Network-Led Development and the Rise of Turn-key Production Networks:
Technological Change and the Outsourcing of Electronics Manufacturing
by Timothy J. Sturgeon
Massachusetts Institute of Technology
December, 1998
Forthcoming in: G. Gereffi, F. Palpacuer, A. Parisotto (eds.) Gl o bal Pro du cti o n
an d Lo cal Jo bs. International Institute for Labour Studies, Geneva
MIT E40-227
Cambridge, MA 02139
sturgeon@mit.edu
1. Introduction
This chapter is based on the proposition that first tier suppliers, especially those that
serve American transnational corporations, are capturing a higher share of the value added
in the supply chain. In particular, I argue that a significant share of American electronics
firms are adapting to volatile and intensely competitive market conditions by outsourcing
their product-level manufacturing to a global-scale network of specialized merchant
suppliers, known in the industry as “turn-key contract manufacturers.” Such suppliers are
given the appellation "turn-key" because they require very little support or input—beyond
design specifications—from customer firms. At the same time, American final productlevel, or "brand-name" electronics firms have reasserted control over product definition,
product design, and marketing functions, which are largely being kept in-house.
The intent of the chapter is to explore some of the reasons behind the emergence of
turn-key contract manufacturing, and discusses the implications of this new organizational
model for places that seek to foster the development of the electronics industry. I argue
that the rise of turn-key contracting has created new imperatives for developing places to
connect to global-scale production networks or be left out of the mainstream of industrial
development. The policy rubric that responds to this new reality I have dubbed “networkled development.”
The chapter is organized as follows. Section Two provides an introduction to turnkey contract manufacturing through the example of Apple Computer’s growing partnership
with SCI System, the world’s largest contract manufacturer, and then goes on to document
the recent boom in revenues among the world’s largest twenty contract manufacturers.
Section Three discusses the new requirements for first-tier suppliers, outlining the
production-related services that have been the source of dramatic revenue growth for
contract manufacturers. Section Four provides a detailed discussion of circuit-board
assembly technology (the core process of product-level electronic assembly), including a
1
description of a major shift in manufacturing process technology—beginning in the mid1980s and nearly complete today—that helped to trigger the surge in production
outsourcing. Along the way I point to the implications of these changes in industry
structure and technology for policies aimed at fostering the development of the electronics
sector. Section Five presents an account of the temporal and geographic development of
turn-key production networks. Section Six examines the impact of turn-key production
networks on local enterprises and employment. Section Seven concludes with an argument
for a refined “network-led” approach to economic development that takes into account the
emerging industry structure presented in the chapter.1
2.
An Introduction to Turn-key Production Networks
In April 1996 Apple Computer announced that it was selling its largest United
States personal computer (PC) manufacturing facility in Fountain, Colorado to a littleknown electronics company called SCI Systems. Apple had just posted the largest
quarterly loss in its history ($740M) and had narrowly avoided being taken over by Sun
Microsystems, so it may not have been suprising that it was shedding some of its assets.
What seemed strange about this deal was that, according to Apple management and
industry pundits alike, Apple’s troubles did not stem from poor demand, but from its
inability to meet demand.2
1
The implications of turnkey contracting for theories of innovation and industrial organization are discussed
at length in Sturgeon 1997a and Sturgeon 1997b.
2
Apple’s gambit to protect its market share against those companies offering PCs based on Microsoft’s
Windows operating system and Intel’s x86 microprocessor architecture (known in the industry as
"WINTEL") by offering cheaper, lower-performance machines backfired when customers flocked to Apple’s
higher-performance products instead. Apple’s manufacturing operations were not nimble enough to make
up for this poor forecasting by quickly increasing production of higher-end machines. The PC industry as a
whole had grown 25% during 1995 and many key components, particularly memory chips, were in short
supply. Orders for high-end machines went unfilled and low-end machines began piling up in inventories.
The result was that Apple lost its already tenuous hold on some of its customers, who, unable to buy
Apple machines with the capability of fully utilizing the industry’s new “killer application,” the World
Wide Web, migrated to readily available, powerful, and relatively inexpensive WINTEL machines. By
April 1996, Apple’s share of the worldwide PC market had fallen to an all-time low of 5.8%, down from
7.7% in the first quarter of 1995. Apple’s new CEO, Gilbert Amelio, who was brought in to address the
crisis, instituted a three-track plan to revive Apple by targeting new product development on Internet and
2
Why would a company that is having trouble meeting demand sell one of its most
important production facilities? One could easily imagine an effort to improve
responsiveness and efficiency at existing facilities, but a move to decrease capacity at such
a moment, on the face of it, seemed foolish. Did Apple plan to make up for the resulting
loss in manufacturing capacity by expanding its remaining production facilities in Ireland or
Singapore, moving production to lower-cost offshore locations? A closer look at Apple’s
restructuring strategy and its partner in the deal, SCI, provides some answers to this puzzle
and serves as a thumbnail sketch of the organizational sea-change that is currently
underway in the electronics industry.
Surprisingly, the sale to SCI did not mean that Apple computers would no longer
be produced in the Colorado facility. On the contrary, the deal included a three-year
agreement for SCI to continue to manufacture Apple products in the plant. SCI is the
largest of an emerging cadre of specialized firms whose sole business is to provide
electronics manufacturing services on a contract basis; accordingly, companies like SCI are
known in the electronics industry as “contract manufacturers." SCI had the right to use the
plant’s production lines to manufacture products for any of its other customers as well as
Apple, which at the time included more than fifty firms including Hewlett Packard and
IBM, companies that compete directly with Apple in the PC market. The majority of the
five-year-old plant's 1,100 workers were to stay on as SCI employees.
So, Apple was not selling one of its United States plants to a burgeoning local
electronics company and moving its own production offshore, it was contracting with SCI
to continue to manufacture Apple products in Colorado. According to Apple’s then CEO,
Gilbert Amelio, the company’s strategy was to outsource production to companies such as
SCI in order to reduce Apple’s manufacturing overhead and inventory carrying costs while
concentrating the company's resources more intensively on marketing and product design
multimedia products, streamlining the company’s crowded product line, and drastically restructuring its
operations (e.g., by outsourcing its manufacturing, technical support services, and internal
3
(Electronics Buyers News, 1996). After the sale, Apple was able to alter the volume of its
production—upward or downward—on very short notice without installing or idling any
of its own plant and equipment. Of particular interest to Apple’s management, given the
company’s recent troubles meeting unexpected demand, was the improved “upside
flexibility” that the deal with SCI provided.3
Was the Apple/SCI deal unusual? Certainly not. If anything, according to some
industry watchers, some of Apple's problems stemmed from the fact that it had been too
slow to outsource its manufacturing operations, even though nearly 50% of the company’s
manufacturing was already performed by contractors prior to the sale. By selling the
Colorado facility to SCI, Amelio was simply placing Apple more squarely on a bandwagon
that was already well underway. Since the mid-1980s, and particularly since the early
1990s, large and well-known American (and more recently, European) electronics
companies such as Apple, IBM, NCR, Philips, ATT, Hewlett Packard, Digital Equipment,
and Ericsson have been abandoning their internal manufacturing operations in en mass and
turning to contract manufacturers such as SCI to build their products. At the same time,
many younger, faster growing electronics firms, many of them based in Silicon Valley,
such as Sun Microsystems, Silicon Graphics, 3Com, Bay Networks, and Cisco Systems,
have always used contract manufacturers; few of these newer firms have built internal
manufacturing capacity as they have grown.4 The Apple/SCI deal, then, can best be
telecommunications system management to third party vendors) (San Francisco Chronicle, April 30 and
August 14, 1996).
3
As recent events at Apple proved, inability to meet demand during an industry upturn is just as
devastating in a fast-moving marketplace such as PCs as being stuck with excess capacity during an
industry downturn. In an industry with a highly volatile growth pattern such as electronics, such upside
flexibility is an extremely important asset.
4
In many ways, the turnkey network model is a child of Silicon Valley, where outsourcing to functionally
specialized independent local firms is a long tradition (see Saxenian (1994) for an excellent account of
industry organization in Silicon Valley). As Saxenian documents, East Coast electronics firms such as
Digital Equipment have historically been highly vertically integrated. On the other hand, there are other
important clusters of contract manufacturing activity in the world, especially Huntsville, AL; Singapore;
and Scotland; so the model cannot be equated with Silicon Valley.
4
understood as part of a larger shift in the way electronics production is coming to be
organized.
Increased outsourcing of electronics manufacturing by American brand-name firms
has created an unprecedented boom in contract manufacturing revenues, especially during
the past five years. From 1988 to 1992 the sum of revenues generated by 1995's estimated
largest 20 contractors grew at an annual rate of 30.7%. Since 1992, however, revenue
growth has been accelerating dramatically year by year: from 1992 to 1995, revenues grew
46.4% each year, with the fastest growth coming from 1994 to 1995, when revenues grew
an astonishing 51.2% (see Figure 1 and Table 1).5 At the time of this writing the
unprecedented growth in the industry is showing no sign of slowing down (for example,
the SCI's revenues grew 65% to more than $5.3B in calendar year 1996).
There are many factors that have contributed to increased outsourcing by American
brand name electronics firms, and thus the boom in contractor revenues. First, relative to
firms from Asia and Europe, American firms has generally placed manufacturing in a low
position on the hierarchy of corporate esteem. Accordingly, as the capabilities of the
contract manufacturing sector have improved, American brand name electronics firms have
been more than willing to use them while curtailing, and even shutting down internal
manufacturing operations which are often seen by top management as draining resources
away from more crucial innovation and sales related activities. (See Thomas, 1994, for a
detailed account of these tensions at a leading American electronics firm.) Second, ongoing
market volatility in many segments of the electronics industry has made production
scheduling exceedingly difficult. By using contract manufacturers brand-name firms gain
the ability to ramp the volume of their production upward or downward on short notice,
without the need to install or idle in-house plant and equipment. Third, since the mid1980s, contract manufacturers have shifted from assembling products from kits of parts
5
Technology Forecasters (1996) estimates that the largest 30 firms accounted for about 30% of all
worldwide contract manufacturing activity in 1995, putting the total worldwide market at $46.3B that year.
5
Figure 1. Revenues; 1995’s Top Twenty Contract Manufacturers, 1986-1995
(billions of current dollars)
$8.00
$7.00
$6.00
Top 5
Top 6-20
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
'86
'87
'88
'89
'90
'91
'92
'93
'94
'95
Table 1. Revenues; 1995’s Top Twenty Contract Manufacturers, 1988-1995
(thousands of current dollars)
CM Revenues (thousands of $)
Annual Average Growth Rates
'88
'92
'95
'88-'92
'92-'95
'94-'95
Top 5
1,077,366
2,433,127
7,772,792
24.4%
47.3%
51.9%
Top 6-20
606,000
1,534,200
4,672,382 49.1%
45.0%
50.0%
Top 20
1,683,366
3,967,327
12,445,174 30.7%
46.4%
51.2%
Source: Technology Forecasters (1996). Note: Some data for years prior to 1994 in some companies in the 6-20
ranking are estimated. Calendar years are used where possible.
supplied by customer firms on a “consignment” basis, to purchasing all the needed
components up-front for customer firms on a “turn-key” basis. Turn-key component
purchasing drives up contractor revenues as these payments pass through the contractor to
component suppliers. Fourth, contractors have added a range of front- and back-end
services related to the assembly process, such as circuit-board layout, testing, final product
assembly, and final packaging, creating new sources of revenue and profit. Fifth, a
6
technological shift in the base process of product-level electronics manufacturing, circuitboard-assembly, has heralded widespread automation of electronics manufacturing
processes that were previously performed by hand. The pressure to acquire and master
new, more expensive automated manufacturing equipment at in-house manufacturing plants
has made the prospect of using highly capable contract manufacturers even more attractive.
Similarly, the need for automated production equipment has increased the risk of installing
additional in-house capacity in the face of ongoing market volatility.
In the following two sections I focus on the latter three issues, the rise of turn-key
component purchasing, the addition of new value-added services by contractors, and
technological change in circuit-board assembly, not because these are the sole causes of
increased outsourcing, but because they have the greatest immediate impact on the
prospects for labor-intensive EPZs. I will argue that the organizational model that is
emerging in the electronics industry, which I have dubbed the “turn-key production
network model,” has important implications for developing places and for the fate of
enterprises in EPZs that continue to rely principally on providing low-cost labor for manual
electronics assembly.
3. The New Requirements for Electronics Assembly
3.1 Turn-key Component Purchasing
Increasingly, contract manufacturers have been purchasing components for their
customers, in what is known in the industry as a "turn-key" contract. In this arrangement,
the contractor essentially acts as a lender to its customers by purchasing and holding
component inventories until products are manufactured. Most customers allow contractors
only minimal mark-up on the components they buy.6 After finished products are
6
These prices are negotiated when contractors present the customer firm with a “bill of materials,” a list of
the prices the contractor intends to charge the customer for each component in a specific product. Since the
market prices for these components are well known to the customer, it is difficult for contractors to markup component prices. Contractors must rely on manufacturing services and other value added services (e.g.
design for manufacturability, testing, final packaging, etc.) for profits.
7
delivered, customer firms usually have a 30 to 60 day grace period to pay contractors for
their manufacturing services and turn-key component purchasing. While turn-key
component buying passes cost and risk to contractors, it also increases the flow of capital
through the contractor and drives up revenues, placing the contractor in a better financial
position to invest in additional production capacity. Turn-key component buying also
creates new capabilities at the contractor (e.g. purchasing, materials management, incoming
component inspection, etc.) and strong market linkages with component suppliers, putting
the contractor in a better position to broaden its customer base and extract volume-related
concessions from component suppliers.
Table 2 reveals the share of contract manufacturing revenues from turn-key
contracts for a sample of contract manufacturers surveyed for the Technology Forecasters
Contract Manufacturing Database (TFCMD). The characteristics of the TFCMD are
discussed in detail in the chapter’s appendix. There is a clear trend upward from 70.1% in
1988 to 76.8% in 1994. There are far fewer responses in the 1986 data (10), and all of the
data were from contractors in the United States, so the figure of 46.5% in 1986 is less
reliable as a worldwide measure of turn-key component buying. Still, it fits the overall
upward trend.
Table 2. Share of Contract Manufacturing Revenues from Turn-key Contracts,
1986-1994
Average All Interviews
Responses
'86
'88
'90
'92
'94
46.5%
10
70.1%
55
73.6%
77
74.8%
68
76.8%
69
Source: Technology Forecasters Contract Manufacturing Database (see the Appendix for a detailed discussion).
The implications of turn-key component purchasing for economic development are
clear. Firms that provide electronic assembly services can no longer rely solely on low
labor costs to win business. Suppliers must have the financial and administrative capability
to purchase all needed component and material inventories up-front. In order to control the
flow of components through the factory, especially in an environment where multiple
products for multiple customers are being assembled, most turn-key contract manufacturers
8
employ computerized “manufacturing resource planning” (MRP) systems. These systems
are expensive, difficult to master, and often must be continually adapted and upgraded to fit
the contractor’s specific operation. Today, policies intended to upgrade the local supplybase need to take such new requirements into account. Capital needs be made available,
not just for plant and equipment, but for turn-key component purchasing, MRP systems,
and training as well.
Moreover, because contractors are responsible for purchasing materials and
components, turn-key contracting opens up new possibilities for the development of
backward linkages to the local economy, and thus the upgrading of the supply-base.
Traditional “consignment” contracts—where lead firms supply contractors (or branch
plants) with “kits” of components and materials for assembly processing—are essentially
labor contracts. Consignment contracting is especially common in EPZs, which, after all,
are named for such “export processing” activities. In fact, many firms establish
relationships with labor contractors in EPZs specifically to take advantage of regulations
allowing re-import of processed, “consigned” materials to their home markets with duties
paid only on the value-added offshore (e.g. 807 regulations in the USA and OPT
regulations in the European Union). Such processing of consigned materials provides little
opportunity for local sourcing and does not foster industrial upgrading beyond the creation
of a low-skilled industrial labor force.
On the other hand, as turn-key contracting replaces simple processing of consigned
materials, new opportunities are being created for local enterprises to upgrade to fullservice contract manufacturing, component manufacturing, and a host of other producer
services (e.g. component distribution, logistics services, warehouse management, etc.).
This is how many component suppliers in Singapore have emerged, for example. There is
a dense concentration of firms in Singapore that sell precision machined metal parts (e.g.
disk drive frames, IC lead frames, IC bonding wire, etc.), simple electrical and electronic
components (e.g. discrete electronic devices, bare circuit boards, transformers, power
9
supplies, etc.), small motors, plastic parts, and engineering services. (See Section 7 for a
concrete example of such a firm.) These firms largely grew up—with the support of
government policy—to supply the foreign electronics companies that established
production facilities—with the support of government policy—in Singapore and Malaysia
during the 1970s and 1980s, but more recently, the burgeoning group of contract
manufacturers operating in and around Singapore have emerged as an important new
intermediary market. In some cases, several smaller Singaporean component and service
suppliers—each with its own specialized expertise—have merged to create larger firms
capable of offering a wide range of products and services. Several have evolved into fullservice contract manufacturers—the trend toward which is outlined in the following
section.
3.2 New Services
Even as the growth in turn-key contract manufacturing has signaled a shift away
from vertical integration within brand-name electronics firms, contractors have been
vertically integrating within their specialty by increasing the range of services they offer.
Besides the core electronics manufacturing process, circuit-board assembly, most
contractors have added a range of back- and front-end services, such as design for
manufacturability, circuit-board layout, product-specific process development and
documentation, various forms of testing, test routine development, test fixture design and
fabrication, final product assembly, final packaging, software loading, document
duplication, and shipping finished products directly to distribution (see Table 3 for a
summary).
By gathering a wider range of production functions under one roof, or at least
within one corporate entity, contractors’ can fulfill all of their customer’s manufacturingrelated needs. The range of services that contractors offer have tended to be limited to the
functionally coherent set of production activities centered on circuit board and product level
10
assembly, such as board layout, component purchasing, testing, final assembly, and
shipping to distribution. In general contact manufacturers have not, as some industry
watchers have warned, moved to compete with their customers by introducing final
products under their own brand names (e.g. Borrus, 1995). Although there are exceptions
(e.g. Acer (Taiwan) in PCs), most contractors have remained focused on providing
manufacturing services for their customers. Those that have had some success have been
careful to avoid developing products that compete directly with their customers, or have
developed products that complement their contract manufacturing activities. Some
companies that have tried to move into their customers’ business (e.g. Natsteel (Singapore)
in disk drives and Leading Edge (Taiwan) in PCs) have recently re-focused their business
on contract manufacturing. A clear functional division of labor seems to be emerging in the
electronics industry that is proving to be remarkably stable; those that assume a
deterministic upgrade path from turn-key contract manufacturing to “own brand
manufacturing” (OBM) may well be mistaken.
Table 3. Services Typically Offered by Turn-key Contract Manufacturers
Backward integration:
• Design services
- Component design (e.g. ASIC)
- Circuit-board design
- Test fixture design
- Test routine design
• Layout services
- Circuit-board layout
- Through-hole to SMT conversion
- Re-design for manufacturability
• Turn-key purchasing
- Component selection
- Component purchasing
- Incoming component inspection
- Materials management
• Logistics
Core service:
• Circuit-board assembly
- screen printing
- component placement
- soldering
- cleaning
Forward integration:
• Testing services
- in-circuit test
- functional test
- environmental test
• Final product assembly
• Document reproduction
• Software reproduction
• Final Packaging
• Shipping to distribution
• Repair
- circuit board- level
- final product level
The shift toward full-service turn-key contract manufacturing has created new
opportunities and challenges for economic development policies intended to upgrade the
local supply-base. Simple labor contracting is no longer adequate to win the business of
11
electronics firms that sell in advanced markets. Suppliers now need to provide an everwidening array of value-added services for their customers. While such upgrading is
burdensome, once the new capabilities are in place, value-added services can become the
principal source of profits for turn-key suppliers and keep them closely tied to the ongoing
technological development of the industry. Moreover—and this is a key point—fullservice contract manufacturers can become a valuable resource for local product-level
electronics firms which can use them—just as foreign firms can—to quickly and efficiently
bring new products to the market without the need to install in-house manufacturing
capacity.
4. Technological Change in the Core Product-level
Electronic Assembly Process: Circuit-Board Assembly
To understand the change in process technology that helped to trigger the
emergence of turn-key contract manufacturing in electronics, it is necessary to consider
electronic design and assembly at the circuit-board level. Virtually all semiconductor-based
microelectronics products have assembled circuit-boards at their core. The individual
electronic components that go into any electronics product must be inter-connected in order
to be useful. Interconnection is achieved by attaching individual electronic components to
circuit-boards. Bare circuit-boards are rigid epoxy-resin sheets with thin metal wires
(called “vias”) embedded in them. The vias embedded in the circuit board conduct electrical
signals between electronic devices (e.g., microprocessors, memory chips, power supplies,
connectors, etc.) that are attached to the surface of the board. It is the interaction of
electrical impulses between the components attached to circuit boards that give electronics
products most of their functionality.
The process of placing electronic components onto circuit boards and permanently
attaching them in place, called circuit-board assembly, comprises the core process of
product-level electronics manufacturing (see the “core process” column of Table 3). Most
electronics products have complex interconnect requirements and contain multiple circuit
12
boards. The drive toward miniaturization and better performance in final products has led
designers to increase the density of the wiring vias embedded in circuit boards. To
accommodate all the required circuitry in a smaller area of board space, many newer
electronics products contain circuit boards that consist of multiple layers. (Today, circuit
boards are fabricated with as many as 18 layers.)
The circuit board assembly process accounts for the bulk of the cost of productlevel electronics assembly. Final product assembly, for all but the most miniaturized
electronics products, is a much less demanding process, consisting of simply attaching
various assembled circuit boards and other sub-assemblies (e.g., disk drives) into their
appropriate positions within the outer casing of the product and closing the case. The lack
of tools and expertise required is why final assembly is often referred to in the industry as
"screwdriver assembly.”
As recently as 1985, the prevailing technique for attaching electronic components to
bare circuit boards was to place components on the board (either by hand or by machine)
using “pin-through-hole” (PTH), or simply “through hole” circuit-board assembly
technology. With PTH, the metal leads emanating from the perimeter of electronic
components pass through metal-plated holes drilled in the circuit board. The metal plating
around each hole makes the electrical connection between the component lead and a specific
wire (via) embedded in the circuit-board. After all components are placed into their
assigned set of holes, the bottom of the circuit-board is dipped in molten solder,
permanently connecting each component lead to a specific via in the circuit board. Most
PTH components can, with little training, be hand-placed prior to soldering.
In the mid-1980s, a generational change in circuit-board assembly technology
began that dramatically increased the capital intensity of the circuit board assembly process.
With today's highly integrated semiconductor devices (such as microprocessors, ASICs,
DRAMs, DSPs, and EPROMs), it is physically impossible to drill holes close enough
together to accommodate the tiny leads, which are too frail to be passed through holes in
13
any case. The technical solution to this problem has been to forego drilling altogether by
placing component leads on the surface of the circuit board in an assembly process called
“surface mount technology” (SMT). Because SMT does not require holes to be drilled in
the circuit board, product designers can now use components with much tighter lead
spacing. On SMT circuit-boards, drilled holes are replaced by bumps of raw metal that
appear where the embedded vias pierce the surface of the board. These bumps are arranged
as “footprints” that match the ”land pattern geometry” of the leads emanating from the
components to be mounted on the board. Without holes, SMT components can be placed
on both sides of the board, further increasing the density of the circuitry in the product.
Before SMT, the majority of electronic assembly was done by hand. The popular
image of the “global assembly line,” with rows of young women using microscopes (for
chip assembly), or placing PTH format electronic components on circuit boards by hand, is
well known. It had long been an ironic truth that such “high-tech” items as semiconductors
and circuit-boards were assembled under extremely “low-tech” conditions (Sayer, 1986;
Scott, 1989). But the shift from PTH to SMT has rapidly forced the electronics industry
away from hand work and toward automated assembly. The precision required to quickly
and accurately place SMT components on circuit boards is simply beyond the limits of
human dexterity. 7 If each lead is not aligned exactly with its corresponding “footprint” on
the circuit-board, the connection between the component and the circuit board will not be
made and the product will not work, or, even worse for the brand image of the lead firm,
7
The same forces have led to the widespread automation of semiconductor assembly. The tight spacing and
large number of leads that need to be attached to today’s highly integrated semiconductor devices have made
it impossible to assemble most semiconductors by hand, even with the aid of powerful microscopes. Many
of the same arguments that this paper makes can be easily made for semiconductor assembly as well (e.g.
there are many fast-growing “contract assembly” companies that assemble semiconductors for a number of
component manufacturers), but the aim of this paper is to draw attention to board- and product-level
electronics assembly, which has been strangely ignored by academics and policy makers alike, who have
tended to put the semiconductor industry at the center of their efforts. While all microelectronics-based
products, regardless of application, contain semiconductor devices as core components, the revenues
generated by the semiconductor industry are only about one tenth the value of the revenues generated by
electronic final products (Dataquest, 1994). Taking the wider view provided by circuit board assembly
opens a window to the remaining 90% of the industry.
14
the product will initially work but then later fail in the field. Thus, in most electronics
factories, the number of workers hand-placing PTH components on circuit boards have
been dramatically reduced and circuit board assembly is now done largely by
programmable “pick-and-place” robots. 8 With automation, equipment costs for a new
production line have increased from less than $200,000 in the early 1980s to more than
$1,000,000 in the mid-1990s.
Today, SMT is the standard manufacturing process for products in most electronics
industry segments, especially products with small form factors such as consumer
electronics, and products with rigorous processing needs such as computers and
telecommunications equipment. Table 4 shows data on the share of circuit boards
assembled with at least 10% of components in SMT packaging format among the contract
manufacturers surveyed for the TFCMD. The table clearly demonstrates the transition to
SMT.
Table 4. Share of Contract Manufacturing Revenues from Assembling Circuit
Boards with at least 10% SMT Components, 1986-1994
Average All Interviews
Responses
'86
'88
'90
'92
'94
23.1%
35
32.3%
66
45.7%
75
57.6%
69
70.5%
67
Source: Technology Forecasters Contract Manufacturing Database (see the Appendix for a detailed discussion).
The adoption SMT circuit board assembly technology greatly increased the
minimum economies of scale in electronics manufacturing. The reason that hand assembly
8
SMT was invented in the United States for aerospace applications in the 1950s and used extensively by
NASA during the 1960s. The smaller form factors allowed by SMT are well-suited for aerospace
applications because of the drive for weight reduction. SMT was first adapted for high-volume production
in the 1970s by Japanese companies for mass production of consumer electronics products (first for digital
watches and later for portable audio products). In the mid-1980s SMT began to be more widely adopted by
electronics manufacturers in the United States, particularly for high-performance data processing
applications such as technical workstations and disk drive controller boards. By the late 1980s, SMT was
in wide use in the United States, with most high-volume production equipment supplied by Fuji (Japan),
Panasonic (Japan), and Philips (The Netherlands). Today, electronics manufacturers are pushing the limits
of SMT technology as the number of component leads continues to increase and the spacing between them
becomes smaller. As the physical limits of soldering tiny leads to circuit boards comes into view,
electronics manufacturers are turning to newer assembly technologies like tape-automated bonding (TAB),
ball-grid array (BGA), and chip-on-board (COB). Few manufacturers use these newer techniques in volume
15
was so popular before SMT is that manufacturers valued the ease of adding and reducing
capacity that labor intensive operations provided. Because SMT assembly equipment is
expensive there is an imperative to utilize it intensively to amortize its cost. Because the
new equipment is capable of very high production volumes, many smaller brand-name
firms have not been able to utilize SMT production equipment to the extent that would
justify either the cost of the new equipment, nor the development of the skills to operate it.
As large companies (and producers of semiconductors) such as IBM, Digital Equipment,
Motorola, and Hewlett-Packard made the transition to SMT in their in-house operations,
more and more electronic components became available only in the SMT format, forcing
smaller companies began to seek outside manufacturing capabilities to fulfill their
production requirements. Even large companies, unsure about the direction of the new
process technology and reluctant to meet the unprecedented capital requirements of their
manufacturing organizations, were spurred by the advent of SMT to increase their use of
contract manufacturers. Contractors that specialized in providing SMT production services
grew quickly. 9
The rise of SMT circuit board assembly technology had reduced the importance of
labor costs in electronics manufacturing, making the need to for policies to help local
suppliers shift to turn-key component purchasing and the provision of value-added services
more acute. Additionally, local suppliers may need assistance to purchase and learn to
operate SMT production equipment.
yet, and the future of circuit board technology is still unclear.
9
One might reasonably ask why the development of automatic insertion equipment for PTH board
assembly by Universal Instruments (Rochester, NY) and others in the 1970s did not trigger a wave of
outsourcing at that time. PTH production equipment introduced economies similar to SMT production
equipment: it had to be run at higher volumes to justify its cost. So, why didn't this shift in minimum
economies of scale give rise to specialized suppliers that could spread equipment costs across a range of
customers? The answer lies in the crucial difference between PTH and SMT: there is little option for hand
assembly for SMT boards. In the past, if companies could not justify the cost of automatic insertion
equipment given small or uncertain volume requirements, they could always employ hand assembly
techniques, choosing the flexibility of variable (labor) over fixed (machine) assets. SMT assembly does not
allow this option to be exercised.
16
5. A Network of Production Clusters: The Historical
Geography of Turn-key Production Networks
Traditionally, most American electronics firms had in-house manufacturing
operations to purchase electronic components and assemble them as sub-systems and final
products of their own design. For transnational firms, a mix of on- and offshore assembly
plants were used. Since the assembly process has historically been quite labor-intensive,
plants assembling high volume, price-sensitive products were located in locations with low
labor costs, some in EPZs (e.g. Mexico’s border region and East Asia). As already
discussed, the more recent trend is for both on- and off-shore in-house manufacturing
pants to dramatically curtail or even cease operation and outsource production activities to
contract manufacturers.
The geography of the turn-key production networks for electronics manufacturing
follows the geography of the American electronics industry, the industry the network has
largely grown up to support. It has strong nodes of development in Silicon Valley, various
cities in the American “Sunbelt” —places from Los Angeles to Florida (i.e. Los Angeles,
CA; Phoenix, AZ; Dallas, TX; Huntsville, AL; Central Florida, and Raleigh, NC), Boston,
Singapore, and Scotland/Wales. The network has smaller but rapidly growing nodes in
Mexico and the ASEAN countries surrounding Singapore, particularly Malaysia, Thailand,
and Indonesia. Two of the largest contract manufacturers have recently opened plants in
Brazil, extending the networks to South America for the first time. The largest contract
manufacturers have plants on in multiple locations. Contractors with facilities in Asia,
Europe, North America and South America can now offer their customers production
services on a truly global-scale.
How have turn-key production networks come about? During the 1970s and early
1980s, brand-name American electronics firms set up offshore affiliates in places like
Scotland, Singapore, and Hong Kong to tap high-quality, low-wage workers for laborintensive assembly and engineering processes. The circuit-boards and final-products being
17
assembled were largely for high volume, price sensitive electronics sectors such as
personal computers and peripheral equipment, telephone handsets, toys, and the like.
Early on, most materials and components came from the United States for assembly on a
“consignment” basis, but over time, an increasing share of inputs began to be sourced
locally, drawing in part on nearby semiconductor assembly plants. By the late 1980s, local
expertise had increased to the point where contract manufacturers took on turn-key
contracts and began buying components locally, while many affiliates either closed down,
shrank, or moved to activities such as hardware design and contract management.
Figure 2 presents a conceptual representation of these developments over time.
Beginning in the early 1970s, American (and later, European) semiconductor firms moved
labor-intensive “chip assembly” processes to low-wage locations in East Asia, especially
Singapore, Hong Kong, Malaysia, and Thailand (Scott, 1989). Once the semiconductors
were assembled in Asia, they were shipped back to the United States and Europe, where
they were sold to brand-name electronics companies and assembled into final products.
For a time, nearly all semiconductor wafer fabrication, circuit-board assembly, and
product-level assembly stayed in the United States and Northern Europe. For circuit-board
assembly, nearby “regional” contractors were used largely during times of peak demand,
when brand-name companies’ internal capacity was completely full. This organizational
structure is quite common. Instead of building enough manufacturing capacity to fulfill
peak demand levels and leave a share of equipment and personnel idle during periods of
“normal” demand, outside contractors and “job shops” are often used as “shock absorbers”
to even out the fluctuations in the business cycle. Under such arrangements, outside
contracting rarely comprises more than 5% of total industry production volumes. In
electronics, the typical contract manufacturing arrangement during the 1970s was for the
brand-name firms to supply labor contractors, known as “board stuffers” with kits of
needed components from their own inventories on a consignment basis. The contractor
then supplied the labor needed to assemble the customer-supplied kits.
18
Figure 2. Organizational and Spatial Change in American-led Electronics Manufacturing
United States Operations and Vendors
Offshore Operations and Vendors
‘70s:
Product Design
a
f
a
f
Manufacturing
Firm Boundary
Intl. Boundary
Marketing
Brand Name Firm (product level)
CM Contract Manufacturing
r=regional; c=consignment; t=turnkey
consigned
components
a
rcCM
finished assemblies
‘80s:
Product Design
Component Manufacturing
f=wafer fabrication, a=chip assembly
a
f
Manufacturing and
Contract Management
Manufacturing and
Contract Management
Marketing
turnkey
components
rtCM
turnkey
components
rtCM
rtCM
finished assemblies
‘90s:
rtCM
finished assemblies
Product Design
a
f
f
a
Contract Management
Direct to
Distribution
Marketing
Direct to
Distribution
turnkey
components
finished
assemblies
Global
finished assemblies
19
tCM
turnkey
components
In the 1980s, brand-name electronics firms operating in high volume, pricesensitive market segments began following the semiconductor industry offshore as a way
to tap low-cost labor in Asia. In the late 1980s, as it became clear that European unification
would become a reality, American electronics companies moved some circuit-board and
product-level assembly of products destined for the European market to Scotland and
Wales to increase value-added within Europe. Scotland and Wales were most often chosen
because of relatively low labor and engineering costs, a well trained English speaking
workforce, and aggressive efforts by local economic development agencies to attract FDI in
electronics. Some of the largest American electronics firms, such as IBM, DEC, HewlettPackard, and Unisys, had large European divisions since the 1960s and 1970s. IBM, for
instance, has its largest European personal computer manufacturing facility in Grenock,
Scotland.
Over time, an substantial pool of local contract manufacturers grew up to assemble
circuit-boards for the affiliates of American brand-name electronics firms, especially in
Scotland, Wales, and Singapore. In many instances, the development of these firms was
abetted by aggressive economic development agencies such as the Scottish Development
Agency and the Singapore Economic Development Board (Deitrick, 1990; McCalman,
1992). Drawing on the components from nearby semiconductor assembly plants, both
brand-name firms and their contract manufacturers, especially those located in Asia, began
sourcing the bulk of their components locally. The local availability of components
allowed brand-name firms to ask their contractors to begin buying components on a turnkey basis.
In East Asia, a regional division of labor emerged in the late 1980s where
contractors in Singapore and Hong Kong began moving their dwindling labor intensive
PTH-based assembly to Malaysia and Indonesia, and China (respectively), where labor
costs continued to be very low. Despite rising wages in Singapore and Hong Kong,
widespread automation of the circuit-board assembly process has allowed a great deal of
20
circuit-board assembly to remain in the these core countries. By the end of the 1980s, a
global-scale external supply-base for the manufacturing of circuit-board and product-level
electronics products was taking shape.
The story could end here, and be one of the migration of American manufacturing
to lower wage locations around the globe, but developments at home have obviated such a
simple, and negative, narrative. There are a wide range of electronics products that have
never been assembled offshore, namely higher value, lower volume products such as large
computers and communications switching equipment. These products contain assembled
circuit boards, just as do high-volume, price-sensitive products such as personal
computers, printers, disk drives, and telephone handsets, but they are generally larger,
more complex, costly, and their designs change more often. Overall, the volume and value
of such products is far from trivial, and the growth of electronics contract manufacturing
capacity in the United States has more than kept pace with its growth in places such as
Singapore and Scotland. As a result, an immensely vibrant contract manufacturing
industry has emerged in the United States since the mid-1980s.
In the 1970s and early 1980s, the loss of the American consumer electronics
industry to competitors from Japan created a paucity of manufacturing expertise in the
United States. As new markets for computer and data communications equipment began to
expand in the late 1980s, companies with specialized manufacturing expertise stepped into
the breach. These firms became what we know now as contract manufacturers.
The largest five companies in the industry are all headquartered in North America.
They have their origins in various places and have emerged from various sectors of the
electronics industry. SCI and Avex are both former NASA contractors from Huntsville,
Alabama that moved into commercial markets by winning contracts to assemble motherboards and add-on cards (respectively) for the original IBM PC in 1981. Jabil Circuit is a
former Control Data and General Motors supplier from Detroit that moved its headquarters
to Florida in the mid-1980s to work on NASA contracts. Solectron (a two-time Malcolm
21
Baldridge Quality Award winner) grew as a supplier to the early personal computer and
disk drive industries in Silicon Valley, California. Celestica is formerly the largest North
American circuit-board and product assembly operation of IBM, located in Toronto,
Canada, which was spun off as an independent contract manufacturer in 1996 and then in
1997 acquired the manufacturing operations spun-off from the British computer maker
ICL, known as Design to Distribution, or D2D.
In the 1990s, as the world-wide supply-base of contract manufacturers deepened,
several things happened. First, offshore contract manufacturers began to successfully
market their services—often through sales offices in the United States—to smaller
American brand-name firms that did not have international operations. Second, larger
American electronics firms began to rationalize their off- and on-shore contract
manufacturing relationships. Instead of managing multiple contract manufacturing
relationships with a large group of smaller contract manufacturers in each region,
companies such as IBM, Hewlett Packard began developing partnerships with the largest
American contract manufacturers such as SCI and Solectron to manufacture their products
on a world-wide basis. This transition has often involved brand-name firms selling inhouse manufacturing facilities to their “global partners.” By the early 1990s the contract
manufacturing sector had developed to the point where large electronics companies such as
IBM, ATT, Hewlett Packard, Dell, and Ericsson began to rely on contractors for the bulk
of their worldwide manufacturing requirements.
In the wake of these changes, the off- and on-shore brand-name affiliates have
moved out of manufacturing, sometimes entirely (but some have retaining in-house finalproduct assembly in order to build final products according to the incoming orders of endcustomers), in an effort to focus more closely on product design, and marketing. Increased
outsourcing has led to a new in-house function for lead firms: contract management, often
built from decimated manufacturing organizations. As business has migrated to global
contract manufacturers such as SCI and Solectron, some smaller regional contractors have
22
seen their business decline. In some cases, these firms have been absorbed by burgeoning
American contract manufacturers seeking to quickly establish global-scale manufacturing
operations through acquisition (e.g. Flextronics). Still, as electronics firms of all sizes
adopt the turn-key model, a great deal of business is being created for small and large
contract manufacturers alike.
Today, in the late 1990s, the world-wide network of contract manufacturers, taken
as a group, offer their customers a global-scale network of leading-edge manufacturing
capacity for hire. By utilizing this network in a highly dynamic manner, brand-name
electronics firms have gained the ability reconfigure the geography of their manufacturing
operations on an ongoing basis without the costs, risks, and time commitments associated
with setting up new offshore production facilities of their own. This is true whether brandname firms are following low-cost-production or manufacture-where-you-sell strategies.
With transition to SMT almost complete, nearly all electronics assembly plants are
highly automated, regardless of location. Although research needs to be conducted that
directly measures the impact of automation on hand assembly workers, it is highly likely
that such workers, who are usually women, have experienced substantial job loss since the
late 1980s. While it is possible that some of these workers have been able to make the
occupational transition from hand assembler to machine operator, it is more likely that these
women have been forced to look for work in sectors where assembly remains labor
intensive (e.g. garments)—or drop out of the industrial labor market entirely—since the set
of skills required are very different. The same is true for the new non-production jobs that
have been created with the shift to turn-key services. In addition, the poor representation
of women in engineering professions has probably led to their exclusion from the new
engineering functions that have been created. As a result, we can hypothesize that the rise
of SMT had meant the wholesale “de-feminization” of electronics manufacturing.
The move to automation has not brought the assembly of high-volume, price
sensitive products back to the United States from East Asia, as some had predicted. The
23
organizational capability to achieve high volume production and the ability to draw on the
rich component supply base in the region became the principle advantage of the region’s
manufacturers. Still, where price sensitivity exists labor costs continue to be very
important. However, with the advent of SMT, access to low cost, high quality
manufacturing engineers has become more important than the cost of production labor, a
trend which favors places such as Singapore, Hong Kong, and Scotland (and more
recently, Thailand, China, and India).
Figure 3 and Table 5 present wage data, collected in surveys for the TFCMD for the
years 1992 and 1994, for production workers and engineers at contract manufacturers in
various geographic locations. Relatively low wages, particularly for engineers, explains
the continued attractiveness of Singapore and Scotland as a manufacturing location for
automated electronics assembly. Engineer wages in Mexico are also relatively low, and
may be contributing to the recent increase of contract manufacturing facilities located there.
The huge wage disparity between production workers and engineers in Hong Kong/China
is an artifact of cross-border labor cost differentials. Most Hong Kong contract
manufacturers shifted manufacturing to China in the late 1980s, leaving sales, purchasing,
materials management, and engineering in place.
24
Figure 3. Average Engineer and Production Worker Wages at Contract
Manufacturers from Various Countries and Regions, 1992/1994 Average
$25.00
$20.00
$15.00
$10.00
$5.00
Engineers
USA
Mexico
Scotland/Wales
Northwest Europe
Singapore
Hong Kong/China
Thailand
Japan
$0.00
Production Workers
Ta
ble 5. Average Engineer and Production Worker Wages at Contract Manufacturers
from Various Countries and Regions, 1992/1994 Average
Engineer Wage
Thailand
Singapore
Scotland/Wales
Mexico
Hong Kong/China
Northwest Europe
Japan
USA
$2.60
$10.74
$11.79
$12.81
$17.05
$18.87
$19.47
$20.28
Survey
Responses
2
9
9
3
3
10
5
33
Production Worker
Wage
$0.89
$3.59
$5.23
$3.27
$1.65
$9.65
$15.67
$8.11
Survey Production wage % of
Responses
Engineer
2
34%
13
33%
17
44%
5
25%
8
10%
16
51%
4
80%
50
40%
Source: Technology Forecasters Contract Manufacturing Database (see the Appendix for a detailed discussion).
25
6. The Impact Of Turn-key Production Networks on Local
Enterprises and Employment
As electronics production becomes organizationally separate from innovation- and
market-related activities with the rise of turn-key production networks, new opportunities
and challenges are created for local economies seeking to tap into global-scale production
networks. For policy-makers in developing countries that target the electronics industry for
growth, turn-key contractors that serve technologically advanced customers need to be seen
as increasingly important players. Governments and entrepreneurs in developing countries
are recognizing the need to form strong linkages with the advanced foreign companies that
continue to create and define the trajectory of technology and markets in fast moving
sectors such as electronics. Since the networks at least in part serve transnational
corporations that compete directly in the most advanced markets, production technology is
likely to remain at the leading edge.
Increasingly, development in electronics means becoming part of an international
production network, not the creation of a Korean-style export-oriented national industry
from the ground up. Besides the fact that massive exporting has become increasingly
problematic in political terms, the electronics industry is now too fast moving, too
technologically demanding, and too capital intensive for such autarkic development
strategies to be effective. At the same time, given the organizational and technological
changes outlined in this chapter, strategies centered on providing foreign firms with lowcost labor for manual assembly of “consigned” materials are certainly becoming less
effective as well. In electronics, EPZs for labor-intensive assembly can only capture the
rapidly dwindling share of electronics manufacturing that still relies on PTH assembly
technology.
A comparison with recent changes in the automotive industry, as outlined in the
chapter by Humphrey in this volume, is instructive. As in the electronics industry, first-tier
automotive suppliers are vertically integrating, taking on a greater range of functions,
26
especially detailed product and manufacturing design, second-tier component sourcing, and
global-scale deployment of manufacturing and logistics. What is different is that the brand
name firms in the automotive industry—the automakers—still believe that they need to keep
final assembly in-house. Final assembly of vehicles, while only accounting for about 10%
of the value of the finished product, constitutes a critical stage of the production chain in
terms of quality and product characteristics (e.g. color and options). This contrasts starkly
with the simple “screwdriver” character of final assembly common in electronics—as
described earlier in this chapter. Even at the level of circuit board assembly, electronics
manufacturing processes are far more “generic” than those of vehicle final assembly as they
are based on well established industry standards and use far fewer unique components.
Furthermore, electronic assemblies are smaller and thus more easily transported than many
automotive parts and modules, reducing logistics complexity, capital investment
requirements, and the need for supplier co-location.
These differences mean that in the automotive industry, globalization of production
is proceeding with the direct participation of lead firms, which are setting up final assembly
plants in emerging markets and asking their key suppliers to serve them in those markets in
“follow sourcing” arrangements. In the electronics industry, brand name firms now can
have their products entirely manufactured and all but a few key components (e.g. ASICs)
sourced in a wide variety of locations without the need for FDI by the lead firm. At the
industry level, this means that electronics manufacturing plants have become much less
prone to overcapacity problems than automotive final assembly facilities because electronics
plants owned and operated by turn-key contract manufacturers have a merchant character
that allows their production capacity to be utilized by multiple lead firms, while automotive
final assembly plants have a captive character that weds the plant’s output to a single firm’s
products and fortunes in the local market.
The recent rush of automakers into many of the most promising emerging markets
has already led to severe overcapacity in many developing countries. In Vietnam for
27
instance, one or two merchant turn-key contract manufacturers could conceivably assemble
all of the electronics products sold in the country (assuming tariff and local content rules
favored local manufacturing, which they currently do only for consumer electronics). By
contrast, the eleven automakers that currently assemble motor vehicles in Vietnam (because
tariff structures do favor local assembly) sold only 5,000 vehicles in 1997, leaving most
automotive factories in the country operating far below optimum capacity and highly
vulnerable to closure (see Sturgeon, 1998, for details).
To be fair, since large-scale outsourcing of final assembly in the automotive
industry is unlikely to occur in the near future, perhaps a better comparison for turn-key
contract manufacturers in electronics are the first-tier “global suppliers” emerging in the
automotive industry. As Humphrey points out in this volume, the collaboration of key
suppliers with lead firms at the early stages of the design process is resulting in the
consolidation of design activity in the core locations of the industry (e.g. Detroit). (also see
Sturgeon, 1997c) Thus, local automotive suppliers in emerging economies have fewer
opportunities to participate in vehicle design activities.
Electronics contract manufacturers too collaborate closely with lead firms early in
the product development cycle. For example, lead firms often work out the details of
product design with nearby facilities of contract manufacturers, who provide prototype
development and design-for-manufacturability services, pilot production runs, and
manufacturing documentation before the product is transferred to the contractor’s worldwide network of plants for high volume production. Most often these activities take place
near the headquarters of the lead firms, such as when Hewlett Packard works with
manufacturing engineers from Solectron in Silicon Valley to bring a new printer, scanner,
or personal computer design into production. Still, the electronics industry is much less
concentrated than the automotive industry, allowing many more opportunities for smaller
contract manufacturers to collaborate with smaller customers. In addition, the extremely
rapid product life-cycles in the electronics industry, especially when compared to the
28
automotive industry, create a wealth of ongoing opportunities for design collaboration.
The rise of truly global electronics contract manufacturers may mean the geographic
consolidation of design activities carried out for the largest lead firms to the detriment of
smaller regional contractors, but the constant up-welling of smaller brand-name companies
competing in a dizzying array of electronics sub-sectors keeps the game relatively open and
barriers to entry relatively low. The “full service” requirements being placed on contract
manufacturers today are not limited to the largest firms, but are an ubiquitous trend
throughout the industry regardless of the size of the players. One could even argue that
small brand name firms, because they lack the resources to build in-house manufacturing
organizations, are in even greater need of turn-key production services than larger firms.
Humphrey also notes the changes in labor requirements that have come with the
shift to global vehicle designs. Since the many vehicles and now being manufactured on a
global basis (albeit sometimes with minor modifications), assembly plants, first-, and
increasingly second-tier suppliers in developing countries are facing new requirements to
match the efficiency and quality standards of operations in core locations, resulting in fewer
jobs per unit of output but a general upgrading of job quality as measured by worker voice,
training, and job variety. With the shift from PTH to SMT circuit board assembly
technology discussed in this chapter, a very similar situation can be said to be unfolding in
the electronics industry. High speed pick-and-place robots have largely replaced hand
assemblers in electronics factories from California to China, and the remaining jobs require
machine operators to perform routine machine maintenance and programming, participate in
elaborate quality control (e.g. SPC) and worker involvement programs that require higher
order skills (e.g. written and verbal communication and documentation), and undergo
significant periods of training prior to commencing work. The emergence of full-service
turn-key contracting also creates a wealth of non-production jobs for which there were no
need in the days of consignment contracting such as engineers for product, manufacturing,
and test design; component and equipment buyers; sales staff and account managers to
29
interface with customers; materials managers and logistics personnel; etc. Simply put, the
rise of global-scale turn-key production networks creates fewer job per unit of output—but
the jobs that are created are of distinctly higher quality.
Another element of job quality—employment stability—may also be impacted by
the enhanced role that suppliers now play in both the electronics and automotive industries.
The build-up of internal expertise at supplier firms often progresses hand-in-hand with an
expanded customer base. When suppliers take such a “merchant” stance within their
industries, their fortunes are less “captive” to those of any single customer. This leads to a
smoother demand profile, stable employment requirements, and—critically in highly
automated production environments—consistently high utilization rates for capital
equipment. In some instances, diversification can be achieved by serving customers active
in several different markets. This is especially true in electronics, where many contract
manufacturers consciously strive to spread their business among customers operating in a
broad range of electronics sub-sectors (e.g. computers, communications, industrial,
consumer, medical, etc.).
7. A Network-led Development Model
As the assembly of circuit-board and product-level electronic products moves outof-house to large transnational, regional, and smaller local contract manufacturers, it
follows that economic development strategies must make a similar move toward a
“network-led” model of economic development that seeks to upgrade the local, regional,
and national supply base to capture additional functions as they are outsourced by
transnational corporations. Beyond creating high-quality production jobs at the local level,
the shift toward turn-key component buying provides local contract manufacturers, and
their local customers, with access to world-scale streams of materials, components, and
technology. Once a turn-key supply base is established, local brand-name firms can gain
30
access to leading-edge supply networks, productive capacity—and possibly even
distribution networks—for the manufacture and sale of their own products.
To provide a concrete example of a network-led development path traveled by a
specific firm, I will briefly relate the story of the Singaporean firm Uraco. Singapore is the
premier exemplar of network-led development, and the state policies that promoted
education and training related to electronics manufacturing and the active, targeted efforts of
the Singapore Economic Development Board to attract FDI by specific companies are well
documented elsewhere. (e.g. Deitrick, 1990) The key to deriving insight from the
following account is to bear in mind that the development of Uraco occurred within the
thriving milieu created by the huge volume of electronics-related FDI that was flowing into
Singapore during the 1980s and 1990s.
Uraco was founded in 1981 by two engineers, Mr. Lim Ee Ann and Mr. Ng Kok
Heng, who found themselves out of work after they were laid off from the Singaporean
subsidiary of the German electronics firm Rollei. Seeing that the local tool and die
business in Singapore was underdeveloped (because most foreign firms tended to bring in
their own tooling), the two set up some machine tools on a chicken farm owned by Mr.
Ng’s parents. From their experience at Rollei they knew that advanced lathes for precision
metal cutting spun very fast but could be stopped quickly to make rapid changes. The two
retrofitted the inexpensive lathes they had purchased with motorcycle brakes to achieve the
same effect. The company generated $700,000 in revenues during its first year of
operation, mostly by supplying precision metal parts to the burgeoning disk drive industry,
which was investing heavily in manufacturing in Singapore and Malaysia at the time.
(Business Times, 1995)
As Uraco grew, it began to supplying a wider range of products to the disk drive
industry, including precision metal stampings and assembled circuit boards. Most of the
company’s business was with Seagate, the leading disk American drive manufacturer, but
the company also exported parts to Hitachi’s operations in the Philippines (Hitachi is the
31
leading Japanese disk drive manufacturer). In 1987 the company, whipsawed by the
extremely volatile disk drive and PC markets, began the first of many efforts to diversify its
business base by entering into the electronic component distribution, eventually winning
distributorships from Motorola, Harris Semiconductor, and Siemens. The opportunity for
electronic component distribution in Singapore and Malaysia stemmed from the lack of an
adequate conduit to connect local chip assembly operations with the growing sub-assembly
and product-level manufacturing that foreign firms were doing in the region. (see Figure 2)
By 1996 Uraco’s revenues had grown to more than $53 million and the company
was operating 82,000 square feet of production space in three Singaporean factories, and
165,000 of square feet of production space in five factories in Jahor and Selangor,
Malaysia. Revenues were based on component distribution, the manufacturing of precision
metal parts and simple electronic components such as crystals and connectors, circuit board
assembly, and the provision warehouse consulting services. (Business Times, 1996)
In the mid-1990s the company began to leverage its experience with electronic
components, contract manufacturing, and warehouse management to—for the first
time—manufacture and sell products of its own design, including connectors, crystals,
automated warehouse vehicles, electronic ballasts for fluorescent lamps, light bulbs, and
telecommunications products. The latter product is of interest because it was specifically
developed to address the acute shortage of telephone lines in developing countries with an
inexpensive device to multiply, or “multiplex,” a single phone line to six lines. (Singapore
Investment News, 1996) Also of interest is the company’s willingness to exploit the
internal expertise it had accumulated (e.g. in component purchasing and warehouse
management) as new lines of business (e.g. component distribution, warehouse
consulting, and automated warehouse vehicles). Even with these attempts to design and
manufacture its own products, the bulk of Uraco’s business remained in providing
production services and components to other brand name electronics firms. In late 1996
the firm won an important contract to manufacture flatbed scanners for Hewlett Packard
32
and in 1997 reorganized its business into three divisions: precision machining, contract
manufacturing, and investment. (Business Times 1996b and 1997)
As we can see from this example, a set of network-led development policies should
rely initially on FDI from advanced markets to bring in leading-edge technology and
provide linkages with advanced markets. Then, the local supply-base should be supported
in efforts serve foreign affiliates. Once an advanced merchant supply-base is established,
specialized producer services can be marketed to the world and to local lead firms. In the
end, network-led development strategies should aim to create a leading-edge supply-base
that bolsters the development of both suppliers and local lead firms while continuing to
attract FDI from leading foreign firms. Still, it is extremely important to keep in mind that
today, given increased outsourcing, FDI for electronics manufacturing is more likely to
come from large, globally- and regionally-operating contract manufacturers than from
better-known brand-name firms. The investment environment that existed in Singapore
during the 1980s—with high profile lead firms making the bulk of investments in plant and
equipment—could not be re-created today.
The aim of network-led industrial policy should be to encourage the development of
specialized industrial clusters with tight linkages to other geographic nodes in the same
industry, not to build comprehensive national industries from the ground up. This requires
the development of a specialized local supply base with an open, merchant character that
can be easily tapped by foreign or local lead firms, adding value to the global network. For
suppliers of turn-key production services, the requirements for network entry are high,
including low costs, high quality, advanced process technology, good responsiveness to
engineering changes, timely delivery, the financial and organizational capacity to purchase
needed component and material inventories up-front, the capability to provide a wide range
of production-related services (a full-service orientation), and the innovative capacity to
turn internally accumulated expertise into new lines of business. But the rewards are high
33
as well, including access to advanced markets and technology that allow continuous
upgrading to the state-of-the-art.
REFERENCES
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35
Appendix: The Technology Forecasters Contract Manufacturing Database
A central piece of evidence used in this chapter is the Technology Forecasters
Contract Manufacturing Database (TFCMD), which was compiled in 1996 by the author
from the files of the leading market research firm for the electronics contract manufacturing
industry, Technology Forecasters.10 The data originally appeared in four reports published
in 1989, 1991, 1993, and 1995. In addition to the Technology Forecasters material, data
from a report published in 1987 by Gnostic Concepts is included in the TFCMD. Since the
information was collected for the calendar year prior to each report’s publication, the data in
the TFCMD runs bi-annually from 1986 through 1994. Information was collected with
surveys that were administered by telephone, fax, and regular mail. The quality of the
responses varied greatly, from partly filled out fax surveys to two hour telephone
interviews and a few on-site interviews. In general, the responses from contract
manufacturing firms in the United States were of better quality than those from firms
outside the United States. The author served as Market Analyst for the 1989 and 1991
reports, with partial responsibility for respondent selection, data collection and telephone
interviews, and report writing; and primary responsibility for data analysis. The content of
the questionnaires varied from year to year, but 46 easily quantifiable questions were asked
on two or more occasions.
The contract manufacturers in the TFCMD were identified through advertisements
in trade magazines and parts catalogs (e.g. Asian Components), attendance at trade shows
(especially the annual Surface Mount International show), regional and national economic
development agencies (e.g. the Scottish Development Agency and the Singapore Economic
Development Board), and various company directories. Because of these selection
methods, there is a strong bias in the data toward companies that were actively advertising
and marketing their services during the selection period, particularly to United States
10
The author wishes to thank Technology Forecasters for permission to use this database, especially
Pamela Gordon, Technology Forecasters President.
36
electronics firms. The exceptions to this are the contractors located in Japan and Northwest
Europe, which on the whole did not market their services to American electronics
companies, but where special efforts were made by Technology Forecasters’ researchers to
locate and survey contract manufacturers of any kind. This gives the data from Northwest
Europe a distinct character: it mainly consists of responses from small, engineering-heavy
“job-shop” type companies as opposed to the larger, higher volume contractors from the
other regions. The marketing-centeredness and American-centeredness of the data is
appropriate because the topic of this chapter is the evolution and character of Americancentered production networks for electronics manufacturing.
Table A1 shows a tabulation of the surveys in the TFCMD according to the regional
segmentation devised by the author and used in the chapter. In total, the database contains
information from 329 surveys returned from 190 companies (many contractors were
surveyed in several years), for a total of 9,246 individual responses. The 1986 data from
the Gnostic Concepts report is almost entirely from firms located in the United States. The
regional segmentation is based on the eight countries, sub-national regions, and supranational regions where the bulk of the surveys were returned from, such as the United
States (163), Northwest Europe (35), Singapore (31) Scotland/Wales (30), and Hong
Kong/China (19). The United States category includes seven responses from contractors
located in Ontario, Canada. An Emerging Asia category is comprised of the average values
of the data in surveys returned from Thailand (4), India (4), and the Philippines (2).
Because of their interest to the chapter, the regional segmentation includes categories for
responses from Mexico (11) and Japan (9), even though the number of overall responses
from these countries was relatively low. The regional segmentation leaves out data from
places where less than nine surveys were collected, including Ireland (8), Taiwan (6),
Australia (4), Scandinavia (3) and the Czech Republic (1). Since not all questions were
answered by respondent firms, the number of responses to individual questions is often too
low in these countries to include them in the analysis. Furthermore, the surveys from these
37
countries were determined not to aggregate well into any supra-national regional grouping.
In total, the sample used for the chapter includes data from 308 surveys returned from 168
firms, for a total of 8,657 individual responses. Since the response rate for different
questions varied, all tables and figures in the chapter drawn from the TFCMD show the
corresponding number of responses, allowing the reader to judge the robustness of the data
presented.
Table A1. Regional Tabulation of Returned Surveys and Responses in Technology
Forecasters’ Contract Manufacturing Database, 1986-1994
Japan
Emerging Asia1
Hong Kong/China
Singapore
Northwest Europe2
Scotland/Wales
Mexico
United States3
Total in Sample
All Interviews
# sur. # sur. # sur. # sur. # sur. total resp. # surveys
# firms
'86
'88
'90
'92
'94
'86-94
‘86-94 responding
0
0
4
4
1
320
9
7
0
4
1
1
4
190
10
8
1
6
4
2
6
541
19
10
1
6
8
10
6
893
31
16
0
5
11
11
8
1,144
35
30
1
4
7
11
7
998
30
19
1
3
2
1
4
317
11
7
31
33
34
29
36
4,252
163
78
35
61
71
69
72
8,657
308
175
36
66
76
72
79
9,246
329
190
1
Includes responses from Thailand, India, and the Philippines. 2Includes responses from Germany, Austria, Switzerland,
Liechtenstein, Belgium, France, and the Netherlands. 3Includes Canada.
The American-centered nature of the data in the TFCMD is revealed by Table A2,
which presents the national origin of contractor’s customers, tabulated by contractor
location according to the regional segmentation devised by the author. It is clear that
American electronics firms dominate as customers in all regions except for Northwest
Europe and Japan, where local companies comprise the bulk of the customer base.
Contractors’ responses are tabulated according to headquarters locations, even if the
firms possess offshore facilities. The vast majority of the contractors interviewed had all of
there operations contained within the boundaries of their home country. Exceptions to this
are the largest American contractors, SCI, Solectron, and Avex, which had manufacturing
in Singapore, Malaysia, and Scotland since the late-1980s and early 1990s; a few American
contractors with the bulk of their manufacturing (and some of their ownership) in
38
Singapore and Thailand, such as GSS/Array Technology and Flextronics International;
several Singaporean contractors with branch plants in Malaysia and Indonesia; and a few
smaller American contractors with branch plants in Mexico. By 1997, about 10-12 of the
largest American contract manufacturers had set up truly global-scale operations, with
manufacturing plants in the United States, Europe, Asia, and Latin America. Two
American contractors now have branch plants in Brazil. At the time that the data was
collected, however, far fewer contractors had offshore operations than do today, so the
regional data in the TFCMD correlates closely with the characteristics of the contractors
headquartered in those regions.
Table A2. Regional Tabulation of Customer Home Locations* in Technology
Forecasters’ Contract Manufacturing Database, 1986-1994
CUSTOMER HOME
LOCATION (%):
CONTRACTOR
LOCATION (%):
Japan
Emerging Asia1
Hong Kong/China
Singapore
Northwest Europe2
Scotland/Wales
Mexico
United States3
CUSTOMER HOME
LOCATION (#):
CONTRACTOR
LOCATION (#):
Japan
Emerging Asia1
Hong Kong/China
Singapore
Northwest Europe2
Scotland/Wales
Mexico
United States3
Total
USA
Europe
Japan
Other**
0%
67%
38%
61%
20%
48%
94%
98%
9%
8%
38%
15%
75%
41%
6%
2%
91%
25%
19%
17%
6%
11%
0%
0%
0%
0%
5%
8%
0%
0%
0%
0%
USA
Europe
Japan
Other**
0
8
8
40
14
27
15
212
324
1
1
8
10
53
23
1
4
101
10
3
4
11
4
6
0
1
39
0
0
1
5
0
0
0
0
6
* Headquarters location of parent company. **Includes Australia (4) and Taiwan (2). 1Includes responses from
Thailand, India, and the Philippines. 2Includes responses from Germany, Austria, Switzerland, Liechtenstein, Belgium,
France, and the Netherlands. 3Includes Canada.
39