It was once called offshore assembly because that's all it involved—the intricate and delicate assembly of complex integrated and hybrid circuits using cheap labor available outside of the U.S. But today we call it contract manufacturing, or electronic manufacturing services (EMS). This now common, worldwide practice affects every aspect of production, including concept, design, assembly, test, marketing, and even sales.
Indeed, contract manufacturing no longer only makes an impact on the poorly paid. Its specter now casts a long shadow over the well-compensated and highly educated community of electronics engineers. This latter consequence has clearly escalated during the last decade.
The rapid expansion of offshore contract manufacturers into design services is putting increased pressure on the rate of unemployment plaguing U.S. engineers, according to the IEEE-USA, the Washington, D.C.-based lobbying organization of the Institute of Electrical and Electronics Engineers, and other industry trade organizations. Although numbers are hard to come by, LeEarl Bryant, who recently completed her term as IEEE-USA president, says, "We're very aware of offshore contract manufacturers and the increasing reliance of U.S. companies on offshore locations."
To combat this, the IEEE-USA has plans to move aggressively on several new fronts to address the EE unemployment problem in the U.S. Already, the trade group has asked Congress to investigate the impact of increased hiring of non-U.S. guest EEs with H-1B visa status and is now talking about redirecting some of its attention to offshore activities.
It may get help. The Electronic Representatives Association (ERA) is becoming increasingly concerned about the potential long-term result of offshore design and production on its member firms of independent sales representatives. In August, informal meetings were held between Bryant and key members of the ERA at Wescon. The result, she says, is that "we're going to have a working relationship" with the ERA. In fact, the IEEE-USA will invite a member from the ERA executive staff to join its Career Policy Council, which will meet sometime during the first quarter.
"Contract manufacturing is a huge issue for us right now," asserts Raymond J. Hall, the ERA's CEO. "We think that it's going to have a devastating impact on U.S. engineers, but also on our members. Contract manufacturers are trying to do relationship selling and thus eliminate sales reps." Recognizing the growth of offshore design activity, Hall notes that some of the larger U.S.-based sales-rep firms have already set up shop in China to represent manufacturers in that country.
Another possible approach is to take a closer look at the technical accreditation of offshore design engineers. The IEEE-USA has already called on the Engineering Credential Evaluation International (ECEI) of the Accreditation Board of Engineering and Technology (ABET) to screen H-1B visa holders. ABET is the only U.S. service specializing exclusively in the assessment of credentials of engineers educated outside of the U.S. This independent service enables state boards, employers, and educational institutions to interpret engineering academic credentials from non-U.S. institutions. Moreover, ABET is developing a comprehensive database of worldwide engineering educational programs.
Data developed by ECEI and presented at a recent meeting of the National Council of Examiners for Engineering and Surveying (NCEES) indicates that a large number of offshore-based engineers may not meet ECEI criteria. Fully half of the credentials of H-1B visa holders in a NCEES survey don't meet the ECEI's accreditation criteria. Further, only 43% met ABET's certification requirements, 6% couldn't be authenticated, and the remaining 1% were withdrawn. Bryant believes the accreditation required of U.S. engineers should also apply to engineers working under contract to U.S. firms in offshore facilities.
Clearly, offshore design is expanding, and so is its reliance on foreign engineering talent. For example, Singapore-based Flextronics International offers a design service that employs more than 1500 design engineers and has been involved in more than 2000 chip design projects. Last month, the firm said that it expects to double its design and development staff by March, with most of this growth in the Chinese cities of Guangzhou, Shenzhen, and Shanghai.
Flextronics started designing products only six years ago but decided to seriously crank-up its design organization about two years ago with the acquisition of two companies--the DII Group and Palo Alto Products. Aside from increasing its internal design activities, these acquisitions brought new design capabilities to its manufacturing services. "Most of what we do now is actually design engineering in a consulting capacity," says Jim Sacherman, senior vice president of Flextronics and former CEO of Palo Alto Products. "This includes helping companies design products that they will manufacture themselves."
In what Sacherman calls his company's "largest foray into software," Flextronics recently acquired Azisa, a global software and hardware engineering services company based in South Africa with more than 200 firmware and embedded software designers. The deal enables Flextronics to establish design and development facilities in low-cost regions and boost its global footprint. The firm is also negotiating with Casio Computer to help design and manufacture several of Casio's new consumer electronic products (see the sidebar "The Changing Focus Of Semiconductor OEMs," p. 46). In addition, Flextronics designed and will produce the Fossil digital wristwatch with a built-in Palm operating-system (OS) based personal data assistant (PDA). Flextronics also performed the mechanical design work on Microsoft's popular Xbox game.
There also is more teaming in the design process among U.S. OEMs and offshore foundries. For one, Intel Corp. recently formed an alliance of a dozen Asian computer design and manufacturing firms to help Intel accelerate its PC designs. Similarly, United Microelectronics (UMC), a Taiwan-based pure-play foundry, has licensed MoSys' embedded semiconductor-memory technologies to offer system-on-a-chip (SoC) designers memories that are more tightly aligned with its processes. The agreement allows UMC to provide design services and support to its customers directly, while preserving continuity and stability of business arrangements between MoSys and its licensees.
UMC also recently unveiled a joint initiative with Cadence Design Systems to help customers better manage their transition to fabrication through physical design verification using Cadence's nanometer design technology. Taiwan Semiconductor Manufacturing Co. (TSMC) and EDA specialist Synopsys are also working together. TSMC recently qualified Synopsys' signal integrity suite to cover design methodologies for 130- and 90-nm process technologies.
Increasingly, much of the outsourcing of design is in the premium consumer segment. Taiwan's HTC, for example, designed the Microsoft-based O2 Pocket PC XDA PDA. Pocket PCs are available from several manufacturers and wireless carriers. Neil Mawston, a senior analyst with the Global Wireless Practice of U.K.-based Strategy Analytics, says that "In the very low end, we're seeing some deals to outsource IC design, where small OEMs pick a silicon-to-software (S2S) solution right off the shelf." One example he mentions is China's TCL, which is buying components from Ericsson Mobile Platforms.
Some U.S. OEMs outsource design because local or regional designers have a better handle on regional requirements. "London, Seoul, and Tokyo are good examples of handset-design hotspots right now," notes Mawston. One reason for the attention on design at this point, says Mawston, is that contract electronics manufacturers have overbuilt production and are aggressively searching out new customers in Japan and other Asia/Pacific countries to fill under-utilized capacity. "This could fuel the proliferation of a growing mass of third-tier reference-design handset vendors," he says. Semiconductor revenue in the Asia/Pacific region already tops all other areas of the world (see the table).
Meanwhile, a recent survey by investment house Bear, Stearns & Co. suggests that 87% of electronics industry OEMs will increase their outsourcing in the coming year as they attempt to cut costs and capital spending. Contract manufacturers captured 20% of the electronics and information technology (IT) total available market (TAM) in 2001, according to a study just released by market analyst International Data Corp. (IDC). The TAM for contract manufacturing services reached $560 billion for the year. "Increasingly," says Kevin Kane, program manager for IDC's Contract Manufacturing Services, "contract manufacturers are becoming a more important part of product development," adding their own well-honed expertise in a number of areas, including design.
IDC says electronic manufacturing is currently tending toward mainland China, with Taiwanese design firms a key part of the trend. High-end projects remain in Taiwan as lower-end production moves to China. Because of the soft economy, offshore production centers have not escaped layoffs. Malaysia's high-tech industrial centers have reportedly lost up to 16,000 jobs, including engineers, to China. Investment formerly directed to Malaysia's technology centers is now going to China. Singapore has also lost ground to the growing investment in China.
China may be the biggest threat to U.S. chip companies. "By 2005," says George Scalise, president of the Semiconductor Industry Association (SIA), "more than half of the world's semiconductors will be made in Asia," with more design centers springing up in China, reducing that country's reliance on foreign chip design.
Andrew Chun Chen, a consultant, and Jonathan Woetzel, director of the Shanghai office of McKinsey & Co., a global management consulting firm, agree. They expect China to become a global semiconductor power by 2010. China's labor costs remain low; on average, senior design engineers receive an annual wage of not much more than $20,000 (see the figure). Also, the Chinese government now provides the country's semiconductor industry favorable tax treatment. But to achieve world-class status, the analysts believe that China must emphasize chip design rather than the capital-intensive manufacturing approach that helped Taiwan become an offshore manufacturing leader.
By 2010, according to an extrapolation of projections for 2000 through 2004 developed by the Gartner Group, a market research organization, China-based design houses and China-based design branches of global semiconductor OEMs, like Motorola, will design chips for which Chinese electronics-goods manufacturers will pay more than $10 billion. The McKinsey analysts believe that the Gartner estimate is conservative. With pure-play foundries typically providing chip manufacturing services for design companies and integrated device manufacturers, they expect the total consumption of chips in China to reach $45 billion by 2010.
Against this backdrop, U.S. semiconductor houses may find it increasingly difficult to sustain in-house technical leadership. That could be the greatest challenge of all.
Obviously, contract manufacturing is here to stay. Its many cost and competitive benefits assure its place in the business world. The only real question becomes: Is there enough room remaining for innovation in design and manufacturing to stave off the advancing tidal wave of contract manufacturing?
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Accreditation Board of
Engineering & Technology
Cadence Design Systems
Casio Computer Corp.
Cirrus Logic Inc.
Infineon Technologies Corp.
National Council of
Examiners for Engineering
& Surveying (NCEES)
Quanta Display Inc.
Shanghai Video & Audio
Electronics Group Co. Ltd.
Manufacturing Co. (TSMC)
TCL Group Co. Ltd.