Chinese Electronics: Getting Ahead of the Game

Travelling the Silicon RoadSHENZHEN, China — It seems wherever you go in China’s cities, north south, east or west, business and government are looking for foreign partners and investments.

Start-ups, local and central government, well-established domestic companies alike, all discuss the possibilities of establishing a win-win relationship with companies from the West, particularly the United States. These efforts are still relatively nascent in China’s chip industry, with a few notable exceptions like foundry Semiconductor Manufacturing International Corp.

And on the other side, many are just as eager. In some cases, they’ve already been here for years, like Agilent or Applied Materials. Or they are just now looking to get involved in the booming Chinese market, and might not be sure who to partner with – venture capital firms, for example, look at the raft of Chinese chip and technology start-ups, and are bewildered about which ones to choose.

But China’s electronics manufacturing industry is considerably more developed than its chip industry. While developing intellectual property and bringing it to market might not be a Chinese strongpoint, manufacturing is, so it is only natural that China’s electronics manufacturing industry is humming along strongly and has been for years.

While the semiconductor content of Chinese electronic components may come from beyond China, the rest of the content that goes into making an electronic product can be found locally here in China, be it cables, boards, connectors or whatever. In many cases a product can be sourced entirely here in Shenzhen and that, along with cheap human resources, is why manufacturing is inexpensive here compared to the rest of the developed world.

Look at the cost of manufacturing a television. Thirty years ago, it cost about 3,000 yuan; today it costs about 500 yuan to produce a TV in China, noted Chao Getu, a general manager at Shenzhen Deren Electronic Co. Ltd. That’s about 62 bucks.

“The same thing will happen in the field of white goods and household electronic appliances, sooner or later,” Chao observed. “The advantage of China lies in the whole [electronics] supply chain.

And when it comes to doing business with the West, China’s electronics companies are also ahead of the game. Deren Electronic is a good example.

A privately held company created in 1992, Deren is focused on R&D and production of electronic connectors. It has a solid foot in the middle layer of the electronics supply chain in Asia and the world; its revenue this year should be around $87.5 million (700 million yuan). It has seven factories around China, and has an impressive list of domestic and foreign customers.

Among its Chinese customers are giants like home appliance manufacturer Haier and television maker Konka. Among its foreign customers most notably are big Japanese names in electronics: Toshiba, Sony and Sanyo – a notably tough market to crack, even now.

How the company got into Toshiba and the Japanese market initially, was its competitive price, said Chao. While the Western supply chain is open to foreign suppliers, the Japanese electronics supply chain is still relatively closed, at least until a few years ago.

To get more solid footing in that market, Deren went a step further, hiring Japanese engineers and setting up a new business division specifically to interface with Toshiba and Japanese customers, one that operated like a Japanese business; Deren recruited staff for that division from Japanese companies.

“This was a good start for Deren,” said Chao; it led to its business with Sony and Sanyo.

Deren has also been able to lure the business of U.S. giant Tyco Electronics. The two companies announced their partnership in January of this year, signing a strategic agreement for connectors to be used in home electronic appliances and communications equipment. Deren agreed to manufacture and distribute certain Tyco brands within China; in addition to this OEM agreement it also serves as a distributor for other Tyco products.

For Tyco, which was at one time naturally a competitor of Deren, it gained a local foothold in the blossoming Chinese market, a place it had struggled to penetrate previously. By partnering with Deren and offering its technology, it suddenly was inside China’s large home appliance market.

Meanwhile, Tyco is supplying Deren with patented electronic connector technology, advanced management techniques and brand marketing, and more importantly an entry into the top-level of its target customer base.

Essentially, the deal represented the localization of Tyco – an important step for foreign companies doing business here – and a step toward the globalization of Deren Electronic. Tyco brought in staff from Taiwan to train Deren employees, gaining access to people with business experience overseas.

As Chao observed, “We need more cultivation than utilization.”

Electronic News Travels to ChinaThe company has already learned a lot from Tyco in less than a year, he said. Its human resources management and factory production and product design have all seen great improvements. While the cooperation on a sales and marketing level remains somewhat lower by comparison, Deren hopes to raise that level going forward.

It’s not resting on its laurels either; it is currently courting a large European company as well, hoping to duplicate its relationship with Tyco and continue its foray into global markets.

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.

Recycling America

Editor’s Note: this is the third part of a three part series. The first part is E-Waste: A Growing Problem; the second part is Recycling Europa.

Recyclers, Industry Deal with Cost of Electronic Waste and Pollution

While the European Union prepares to legislate electronics recycling mandates within the next few years, there are nascent efforts to develop some sort of national infrastructure here in the United States.

Alas, Electronic News (the print edition): we hardly knew ye!The debate over what to do with outdated electronics, or e-waste, was highlighted following the recent release of a report entitled “Exporting Harm: The High Tech Trashing of Asia.” The Seattle-based Basel Action Network (BAN) and San Jose-based Silicon Valley Toxics Coalition (SVTC) coordinated the field investigation and ensuing report. The report found that much of the obsolete electronics collected domestically for recycling is actually shipped abroad, typically to China, where it is disposed of or recycled with little or no regard to environmental and worker health and safety. The report also indirectly illustrates the difficulties the recycling industry faces here in the United States, namely finding a way to recycle e-waste profitably yet responsibly.

On these shores, efforts to address electronics recycling are several years behind those of Europe. But the e-waste ball has begun to roll in the United States. Last April the National Electronics Product Stewardship Initiative (NEPSI) was formed. NEPSI comprises a number of members from the federal government, the electronics and recycling industries, as well as environmental groups.

Xerox Corp. cleans equipment to be remanufactured using an environmentally friendly process
Electronics companies have made some progress on environmental issues, such as Xerox Corp., shown here cleaning equipment to be remanufactured using an environmentally friendly process that also has reduced overall cleaning costs. But issues remain.

Among the groups are the U.S. Environmental Protection Agency, the Electronics Industry Alliance (EIA) and SVTC, all of which have found themselves at odds with one another over the issue of e-waste. “The infrastructure for collecting, reusing and recycling electronics in the United States has not kept pace with this growing waste stream, and the number of electronic products entering the waste stream is projected to increase dramatically unless reuse and recycling options expand,” said a NEPSI statement on its Internet homepage.

Last month’s NEPSI meeting in Tampa, Fla., was the most involved to date, concentrating on financing models for electronics collection, reuse and recycling, NEPSI reported. “The group made important and significant progress in the discussions related to a financing system, particularly in understanding the various concerns amongst stakeholders related to front-end vs. end-of-life fees,” Gary Davis, NEPSI coordinator, said in a statement.

“We should all be focusing on our core competency,” suggested Kerry Fennelly, director of communications for the EIA. The EIA has a short-term recycling grant program in place designed in part to evaluate different cost models of recycling. “There’s a role for the recyclers; there’s roles for the municipalities and a role for the consumer,” she added.

But the question of who should bear the cost—electronics manufacturers, consumers, recyclers—is a key issue for both the electronics and the recycling industry. And how to do it cost-effectively is a problem that’s troubled the recycling industry as a whole throughout its history and electronics recycling in particular. Should it be built into the cost of the product? Is the public willing to pay a fee? “I don’t think Joe Public is willing to pay a fee,” said Richard Campbell, senior VP of DMC, the Electronics Recycling Co.

These are questions that electronics recyclers are grappling with themselves in a business that is still in its infancy, Campbell noted. “Companies are realizing there is a cost involved,” he added. “It’s no different than tires or car batteries or oil filters. All of those have a built-in cost to get rid of them.”

This is the only way to recycle profitably yet responsibly and not merely ship it overseas, Campbell and others in the recycling industry said. DMC, a member of NEPSI, welcomed “Exporting Harm” because it highlighted the problems it and the industry faces. “To us, these articles and initiatives are a good thing for DMC because we’ve been trying to do it the right way since we opened our doors six years ago,” he explained.

It does all of its recycling, refurbishing and materials recovery domestically. It guarantees its customers that none of the e-waste it processes will end up in landfills.

Yet it is in domestic landfills or overseas destinations such as those highlighted in “Exporting Harm” that household and municipal electronics often end up, according to environmental groups and the U.S. Environmental Protection Agency. “There needs to be some federal infrastructure, for sure,” Campbell said. DMC is currently working with a large nonprofit organization to develop a program to recycle household electronics economically. “It’s very low profit. We have to deal in volume,” Campbell explained.

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.

Is the Sky Falling?

Analysts, Tool Makers Say No

One would have thought the sky was falling on the semiconductor industry last Thursday morning as technology stocks dropped, with semiconductor capital equipment shares leading the way.

Chicken Little must be an investor.

Alas, Electronic News (the print edition): we hardly knew ye!Assembly equipment company Kulicke and Soffa Industries Inc. (K&S) Wednesday evening announced that it experienced some customer order deferrals and pushouts for ball-bonder tools because of space constraints and wafer and substrate shortages affecting certain customers.

“We hope no one overreacts to this news,” said C. Scott Kulicke, the company’s chairman and chief executive officer.

But overreaction is exactly what happened according to analysts and other equipment manufacturers. The K&S announcement, coupled with reports that Motorola Inc. would reduce its projection of demand for wireless handsets, prompted already nervous investors to sell off technology stocks Thursday.

On Thursday as of noon EDT, the tech-heavy Nasdaq index had lost 22 points, or 0.61 percent, falling to 3,635 after dropping more than 3 percent earlier in the day. Even the consistent performers in the capital equipment industry weren’t immune; Applied Materials Inc. was down $3.56 and closed at $69 per share. The Nasdaq rebounded, however, to close at 3,750, up 101 points.

While many chip stocks, including chipmakers IBM and Intel, ended Thursday on positive notes, equipment stocks remained tepid. The Semiconductor Equipment and Materials International (SEMI) index of equipment companies ended the day down more than three points. Technology stocks in general seemed to be holding their gains on Friday-the Nasdaq was up more than 14 points as of 12:45 p.m. EDT. Equipment stocks, however, continued to be lukewarm; the SEMI index was down another 1.5 points.

No Cause for Alarm

Fat kid in a bunny suit -- that's me!
Well, now I can say it: they were WRONG!

Technology and financial analysts said investor reaction had to do with mixed signals in the marketplace, and not the analog/digital kind.

On one hand, there was the K&S announcement, the Motorola announcement, and recent reports from some companies that near-future earnings may not be as high as predicted. But this tends to be typical for second-quarter reports during the summer, even during an upswing. Furthermore, many companies are posting record earnings and aren’t experiencing the traditional summer slowdown. Also, the Semiconductor Industry Association (SIA) last Thursday reported that world semi sales had topped $16.6 billion in June, a 48 percent year-to-year increase over June 1999 and an all-time record.

“(The SIA) figures are through the roof, which indicates the industry is as good as it can get, and every time we say that, it gets better,” observed Risto Puhakka, vice president of VLSI Research Inc. He added that the stock price of chipmakers doesn’t seem to be getting stronger, however, and some have even declined recently. “We have a lot of mixed signals from the marketplace,” he said.

“The basic thing is that the industry is at full swing, and you see shortages here and there,” Puhakka said. As for sensitive investors and bouncing stock prices, everyone is trying to figure out where it’s going to peak and how soon, he added.

Several analysts noted that assembly equipment companies have much shorter lead-times on orders than front-end tool makers, and that they are the first to feel the effects of a downturn because the assembly industry closely tracks the chip industry in general. This may have been part of the reason investors reacted the way they did, said Dick Greene, principal equipment analyst with SEMI.

“I haven’t seen anything in our data that reflects any particular signs of a downturn,” Greene said.

S.G. Cowen Securities Corp. analysts concluded that the reasons behind K&S’s announcement were essentially the same reasons behind Teradyne Inc.’s previous announcement of lower than expected quarterly earnings, said Tia-min Pang, managing director and equipment analyst.

Pang said that K&S revealed in a conference call Thursday that a Taiwanese subcontractor was primarily responsible for the order push-out because of space constraints at its facilities. Looking to other customers to fill the vacant slots, K&S discovered that other subcontract accounts had tempered their outlook, taking a more conservative approach to near-term spending, Pang said. The company indicated that most of these customers are located outside of Taiwan and for most, the issue is a lack of finished wafers from their foundry fab partners, he added.

This was consistent with Teradyne’s announcement that customers in Korea and Singapore had eased spending because the number of available finished wafers was less than anticipated, according to S.G. Cowen. The firm concluded that Teradyne and K&S share a mutual customer, Amkor Technology, that contributed to both companies’ announcements. Amkor reported quarterly earnings Wednesday night. The packaging and test company said that its fab utilization rates were 75 percent, which could mean one of three things, according to Pang. Either Amkor experienced a lack of wafers to test and package during the quarter, lost market share to its Taiwanese competitors or Amkor and Teradyne’s specific market segment is experiencing softness, Pang said.

“In digging deeper, it appears to be customer-, (geography-) and chip-application-specific,” Pang concluded. “We’re not seeing it anywhere else, just these two companies.”

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.