Electronic Design

The Changing Face Of Semiconductor OEMs

There's a growing concern among the IEEE-USA and other trade groups who represent engineers and engineering-oriented trade associations--that is, U.S. semiconductor companies and leading contract manufacturers are shifting their focus from designing and producing ICs to the design and production of end-use products offshore, mainly consumer electronics. Cirrus Logic, for example, has opened a design center with Shanghai Video & Audio Electronics, a Chinese consumer electronics manufacturer, to jointly develop personal video recorders and DVDs. Others are moving in the same direction.

According to a new Strategy Analytics market study, 26% of cellular handsets worldwide were produced by contract manufacturers in 2002. Expect this number to climb steadily to 38% in 2007, as first- and second-tier handset vendors seek lower costs, product flexibility, and economies of scale. Neil Mawston, an analyst with Strategy Analytics, says that contract manufacturers were desperate to get their hands on orders for some of the 396 million cell phones manufactured worldwide in 2002. "We believe that the lion's share of the shift to outsourced manufacturing occurred in 2001," he said. In fact, Ericsson began outsourcing the production of all its cell phones in April 2001. Now Flextronics not only produces Ericsson's phones but also manages its product introductions, supply chain, and logistics. In addition, Ericsson has a manufacturing agreement with the Taiwanese electronics manufacturer, GVC Corp.

Flextronics became the world's largest contract handset manufacturer in 2002, with an estimated 42% share, producing 45 million cellular handsets last year. Plus, it's the third largest handset manufacturer in the world overall, after Nokia in first place (having produced approximately 142 million handsets) and Motorola in second place (with about 65 million handsets in fiscal 2002).

Taiwan's HTC is the world's leading PDA manufacturer, making the HP/iPAQ model and other PDAs in the U.K. and Italy with an estimated 16% share in 2002. Quanta, also in Taiwan, tops all contract houses in the world among notebook PC manufacturers, with an estimated 17% market share in 2002.

Motorola continues to design its own cell phones but has shifted production from its Harvard facility near Chicago to Mexico. It also outsources other products to other contract manufacturers, such as Flextronics and Celestica Inc. In 2001, Nokia virtually doubled the outsourced manufacturing of its units to 20%. The company still designs its own cell phones. But to lower costs and enhance production capacity, it believes that new products must be designed for manufacturability, which suggests Nokia takes its offshore foundries into account in its designs. Moreover, early in 2001, in an effort to enhance the market position of its code-division multiple access (CDMA) standard digital wireless technology, Qualcomm made a minority equity investment in HTC, of Taiwan, which licensed Qualcomm's 3G CDMA wireless technology portfolio.

According to Mawston, handset manufacturing is now splitting into two camps. One group, comprising companies like Nokia and Samsung, believes that in-house production enables manufacturers to maximize control and minimize risk. The other group, which includes Sony, Ericsson, and Alcatel, among others, believes that outsourced production allows manufacturers to exploit economies of scale and output flexibility.

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