precision engineering - economic development board · pdf filedeveloped the asia competition...

Asia Competition BarometerPrecision engineeringAn Economist Intelligence Unit report

Supported by

© The Economist Intelligence Unit Limited 2012 1

Asia Competition Barometer:Precision engineering

Contents

Preface 2

Executive summary 3

Asia’s growing importance for corporate performance and global competitiveness 5

Competition and profitability at Asian firms 7 Competition: Marginal increase 7

Profitability:Areturntothepeak 9

Case study: World Precision Machinery 11

Positioning for success in Asia 12 SustainedgrowthinAsia 12

Semiconductorsandsolar:Asiangrowthstories 13

Case study: Applied Materials 15

Outlook 16

Barometer methodology 18

© The Economist Intelligence Unit Limited 20122


SupportedbySingapore’sEconomicDevelopmentBoard(EDB),theEconomistIntelligenceUnithasdevelopedtheAsiaCompetitionBarometerwiththeaimofunderstandingthechangingmarketdynamicsinkeysectorsandassessingtheintensityofcompetitioninthem.Drawinguponcompany-leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.

ThisreportfocusesontheBarometerfindingsfortheprecisionengineering(PE)sector.Assessingauniverseofover200PEcompaniesthatarepubliclylistedineightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapeforthesector.

Otherreportsinthisserieslookattheinformationtechnologyservices,petrochemicalsandchemicals,pharmaceuticals,andtransportandlogisticssectorsinAsia.

January2012

Preface



Executive summary

WhatdoestheemergenceofAsiaasamajorengineofglobaleconomicgrowthmeanforcompaniesoperatingintheregion?Asia’srobusteconomicoutlook—coupledwithdiminishedgrowth

prospectsinmanyotherpartsoftheworld—hasattractednewinvestmentintothemarketbothfromregionalplayersandWesternmultinationals.Asaresult,competitionintheregionisexpectedtointensify.Giventhedarkeningglobaleconomicoutlook,andtheexpectedimpactonsomeeconomiesandsectorsintheregion,growthandprofitabilitylookuncertaininthenearterm.Butoverthemediumtolongerterm,Asia’sstrongeconomicfundamentalswillensureconsistentgrowthacrossarangeofindustries.HowarecompaniespositioningthemselvestocapitaliseonAsia’sgrowthoverthenextfewyears?

TheAsiaCompetitionBarometerassessestheintensityofcompetitionandchangingmarketdynamicsinseveralkeysectors.Thisreportexaminestheprecisionengineering(PE)sector,whichincludesthefollowingsub-segments:instrumentsandappliancesformeasuring,testingandnavigation,irradiation,electromedicalandelectrotherapeuticequipment,opticalinstrumentsandphotographicequipment,power-drivenhandtools,metal-formingmachinery,othermachinetools,otherspecial-purposemachinery,airandspacecraftandrelatedmachineryandmedicalanddentalequipmentandsupplies.

Amongthekeyfindingsofthisreportarethefollowing:

• Over the past decade, Asia’s emergence as a manufacturing powerhouse has led to a boom in demand for PE products.PEcomponentsandmachineryformthebackboneofmanyindustrialprocesses,includingintheautomotive,aerospaceanddefence,consumerelectronics,solarenergyandmedicaldevicesectors.AsmanufacturingfirmsinAsiamoveupthevaluechaintoproduceevermoresophisticatedproducts,theywillfurtherboostdemandforPEproducts.

• Profitability in Asia’s PE sector has continued to grow, despite the global financial crisis.Profitabilityplummetedin2005,butsincethenhassteadilyincreased.Theaveragegrossmarginofpublicly-



listedAsianfirmsdeclinedfrom43.1%in2004to27.6%in2005.Thiswasduelargelytoanincreaseincompetitionandaspikeinmaterialcoststhatyear.Theaveragegrossmarginthenrosesteadilytoreach37.4%by2009.OfthefivesectorsthattheEconomistIntelligenceUnitanalysedforthisBarometer,PEistheonlyonewhereprofitabilitycontinuedtogrowuninterruptedthroughthelastglobaleconomicslowdown,partlyduetostrongregionaldemand.CombinedoperatingrevenuesincreasedfromUS$26.6bnin2007toUS$35.1bnin2009.

• Rising private consumption in Asia has boosted demand for PE products and services, but whether it can replace demand in the West remains to be seen.TheriseofAsia’smiddleclasshasbeenaccompaniedbyanincreaseindiscretionaryspending,particularlyongoodssuchascars,mobilephonesandcomputers.Thishas,inturn,drivengrowthintheregion’sPEsector.Still,itremainstobeseenifthisindigenousregionalgrowthwillbeabletooffsetthelikelyslowdownindemandintheWestoverthenextfewyears.PEfirms’successoverthenextfewyearswilldependonhowaccuratelytheyhaveplannedforandmanagedthisshift,particularlygiventhebroaderglobalmacroeconomicuncertainty.

• The PE industry is evolving rapidly, as low-cost Asian producers and high-technology Western firms seek to acquire each other’s competitive advantages.GlobalPEfirmshavebeenmovingintoAsiatotapitsburgeoningmarket,andtolowertheirproductioncostsbyshiftingcapacityfromhigher-costcountriestoAsia.Meanwhile,Asiancompanieshavebeenadaptingtothiscompetitivethreatbyplacingagreateremphasisontechnologicaladvancementinordertomoveupthevaluechainandproducemoresophisticatedmachinery.AsianPEfirmsareeagertotransformfrombeingsimplecontractmanufacturerstoprovidingproductionandsupplychainmanagementcapabilities.Thisemphasisisreflectedinafive-foldincreaseinAsianfirms’totalR&Dexpenditurebetween2004and2009.Asaresult,Asia’sPEindustryhasbeenwitnessingtheconfluenceoftwohithertodistinctbusinessmodels.

• The number and size of players in Asia’s PE sector is growing.Thenumberandsizeofpublicly-listedfirmsinthePEsectorinAsiahasincreaseddramatically.Thetotalnumberoflistedcompaniesintheindustryincreased57%between2004and2009,from131firmsto206.Overthesameperiod,thetotalcombinedrevenueofpublicly-listedPEcompaniesmorethantripledfromUS$9.8bntoUS$35.1bn;thesefirms’combinedtotalassetsrosefromUS$13bntoUS$63.3bn.

• Competition has increased only marginally, with the industry’s biggest players continuing to expand their positions.CompetitioninthePEindustrygrewsignificantlybetweentheyears2004and2006,largelyduetoaninfluxofnewplayersintothesector.However,between2006and2009,thelargestfirmsintheindustrybegantosteadilyincreasetheirconcentration,partlybyexploitingeconomiesofscale.Arelatedtrendthathasbenefittedlargefirmsisgreaterverticalintegration,asPEcompaniesseektodiversifytheirproductofferingsandprovidemorecomprehensiveend-to-endservicestotheircustomers.InthefuturethesectorislikelytobecharacterisedbyfiercecompetitionbetweenbigAsianandnon-Asianplayers,whomayincreasinglyresembleoneanother.



Asia’s growing importance for corporate performance and global competitiveness

Overthepastdecade,Asiahasrapidlygrowninimportancetotheglobaleconomy.ItsshareofglobalGDP,measuredinpurchasing-powerparityterms,increasedfrom26.8%in2001to33.8%in2010.1

By2016,theEconomistIntelligenceUnit(EIU)expectsthisproportiontoriseto38.9%.ThereareseveralbroadtrendsthathavebeendrivingAsia’sPEsector.ThefirstisAsia’semergenceasa

globalmanufacturingpowerhouse.Overthepastdecade,Asia’sshareofglobalmanufacturingoutputhasincreaseddramatically,ledbyChina(seeFigure1).Thishasboosteddemandforprecisionengineering(PE)productsthatareusedtomanufactureavarietyofgoods.

Thesecondtrend,whichishelpingtounderpinthefirst,relatestorisingprivateconsumptioninAsia,whichisboostingregionaldemandformanufacturedgoods.DuetoAsia’srapideconomicgrowthoverthelastfewyears,theregionisnowhometoahugeandgrowingmiddleclass.TheAsianDevelopmentBank(ADB)estimatesthatbetween1990and2008developingAsia’smiddleclasspopulationmorethantripledfrom565mto1.9bn.Asashareofthetotalpopulation,themiddleclassgrewfrom21%to56%overthatperiod.2

1AsiahereincludesBangladesh,China,HongKong,Indonesia,India,Japan,SouthKorea,Malaysia,Myanmar,Philippines,Pakistan,Singapore,SriLanka,Thailand,Taiwan,andVietnam

2“TheriseofAsia’smiddleclass”.AsianDevelopmentBank.2010Figure 1: Share of world manufacturing output

(%, constant 2000 US$)

0

3

6

9

12

15

IndiaTaiwanSouth KoreaASEANChina

2000 2009

Source: UNIDO



Thesenewconsumershavebeenspendingonproductssuchascars,mobilephonesandcomputers.Between2001and2010,mobilephonepenetrationinAsiaandAustralasiarosefrom10.9%to70.6%whilepersonalcomputerpenetrationincreasedfrom4.4%to18.7%(seeFigure2).Overthatsameperiod,thestockofpassengercarsper1000peopleintheregiongrewfrom34.2unitsto54.1.Asiahassomeofthefastestgrowingautomobilemarketsaswellassomeofthelargestautomobilemanufacturersintheworld.In2009,ChinaovertooktheUnitedStatesastheworld’sbiggestcarmarket.Between2011and2015,theEIUexpectsAsiatosee157.5mmorepassengervehiclesand54.7mmorecommercialvehiclesonitsroads.

Importantly,allthreemarketscontinuedtoexpandrightthroughtheglobaleconomicdownturnin2008-09,reflectingtheresilienceofAsianprivateconsumption.TheEconomistIntelligenceUnit(EIU)forecaststhatby2016,therewillbe84.8carsper1000people,whilemobileandcomputerpenetrationwillhavereached112%and32.5%respectively.

ThethirdtrenddrivingAsia’sPEindustryisthegrowingglobalinterestinrenewableenergy,duetoconcernsovertheenvironmentanddeclininghydrocarbonstocks.Thisisboostingdemandfor,amongotherthings,solarphotovoltaic(PV)cells,whichusesemiconductorsmadewithPEproducts.AsianmanufacturersdominatetheglobalindustryintheproductionofsolarPVcells.CombinedPVproductioninChina,TaiwanandJapanincreasedfromlessthan700MWin2004to16,800MWin2010,accountingforsome70%ofthe24,000MWglobalproductionthatyear.3RussellTham,regionalpresidentofAppliedMaterialsSouthEastAsia,saysthatalthoughAppliedMaterialsenteredthesolarbusinessonlyin2006,ithasbeenthefirm’sfastestgrowingsegment,andnowcontributesabout20%ofitsrevenues.AppliedMaterialsalsonowrunsasolarR&DcentreinXi’an,China.

3EarthPolicyInstitute,2001.

Figure 2: Asia and Australasia consumption

0

20

40

60

80

100

120PCs (per 100)Mobiles subs (per 100)Cars (per 1,000)

2016201520142013201220112010200920082007200620052004200320022001

Source: Economist Intelligence Unit



Competition and profitability at Asian firms

Thenumberandsizeofpublicly-listedfirmsinthePEsectorinAsiahasincreaseddramatically.Thenumberoflistedcompaniesincreased57%between2004and2009,from131firmsto206.Over

thesameperiod,thetotalcombinedrevenueofpublicly-listedPEcompaniesmorethantripledfromUS$9.8bntoUS$35.1bn,whiletheircombinedtotalassetsrosefromUS$13bntoUS$63.3bn.Meanwhile,whilethereisnoauthoritativedataonforeigndirectinvestmentinthePEsector,mediareportsandindustryinterviewsindicatearapidincreaseininvestment.Theinfluxofnewplayers,bothAsianandnon-Asian,intotheregion’sPEsectorhasledtoamarginallymorecompetitiveoperatingenvironment.

Competition: Marginal increaseWithmanycompaniesraisingtheirexpectationsofAsiatodelivergrowthandprofits,itisreasonabletoexpectcompetitionintensityintheregiontoincrease.TocapturethisintensitywehaveusedtheHerfindahl–HirschmanIndex(HHI),whichmeasuresthemarketconcentrationofanindustry’slargestfirms.HHIvaluescanrangefrom0(extremelyfragmentedmarket)to1.0(monopoly).Herewehavemultipliedthevaluesby100toachieveascaleconsistentwithprofitabilityindicators(seebelow).TheHHIforAsia’sPEindustrydecreasedfrom10.39in2004to9.30in2009,afterhavinghitalowof5.87in2006(seeFigure3),signifyingthatthe50biggestfirmsintheBarometersawamarginaldecreaseinconcentrationbetween2004and2009.4

CompetitioninthePEindustrygrewsignificantlybetweentheyears2004and2006.TheHHIdroppedfrom10.39to5.87overthatperiod,signifyingthatthemarketshareofthe50biggestfirmsdeclinedsubstantially.Thisislargelybecauseofaninfluxofnewplayers—inthosetwoyears,40newAsiancompaniesenteredtheindustry,capturingmuchoftherapidlygrowingmarket.

However,between2006and2009,thelargestfirmsintheindustrybegantosteadilyincreasetheirconcentrationonceagain.TheHHIrosefrom5.87to9.30overthatperiod.Therearetworeasonsforthis.

4Ameasureofthesizeofcompanies in relation to the industry,andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseofover200listedcompaniesassessed.FormoreinformationontheBarometermethodology,pleaserefertothelastsectioninthisreport.



Figure 3: Herfindahl–Hirschman Index

4

6

8

10

12

200920082007200620052004


2004 2005 2006 2007 2008 2009

Herfindahl—Hirschman Index (HHI) 10.39 8.63 5.87 7.73 8.44 9.30

First,from2007to2009,onlyahandfulofnewcompaniesenteredthesector,hencetheincumbentswereabletogrowtheirmarketshare.

Second,overthepastfewyears,PEfirmshaveengagedinfiercepricecompetition,drivingdowncostsbyimprovingtheefficiencyoftheirproductionprocesses.Inthisenvironment,thelargercompanieshavebeenbetterabletoexploiteconomiesofscale,improvingtheircompetitivepositionandwinningmarketshare.Arelatedtrendthathasbenefittedlargefirmsisgreaterverticalintegration,asPEcompaniesseektodiversifytheirproductofferingsandprovidemorecomprehensiveend-to-endservicestotheircustomers.

Thefivelargestcompaniesby2009turnover—Larsen&Toubro,ChinaCSSCHoldings,Xi’anAircraftInternational,TaiyuanHeavyIndustryandChinaErzhongGroup(Deyang)HeavyIndustries—aresignificantlybiggerthantheirpeers(seeFigure4).

IndustrytrendssuggestthattherewillbeincreasedpriceandtechnologycompetitioninAsia.Non-Asianfirmshaveenteredtheregionoverthelastfewyearstolowertheirproductioncostsandbecloserto

Figure 4: Top ten companies by turnover

Company Country of origin 2004 turnover (US$bn) 2009 turnover (US$bn)

Larsen&Toubro India 3.39 9.89

ChinaCSSCHoldings China N.A. 3.80

Xi'anAircraftInternational China 0.15 1.24

TaiyuanHeavyIndustry China 0.28 1.21

ChinaErzhongGroup(Deyang)HeavyIndustries China N.A. 1.13

ShenyangMachineTool China 0.47 0.90

KNMGroup Malaysia 0.56 0.61

Hi-PInternational Singapore 0.44 0.59

DahengNewEpochTechnology China 0.43 0.49

AlstomProjectIndia India 0.19 0.46

Note:ThesearethetenbiggestcompaniesbyturnoverthatwereanalysedintheBarometer,whichconsideredonlypubliclylistedfirmsineightcountries:China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam



keyclients.Meanwhile,Asiancompaniesthathavehithertocompetedmainlyonpricearenowfocussedonlearningnewtechnologiestomoveupthevaluechain,saysShaoJianJun,executivedirectorandCEOofWorldPrecisionMachinery,anintegratedmanufacturerofprecisionmetalstampingmachines.Asaresult,thesetwopreviouslydistinctPEbusinessmodels—broadly,thehigh-technologyWesternmodelandthelow-costAsianone—arebeginningtomeld.

Profitability: A return to the peakTomeasuretheprofitabilityofthePEsector,wedevelopedacompositeindexoffiveratiosthatmeasuredifferentaspectsofacompany’smargins(formoredetails,seethenoteonmethodologyattheendofthisreport).AccordingtoourBarometer,withtheexceptionofgrossmargin,allotherprofitmarginshaverisenrelativeto2004(seeFigure5).

TherewasasharpfallintheProfitabilityIndexin2005,whichcanbelargelyattributedtoasharpfallingrossmarginfrom43.1%to27.6%.5Grossmarginalsodeclinedmarginallyin2006to27.2%.Thefallingrossmarginintheyears2005and2006canbeattributedtoanincreaseincompetitionandhighermaterialcosts.First,theincreaseincompetitionin2005and2006(seeFigure3)couldhavehadanegativeimpactongrossmargins.Second,in2005materialcostsmorethandoubledtoUS$3.5bnfromUS$1.6bnin2004.Overthatsameyear,combinedoperatingrevenuesincreasedonly25%toUS$12.3bn.Thishurtgrossmarginsin2005.

Sincethatyear,however,AsianPEcompanieshaveseenasteady,albeitgradual,increaseinoverallprofitabilityresultinginthesamelevelsofprofitabilityin2009asin2004.Thiscanlargelybeattributed

Figure 5: Profitability Index

90

105

120

135

150

200920082007200620052004


2004 2005 2006 2007 2008 2009

Profitability index 126.1 100.0 102.2 111.8 117.5 126.1

EBITDAmargin(%) 11.7 12.0 12.1 14.0 13.0 14.4

Grossmargin(%) 43.1 27.6 27.2 30.5 34.2 37.4

Returnoncapitalemployed(%) 10.2 13.3 14.8 13.5 13.4 12.6

Returnonequity(%) 7.5 11.9 14.3 13.6 13.8 13.2

Returnonassets(%) 2.7 4.4 5.1 5.5 5.3 5.3

Herfindahl—Hirschman Index (HHI) 10.39 8.63 5.87 7.73 8.44 9.30

5ThecompositeProfitabilityIndexismadeupoffiveratios that each represents adifferentaspectofacompany’sprofitability.FormoreinformationontheBarometermethodology,pleaserefertothelastsectioninthisreport.



tooperatingrevenuesincreasingfasterthanmaterialcostsfrom2006to2009,contributingtohighergrossmargins.

Indeed,ofthefivesectorsthattheEIUstudiedforthisBarometer,thePEindustryistheonlyonewhereprofitabilitycontinuedtogrowuninterruptedthroughthelastglobaleconomicslowdown.CombinedoperatingrevenuesincreasedfromUS$26.6bnin2007toUS$33.5bnin2008andUS$35.1bnin2009.ThissuggeststhateventhoughmanufacturingexportstodevelopedWesterncountriesdeclinedduringthisperiod,thiswassomewhatoffsetbyindigenousAsiandemandaswellasgrowthinnewmanufacturingsegments.Forinstance,Asia’sproductionofsolarPVcellsincreasedsignificantlyinboth2008and2009.Additionally,AsianmanufacturersmayhavecontinuedtoinvestinPEmachineryinanticipationoffuturedemand.

Inthecomingyears,MrThamatAppliedMaterialsexpectstosee“growthopportunitiesinthesemiconductorindustrypropelledbythewirelessandmobilemarkets,asconsumersdemandanincreasinglynetworkedsocietywithvisuallyrichandinteractivedevicesanytime,anyplace”.Heexpectsasurgeinconsumptionfromtheemergingworld’smiddleclassasproductsbecomemoreaffordable.However,profitabilitywilldependnotonlyonglobaleconomicgrowth,butalsooncostsandtechnology.MrThambelievesthatcompanieswillneedtocontinueinvestinginR&Dtoproducenewertechnologiesatcheapercosts.



Case study: World Precision Machinery

World Precision Machinery: Moving up the technology ladderWorldPrecisionMachinery(WPM),anintegratedmanufacturerof

precisionmetalstampingmachinesbasedinJiangsu,China,hasseenitsrevenuesmultiplyfive-foldbetween2005and2010.Inthefirstninemonthsof2011,thefirmhadrevenuesofRMB947.9m(US$150.1m),amountingtoyear-on-yeargrowthof30%.

ShaoJianJun,thecompany’sexecutivedirectorandCEO,saysWPMderivesmorethan95%ofitssalesfromChinacurrentlyandthatAsia’sstandingastheworld’smanufacturinghubwillcontinuetopresentbusinessopportunitiesforthecompanyas“thestampingindustryformsthebackboneofmanymanufacturingindustries”.WPMiscurrentlyoneofthethreelargestmanufacturersofmetalstampingmachinesinChina.Itmostlysuppliesmanufacturersinhomeappliances(34%ofrevenues),automobiles(32%)andelectronics(15%),whileitearnstherestofitsrevenuefromseveralothersectors.

MrShaoattributestheprofitabilityintheindustryto“aboominmarketdemand,[therisingvalueof]brandnames,pricecompetitivenessandtechnologyinnovation”.However,headds

thattheintensityofcompetitioninthesectorinAsiahasincreasedconsiderably.“MoreandmoremanufacturingplantshavemovedintoAsia,”hesays.Manynon-Asianfirmshavesetupplantsintheregioneitherindependentlyorthroughjointventures.Forinstance,globalplayerssuchasKLA-TencorandAppliedMaterialshaveinvestedinmanufacturingplantsandresearchandsupportcentresindestinationssuchasChina,India,Malaysia,SingaporeandTaiwan.

MrShaoexpectsstiffcompetitioninthePEsectoroverthenextfewyears.HesaysthatAsianfirmshavestartedtomoveupthetechnologyladder,whilenon-AsianfirmsthathaveanAsianpresencehavestartedloweringproductioncosts.

Inthefaceofthisrisingcompetition,akeypartofWPM’sstrategyisverticalintegration:thecompanyhasthecapabilitytodesign90%oftheequipmentitproduces.AccordingtoMrShao,overthenextfiveyears,profitabilityinthePEindustrywillbedrivenbymarketdemandontheonehand,andcostcontrol,productionefficiencyandpricecompetitivenessontheother.Technologyinnovationwillalsobeimportant,hesays.ThisisreflectedinWPM’sdecisiontoemploymorethan200R&DandtechnicalstaffintwoChinesecities,DanyangandShanghai.

1Companypresentation.WorldPrecisionMachinery.5-6January2012.



Figure 6: Private consumption(% real growth p.a.)

-2

0

2

4

6

8

10USSingaporeIndonesiaIndiaEuro Area (AGG)China

2016201520142013201220112010


Positioning for success in Asia

Sustained growth in Asia

Giventhelong-termstructuralproblemsinmanyWesternmarketsandemergingAsia’slargelybullisheconomicfundamentals,theshiftintradeandinvestmentfromtheWesttoAsiawillcontinue.Asia’s

economicgrowthisexpectedtocontinueoutpacingthegrowthofOECDcountries.TheEIUestimatesthatby2016theeightAsiancountriesinthisstudyalonewillaccountfor28.9%ofglobalGDP(measuredinpurchasing-powerparityterms),upfrom23.2%in2010.

AcriticalquestionforAsia’smanufacturingandPEindustriesiswhethertheriseinAsiandemandcanoffsetthesluggishgrowthindevelopedWesternmarkets.China’smerchandiseexportstoEuropefell7.5%month-on-monthinSeptember2011and9%inOctober2011whileitstotalexportsdeclinedby7.2%inthatmonth.China’spurchasingmanager’sindex,aproxyformanufacturingsectorperformance,declinedforthefirsttimeinthreeyearsinNovember2011,registeringasub-50reading,denotingacontractioninfactoryactivity.Itstayedbelow50inDecember2011andJanuary2012.Meanwhile,thecrisisintheeurozonecountriesandtheslowrecoveryintheUSsignificantlyraisetheriskofaglobal



Figure 7: Device penetration levels(%)

0

30

60

90

120

150WorldWest EuropeNorth AmericaAsia & Australasia

PCs (per 100)Mobile subs (per 100)


recession,accordingtotheEIU.Weestimatethereisagreaterthan40%chancethattheglobaleconomywillfallintorecessionsometimeinthenexttwoyears.

Nevertheless,ourcoreforecastassumesthatprivateconsumptioninAsia,particularlyChina,willcontinuegrowingstrongly(seeFigure6).

Still,itremainstobeseenifthatgrowthwillbeabletooffsetthelikelyslowdownindemandintheWestoverthenextfewyears.ThereisalsoariskacrossmanysectorsinAsia,fromrealestatetoshipbuilding,ofanoverinvestmentincapacityoverthepastfewyears.IfmanufacturershavesimilarlyoverinvestedinPEmachinery,thePEindustrymayhavetocontendwithseveralyearsofslowgrowth.

WhilestillvulnerabletoaslowdownintheWest,Asia’sPEindustryhasbecomeincreasinglydependentonrisingprivateconsumptionintheregion.IfAsia’seconomiesshouldstumble—hurtingemploymentandincomegrowth—thatwouldhaveanegativeimpactontheregion’sPEindustry,asconsumersarelikelytoquicklycutbackondiscretionarypurchases,suchasnewmobilephonesandbettercars.

Semiconductors and solar: Asian growth storiesThegrowingdemandforpersonalcomputers,mobilephones,tabletsandotherconsumerelectronicsinAsiahasbeenamajordriverofthesemiconductormarket.Asiaex-Japan’sshareofglobalsemiconductorsalesincreasedfromabout40%in2004tomorethan50%in2009,accordingtotheSemiconductorIndustryAssociation,highlightingthegrowingimportanceofAsiatothissegmentofthePEindustry.6

In2010,theglobalsemiconductormarketgrewbyUS$72bnor31.8%,withAsiaaccountingformorethanhalfofthatgrowth(salesintheregionincreasedbyUS$40.4bntoUS$160bn).Despitethedarkeningglobaleconomicoutlook,andtherelatedmoderationofAsia’sgrowthforecasts,theEIUexpectsthemarketsforconsumerelectronics,mobilehandsets,smartphonesandpersonalcomputersinAsiatogrow,albeitpossiblyatamoregradualrate(seeFigure2).

Indeed,comparedtodevelopedregions,thepenetrationofthesedevicesinAsiaisstilllow(seeFigure7).

Thissuggeststhatthereisstillplentyofroomforcatch-upgrowth.ThusthesemiconductorindustrycanexpecttoseecontinuedgrowthinAsiaand,byextension,socansemiconductorequipmentmanufacturers.Asiahasbecomethemostimportantmarketforcompaniesinthisspace.

Additionally,semiconductormanufacturersrelentlesslyinvestinnewtechnologyinordertolowertheunitcostsofprocessingpower.“Consumerend-demandforelectronics,mostrecentlyinsmartphonesandtabletcomputers,hashistoricallydrivencompetitioninourindustrytomakefaster,morecomplex,andcheapersemiconductorsinlinewithMoore’slaw,”saysMrThamatAppliedMaterials.7 HecitestheiPodasanexample.AniPodbuiltinthe1970satthecost-per-transistorthenwouldhavecostUS$3.2bnandwouldhavebeenthesizeofahouse;however,withinnovationinlinewithMoore’slaw,todayaniPodcostsUS$250andfitsintoapocket.

6GlobalSalesReport.SemiconductorIndustryAssociation.Variousyears

7Moore’slawisnamedafterGordonMoore,co-founderofIntel,acomputerchipmanufacturer,whopredictedthatcomputerprocessingpower—measuredbythenumberoftransistorsonanintegratedcircuit—wouldriseexponentially,doublingevery18monthsorso.



Whatistruehereofsemiconductorsisalsotrueofsolarpanels,saysMrTham.“Astheindustryreducesthecost-per-wattresultingincheapersolarpanels,competitionwilldrivepricepressuresandpotentiallyresultinconsolidation,”hesays.Despitetherecenthiccupsintheindustry,MrThamexpectssolarenergytobecomeaviablealternateenergysource.“InnovationsbyPEcompaniescreatemanufacturingsolutionsthathelpPVproducerspushdownthecost-per-watt,andwilleventuallymakesolarenergycostcompetitivewithtraditionalenergysources.”

InMrTham’sview,mostglobalplayershaveacknowledgedtheimportanceofAsiaasanimportantsemiconductorandsolarmanufacturingbaseandthereis“anemergingpreferenceoftheindustrytohavealargerandmoresignificantpresenceinAsia”.



Case study: Applied Materials

Applied Materials: Continued growth in AsiaAppliedMaterials,withrevenuesofmorethanUS$10bnin2011,is

theworld’slargestsupplierofmanufacturingequipmentandservicesforthesemiconductor,flat-paneldisplayandsolarindustries.“About75%ofourrevenuecomesfromAsia,upfromabout50%adecadeago.WehaveasignificantpresencethroughoutAsiainChina,Taiwan,Singapore,India,JapanandSouthKorea,andarecontinuingtogrowourfootprintintheregion,”saysRussellTham,regionalpresidentofAppliedMaterialsSouthEastAsia.

SinceestablishingitselfinAsiamorethan20yearsagowithsalesandtechnicalsupportfunctions,MrThamsaysthatthecompanyhasadded“strategicandoperationalrolestocatertoamarketbasethatisshiftingtoAsia,andtoimprovecostcompetitiveness.”

“CompetitiontokeepupwithMoore’sLaw,whichdrivesincreasinglyadvancedsemiconductors,hasresultedinatrendofconsolidationforoursemiconductormanufacturingcustomers,aswellaseverincreasingcapitalinvestmentrequiredtoachievetheprofitableeconomiesofscale,”MrThamsays,inexplainingthehighinvestmentbarriersinvolvedinthesemiconductorindustry.

HebelievesthePEsectoritselfisincreasinglycapitalintensive,particularlywiththedevelopmentoftechnologiessuchasthree-dimensionalintegratedcircuits,whichrequire“significantRD&E[research,developmentandengineering]resourcesandinvestmentthatareonlyavailabletoglobalplayers.”MrThamsuggeststhatcompetition-drivenconsolidationamongthePEindustry’scustomerscouldleadtoasimilarconsolidationinthePEindustryitself.InMay2011,AppliedMaterialsacquiredVarianSemiconductorforUS$4.9bnandinNovember2009,itpaidapproximatelyUS$364mtobuySemitool,anothersemiconductorcompany.Similarly,waferfabricationequipmentsupplierLamResearchagreedtobuyrivalNovellusSystemsforUS$3.3bninDecember2011.

Togainacompetitiveadvantage,saysMrTham,PEcompanieswillhavetoinvestinR&D“toaddressanincreasingnumberoftechnologyinflectionpointsinordertoenableMoore’slawandproducenewertechnologiesatevercheapercosts.”Headdsthattheseinnovationswillinvolvenewmaterials,uniqueintegratedcircuitdesignarchitectures,novelpatterningstructuresandlargersubstrates.“Thetrendofglobalisationhasalsoseencompaniesoptimisetheirglobalfootprintthroughthedevelopmentoflowercostoperationsandsupplychains,especiallyinAsia,”headds.



Outlook

Overthepastdecade,Asia’sPEindustryhasexpandedintandemwiththeregion’smanufacturingsector.ThenumberandsizeofAsianPEcompanieshasincreased,whilemanyhavebroadenedthe

scopeoftheiroperationsbyenteringnewsegmentsaswellasbyintegratingvertically.SeveralAsiancompaniesrecordedlargeincreasesintheiroperatingrevenuesbetween2004and2009.Forinstance,theannualturnoverofLarsen&Toubro,anIndiantechnology,engineering,manufacturingandconstructionfirm,increasedfromUS$3.4bnin2004toUS$9.5bnin2009.

Fortheindustryasawhole,afteraslightdipinprofitabilityin2005-06,marginshaverisensteadily.Inparticular,bigcompanieshavebeenabletoexploiteconomiesofscaleandgrowrapidly,bothorganicallyandthroughmergersandacquisitions.Withongoingconsolidationintheindustry,itseemslikelythatthebiggerfirmswillcontinuetogrowtheirmarketshare.

Theindustry’soutlookoverthenextfewyearshingeslargelyontwotrends—themergingofAsianandnon-AsianPEbusinessmodels;andtheshiftindemandfromtheWesttotheEast.First,asAsia’smarkethasgrown,morenon-Asianglobalplayershaveenteredtheregion.“Overthenextfewyears,theAsianfirmsandnon-Asianfirmswillcompetewitheachotherintermsofpriceandtechnologycompetitiveness,costcontrolandproductionefficiency,”MrShaoatWorldPrecisionMachinerysays.Therefore,evenasAsia’slargestPEfirmsarewinningmarketsharefromsmallerAsianplayers,theyincreasinglyhavetocontendwithnon-Asiangiantswhoareloweringtheircostsofproductionandbroadeningtheirfootprintsacrosstheregion.TheindustryisthuslikelytobecharacterisedbyfiercecompetitionbetweenbigAsianandnon-Asianplayers,whomayincreasinglyresembleoneanother.

Second,Asianmanufacturers—and,byextension,thePEfirmstheydependon—areseeingademandshiftfromdevelopedWesternmarketstotheemergingworld,particularlyAsia.Risingdisposableincomesintheregionhavedrivenexponentialgrowthinthemarketsforarangeofconsumerproducts,fromautomobilestotabletcomputers.AsianPEfirmsarebecomingincreasinglydependentontheseboomingAsianmarketsfortheirgrowth.Theirsuccessoverthenextfewyearswilldependonhowaccurately



theyhaveplannedforandmanagedthisshift,particularlygiventhebroaderglobalmacroeconomicuncertainty.Overthelongerterm,Asia’sseculargrowthstorywillensurethatitsPEindustrycontinuestogrowrapidly.



Barometer methodology

Toassesstheintensityofcompetitionandunderstandthechangingmarketdynamicsinkeysectors,theEconomistIntelligenceUnithasdevelopedtheAsiaCompetitionBarometer.Drawinguponcompany-

leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.

Assessingauniverseofover200publicly-listedprecisionengineering(PE)companiesacrosseightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapeforthePEsector.

How do we define the precision engineering sector? ThePEsectorincludesthemanufactureof:

Instrumentsandappliancesformeasuring,testingandnavigation,irradiation,electromedicalandelectrotherapeuticequipment,opticalinstrumentsandphotographicequipment,power-drivenhandtools,metal-formingmachinery,othermachinetools,otherspecial-purposemachinery,airandspacecraftandrelatedmachineryandmedicalanddentalequipmentandsupplies.

Methodology TheBarometerhastwodimensions:profitabilityandmarketconcentration.

Profitability IndexToassesstheaggregateprofitabilityofthePEinAsia,theEconomistIntelligenceUnitdevelopedacompositeindexoffiveratiosthateachrepresentadifferentaspectofacompany’sprofitability:

• EBITDA margin (%):Ameasureofacompany’soperatingprofitability.Itisequaltoearningsbeforeinterest,tax,depreciationandamortisation(EBITDA)dividedbytotalrevenue.BecauseEBITDA



excludesdepreciationandamortisation,EBITDAmarginprovidesaclearerviewofacompany’scoreprofitability.Anincreaseincompetitionmayputpressureonanindustry’sprofitmargins.

• Gross margin (%):Whenusedasamarketmeasureofcompetition,grossmarginmeasurestheprofitabilityconsideringonlythecostsofgoodssold.Thehigherthepercentage,themorethecompanyretainsoneachdollarofsalestoserviceitsothercostsandobligations.Anincreaseincompetitiontendstoreducefirms’abilitytoincreasepricesandtherebyincreaseitsgrossmargin.

• Return on capital employed (%):Ameasureoftheefficiencyandprofitabilityofacompany’scapitalinvestments.Returnoncapitalemployedalsoindicateswhetherthecompanyisearningsufficientrevenuesandprofitsinordertomakethebestuseofitscapitalassets.Anincreaseincompetitionmayrequirefirmstoemployadditionalcapitaltomaintainprofitability.

• Return on equity (%):Ameasureoftherateofreturnontheshareholders’equity.Itmeasuresafirm’sefficiencyatgeneratingprofitsfromeveryunitofshareholders’equity.Returnonequityshowshowwellacompanyusesshareholderfundstogenerateearningsgrowth.Ariseincompetitiontendstoputpressureonreturnsonshareholderfunds.

• Return on assets (%):Ameasureofhowprofitableacompany’sassetsareingeneratingrevenue,orhowprofitableacompanyisrelativetoitsassets.Returnonassetsdeterminesacompany’sabilitytoutiliseitsassetsefficientlyandeffectively.Highercompetitiontendstoputpressureonfirms’abilitytomaintainreturnonassets.

Weaggregatedcompany-leveldataformorethan200publicly-quotedPEcompaniesandexaminedtheirprofitabilityratios.Toenableobservationoftrendsovertime,acompositeProfitabilityIndexwasdeveloped(whereyear2005=100).EBITDAandgrossmarginaregivenahigherweightingintheindexastheyspeakdirectlytobottomlineprofitability,whilethereturnoncapitalemployed,returnonequityandreturnonassetsratiosspeaktohowacompanymakeuseofitsvariousresourcestodrivereturn(i.eefficiency/productivity).

Profitability indicator Weight in Profitability Index

EBITDAmargin(%) 35%

Grossmargin(%) 35%

Returnoncapitalemployed(%) 10%

Returnonequity(%) 10%

Returnonassets(%) 10%

Market concentration Toassessmarketconcentration,theEconomistIntelligenceUnitcalculatedtheHerfindahl-HirschmannIndex(HHI)forthePEsectorinAsiafrom2004to2009.Ameasureofthesizeofcompaniesinrelationtotheindustry,andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseofover200listedcompaniesassessed.8HHIvaluescanrangefrom0to1.0,movingfromanextremelyfragmentedmarket(0)toa

8Orsummedforallthefirmsin the case that there are fewerthan50.



monopoly(1).HHIvalueshavebeenmultipliedby100toachieveascaleconsistentwithprofitabilityindicators.ArisingHHIindexgenerallyindicatesfallingmarketcompetition,whileafallintheHHIsuggeststhatcompetitionisincreasing.

Whilsteveryefforthasbeentakentoverifytheaccuracyofthisinformation,neitherTheEconomistIntelligenceUnitLtd.northesponsorofthisreportcanacceptanyresponsibilityorliabilityforreliancebyanypersononthisreportoranyoftheinformation,opinionsorconclusionssetoutherein.

precision engineering - economic development board · pdf filedeveloped the asia competition...

Documents