It gives us speed to market and direct control over product quality. In markets that move so quickly, you need that short time to market.”


Canon does a lot of camera production in japan. It is highly automated production however., says European consumer imaging products president Mogens Jensen. “There are hardly any people in this plants.”

(Remember Brogan who said the labour component is now so small)


Sony also still makes almost all of its digital camcorders in house, as well as a lot of digital cameras.

Nishida: “If there’s more value in production, like high density circuit boards mounting (for ultra thin Vaio computers and digital cameras, to name a few examples), or very precise assembling. If it’s very sophisticad we do it in-house. Then it’s critically important to maintain the profit in the group.

But if it’s a simple assembly job, like CD, a cheap digital camera, we donlt mind outsourcing.

“Currently it’s 50-50 overall. Outsourced and in-house. But if you look at in-house it’s not all in japan. (Sony has 6 Chinese factories. Vaio is 70 percent in China. Camcorders is 90 percent in Japan. Our manufacturing in China is 40-50 percent. (needs exact numbers from Sony). Audio, almost everything is in China. PC is very high.”

“Every time a new technology comes out, until it becomes standard (common), we continue inhouse operation.

“We call it the waterfall.” (that’s typical for the chips industry)


Panasonic, Fumio Ohtsubo at IFA 2005: He makes a distinction between modular type production and integrated type production, the first being mostly an assembly business, and the latter in-house production with frequent communication between engineering and the manufacturing.

“It’s a heated debate in Japan. The most famous example of the divide is the car industry. The USA think that making a car is an assembly. You take engine from one, tyres from another, dashboard from a third, and it’s a car. Japanese car makers like Toyota, etc, manufacture in house.

Panasonic, in 2005, does less than 5 percent of its products through outsourcing. When products become mature, it would shift production to its factories in low-wage countries. Yet, that won’t be continued for completely commoditised products, he says. Mature will increasingly be shifted to outside producers.

“The balance is very important. We have to make money. When we easily shift mature products, and the volume shrinks, we cannot make money,” Ohtsubo says.


Remember Brogan

Remember Sendo? That company says it doesn’t need China. Nokia too, still produces phones in Finland.

And you’d think phones are ideal, because they’re so light and you can airship a lot of them in a container.

But it’s also much more fashion sensitive than a TV

If technology gets concentrated in components: focus on the components.
But not so easy for the Chinese:
(Scott Hillis interview with head of Applied Materials in late Feb 2007, the biggest supplier of semiconductor capital equipment)
asked him about the industry's investment in China. He basically said China's chip industry has failed to take off and that the latest wave of investment appeared to be heading to Singapore.
In 2003-4 and the beginning 2005, there was a tremendous rush of Chinese semiconductor companies. There are a pile of companies in China. Since that time the Chinese semiconductor industry has really failed to accelerate. Maybe that's not even the right term. It's decelerated relative to the rest of the market. SMIC has not kept up, Wahung-NEC (?) decided on no 12" factory.
What happens next? I think that's evidenced by what Hynix has done in Wuxi (where they have two fabs).
I think the next phase of semiconductor indstury growth is going to be by IDMs (integrated device manufacturers). They have had a relatively slow start but they will inch forward the next few years in part as Taiwan and U.S. ease off technology licensing requirements.
A number of major semiconductor companies are planning fabs for Singapore and I think this next wave is going to be in and around Singapore.
Infineon is already moving and upgrading a fab and Chartered, Qimonda and Micron are looking. A lot of people are looking at Singapore for the next level of investment. If so, those investments have to play out before the next wave can take off.
Companies outside of China cannot move their most advanced processes into China and fabs are always the most advanced process because you're going to spend $3 billion and if you can't put your most advanced factory there it really doesn't make any sense to put a factory there.
Labor is a relatively low cost part of wafer fabs but don't kid yourselves here, 70 percent of wafer fabs are built in Asia, 85 percent are outside the U.S., and a very small part of the equipment we sell is actually to U.S. companies in the U.S.
In cases where AMD is going to get very good incentive package, that will help neutralize the cost differential in New York.
One of the trade discussions between the U.S. and China is that you want trade to be more balanced but on high tech stuff you have all these limitations.

Continue with Chapter 2.10 here



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