Written by Lisa Ann Cairns, Ph.D.
The data showing slowdowns in growth among leading emerging economies is a concern for evaluating risk and regional strategies. However, these models are not accurately capturing the type of growth happening – growth that is central to the semiconductor and electronics industry. Exploring the shifts from industries based in manufacturing to those based in technology and the mobile economy helps to understand the supply chain shifts that are changing our industry and supporting sustainable growth, especially in China and India.
A New IoT World Order in 2015
The 2015 global marketplace is marked by fierce device competition, diverging economies, new market leadership challenges, and the rapid growth of IoT. These trends are challenging the electronics industry and changing traditional economic models, particularly with regard to emerging economies. While economic volatility has caused most global manufacturers to limit their involvement in emerging markets, more hesitation in 2015 will cost companies important opportunities, rather than shelter them from excess risk. Rather than cautioning against negative volatility, changes in the adoption patterns of electronics in emerging markets herald growth opportunities.
Emerging markets driving growth from new industries
Cause for reevaluating traditional economic models is rooted in the shift to technology-based economies or the new mobile economy. The traditional models are based on an older set of market variables (indicators), such as the effects of shifts in commodities like oil (and the impact of price changes in these shifting commodities), which is undermining Russia's economy, for example. Construction and traditional manufacturing, likewise, are slowing in China. Additionally, there are few one-size-fits-all models, yet economists often lump nations into broad groupings that include both mature and emerging economies.
Current, traditional economic models are not effectively capturing positive impacts on growth from the retooling of operations, as in China, and the refocusing on new industries, as in India. These economic shifts in the leading BRIC economies of China and India, especially, are actively moving these nations to new industrial bases – industries that demand internet capabilities and technologies that, in turn, drive new, global growth opportunities. Evidence of the intentional aspect of these shifts to technology-based industries such as consumer electronics and services (LED, solar, medical, etc., as discussed by Financial Times recently) comes directly from the national government policies: China's new Five Year Plan and India's "Make in India" vision, respectively.
The direction that emerging economies are taking, embracing the digital IoT era, is seeding future growth multipliers that are not captured in today's economic models (unlike the way that the current oil surplus has an effect on global markets). For example, companies like Xiaomi and other rising stars are adding to their countries' economic growth by changing the emerging market landscape. These companies are driving the mobile economy, IoT, and especially wider connectivity by bringing connected devices into the hands of emerging market consumers and businesses – by setting into real motion the mobile and technological economies.
BRIC: From production to innovation and consumption
One indicator of the growth in the mobile economy can be seen in BRIC consumer electronic (CE) and device strategies, a point explored in the previous issue of Smith's MarketWatch Quarterly. The CE and device market strategies, for example, have matured from low-cost devices targeted at a new set of emerging market consumers to a set of feature-rich, internet-ready smart devices spanning a range of price points and markets. Additionally, we see successful business marketing strategies that leverage local knowledge, local supply chains, and locally produced and branded goods. No longer is there an equating of local brands with less-than-leading-edge technology or devices, and that is an important shift inviting new competitors and new growth opportunities. There is more to the shift in the emerging economies than simply adopting mature market strategies for smart devices, though. The leading emerging economies of China and India, especially, are thoughtfully moving away from a primary focus of being the world's low-cost manufacturing hub and toward being innovative, globally competitive, technologically based industries.
It is not that emerging markets have not been part of the wider mobile or technological economy to date. Rather, it is that the engine of growth now is clearly shifting away from manufacturing and industrialization. There is strong growth in digital platforms, expanding networks and connectivity, cloud computing and internet-based services, Big Data analytics, and other growing markets and technologies. Innovation in new market competition is ripe as industrialization is reaching its peak, particularly in China, where we see its decline already (in areas from construction to manufacturing and even wages). The economic shift is now from production to innovation and consumption. In this transition, the high growth rates that characterized the BRIC countries, and China and India in particular, have been slowing. This has been a cause of concern and has resulted in many hesitating to enter BRIC markets more aggressively. However, this slowdown is also part of the economic shift that is, actually, more sustainable and realistic for long-term and widespread growth in those economies.
Along with the rise of the mobile economy and IoT ubiquity come new paradigm shifts across industries and economies worldwide. Global strategies and global companies have a new challenge of not just adapting products to emerging markets, but of embedding strategies with local knowledge, local networks, more complex portfolios, and the agility to quickly adapt to changing demands from what will be rapid digital expansion, sparked by opportunities found in new mobility and connectivity.
A new world order: China's example
The industrial era for China, in particular, is slowing, dragging down the annual growth rate that has thus far set the bar by which all emerging economies have been measured. While there are many variables leading to the growth slowdown in China, it is clear that the shift from manufacturing hub to innovation and consumption hub is happening. The lowered growth rate for China heading into 2015 is roughly 7.2% (which has been likened to the 2007 double-digit levels), still a strong growth rate compared to any country except India and possibly Indonesia. CE demand in China is seen as strong, even though the economic shifts have lowered the overall growth rates.
In line with the strengthening of a digital or mobile economy, we see Chinese OEMs presenting real challenges to global OEM leaders, both in the domestic Chinese markets and globally. Clear examples in the Chinese market are local OEMs Xiaomi, Huawei, and Lenovo, especially, with ZTE and others close behind. There is fierce competition for local and regional leadership, and to unseat Samsung, in particular, with goals of global, smartphone market leadership. The rise of Chinese smartphone OEMs is a result of the very same market opportunities that they have created by leveraging their understanding of local, consumer demands and by utilizing new go-to market strategies. For example, Xiaomi pursued the internet-only shop strategy to sell their smartphones over costly marketing campaigns rooted in brick-and-mortar shops, strategies employed by global leaders Apple and Samsung.
These new OEMs are able to compete head-to-head with global leaders in their local markets, which is shaking up the global smartphone market. The competitive advantage that these OEMs are seizing upon is their local market knowledge; plus, their smartphones are loaded with highly competitive features and components, while meeting important price-points (China is currently testing and expanding 4G LTE networks). Notably, the components and panels also come from leading global chip and panel manufacturers, underscoring that these devices are not second-tier.
The mobile economy is new growth
Even current traditional economic models forecast healthy growth for many emerging economies. But when you factor in what these models are missing – particularly, the transition to technology-based mobile economies – the future growth opportunities for electronics players in emerging markets is very bright.
New economic changes in BRIC are opening competition and favoring local companies in the still-hotly-contested smartphone and CE device markets. As a result, market share for global OEM leaders such as Samsung is sliding, such as in China, where new competitors leverage local market knowledge with innovative and agile strategies. We expect to see additional shifts in market share and challenges to leadership positions in regional markets in 2015. If you consider the new economic environment that we see in China and India, in particular, it is clear that we need to rethink how we will evaluate opportunities and risk going forward. Our models are not capturing the important changes and the new world order that IoT and the mobile economy have ushered in. The competitive arena and changes in leadership within the smartphone market is just one clear example of the larger changes taking place in emerging economies. These changes should not be ignored, nor glossed over by focusing only on downward growth level revisions; to do so would be missing a very real opportunity and shift that is poised to sustain long-term growth, but is not well captured in most current models.