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Industry consolidation favors Asia

Posted: 06 Jan 2003 ?? ?Print Version ?Bookmark and Share

Keywords:pc industry? recession? odm? oem? contract manufacturer?

Ralph Schmitt

EVP, Sales and Marketing, Cypress Semiconductor

In 1996, the PC industry went through a major consolidation - one that saw Taiwan ODMs venture into their own. Before the recession, they were in their design capabilities were in their infancy stage, with no brand names or market channels of their own. After a few years of turmoil, they came out of the recession as design and manufacturing powerhouses, many offering their own brands in direct competition with their customers. That recession reshaped the PC industry and put Taiwan ODMs on the map and ultimately in the driver's seat of this large industry.

Today, we believe we are experiencing a similar situation in the communication market space, where current market dislocations favor Asia. As a supplier to leading OEMs and contract manufacturers (CMs), Cypress has a stake in identifying winners and losers. Here is how we see the market dynamics shaping up: First, low-end communication boxes and systems are moving to a CM-type environment, which is why big CMs like Flextronics are scrambling to get a lot of design resources in place. Second, we are seeing many of the PC-oriented ODMs in Taiwan moving toward the communication arena, producing LAN equipment and wireless handsets. Those ODMs are driving cost by designing even lower-cost manufacturing, which they are locating in mainland China. Quite often, this includes low-end design. This is a major market shift, and companies that will win are now based in China and Taiwan.

This migration from PC to communications design has been happening first in the LAN market. This is the part of the communication market that is nearest to the consumer, so it is where products need to commoditize first.

Recognizing this trend, Cypress is offering our board-level design expertise in line cards to communication firms in China. These customers may add some of their IP to board designs that we have done in our Shanghai design center. Even Japanese electronics firms are moving some design work to China - something they have been hesitant to do before.

This also forces the major networking powerhouses like Cisco to be more cost-effective. They have to commoditize the low end of their business and move manufacturing at a minimum low-end design offshore. They will need to move more of their core competencies from Silicon Valley to Shanghai and Hsin Chu if they are to compete in the access and enterprise portions of the network.

Those are the major trends right now - the restructuring of the communication market, the rise of Asian-designed communications hardware, and the movement of IP to Asia. The U.S. powerhouses like Intel, Motorola, and Cisco are going to outsource more of their designs. This will generate more opportunity for Taiwan and mainland China in particular.

The current recession is enabling Asian electronics companies, not to mention countries, climb the supply chain faster than they otherwise could. When this recession is over, Asia will benefit the most, at the expense of many established companies around the world.

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