International credit insurer Coface says the electronics industry in Asia is expected to experience annual growth of over 3% through to 2017. With emerging Asia the new epicentre of electronics innovation, local companies are now counting on the internalisation of production and research.
However, the dynamism of the sector faces new risks, confirmed by the gradual rise in unpaid invoices in the Asia-Pacific region noted by Coface. In 2013, close to three out of four companies in the electronics and IT sector in the region experienced overdue payments, mainly in the sub-sector of electronic components and consumer electronics goods distribution.
Three major risks threaten the electronics sector in Asia.
Firstly, the growing gap in R&D investment capacity between the sector’s medium-sized and very large-scale companies. Innovation is situated at both ends of the market, with manufacturers of semiconductors offering increasingly complex products, and the giants, such as Google with Android, creating new offers.
The dominance of these very large-scale companies, whose market share continues to grow, has resulted in lower profitability and lower margins for companies of a more modest size. This impact is detrimental to manufacturers of semiconductors, at the heart of innovation, who have to invest more in R&D in the face of rapid change.
Second is the increased risks in electronics in mainland China which produces more than a third of global electronics. However, Chinese companies in the sector are particularly affected by pressure on costs and margins, confirmed by the Coface study on payment behaviour.
It appears that in Chinese electronics, the number of overdue days is increasing. In 2013, 44% of overdue payments exceeded 60 days (compared to 25% in 2012). This deterioration is mainly due to business cash flow problems and the economic slowdown in China. Companies assembling products are at increased risk.
Thirdly, competition from mainland China is affecting the Asian players, particularly Hong Kong and Taiwan. Hong Kong and Taiwanese economies, which are dependent on China, are vulnerable to the slowdown in their main commercial outlet.
In Hong Kong, this dependence is increased by the fact that the entire industry in Hong Kong is now outsourced to China. This is especially true in the electronics and IT sector.
In Taiwan, electronics companies are larger than their Hong Kong counterparts and further upstream in the production chain. This means that they are dependent on the activity level of their purchasers, themselves severely affected by the pace of domestic demand (China) and export (the US, Europe and, increasingly, Asia).
Despite increased risks, there are growth drivers. To emerge from this bad patch, the Asian electronics industry must reinvent itself. It has numerous strengths such as innovation in the face of increasingly rapid product obsolescence.
In the medium term, the sector’s growth will be driven by, among others, on-board electronics (automotive and aerospace), electronics for the medical sector, and meeting the demands of the aging population in developed countries.
The Chinese government is also preparing to take measures to promote long-term investment and cooperation between Chinese and foreign companies.
