Oil. It’s one word with three letters and a mountain of consequences to go along with it; the consumer electronics industry is by no means immune to its effects. Energy management has recently been pushed into the limelight of consumer electronics industry because of increased costs associated with energy. “The major concern now is energy, the management of this energy, the consumption of this energy, and the longevity of this energy,” Cesar Chalhoub, vice president of ITG Holdings, remarked.
In an industry such as consumer electronics the cost of energy permeates throughout all business processes, affecting everything from raw materials to retail prices. This is having a detrimental effect on the bottom line, especially at a time when margins are already being slashed because of price erosion. Accordingly, major consumer electronics manufacturers are finding ways to distribute these costs across the operating spectrum instead of transferring the bulk of this burden to the consumer. “The [increased] cost of oil and the cost and of production will be absorbed on many levels; by the manufacturer, by operating costs of getting these products to the market, and in the end the consumer who will be affected, albeit indirectly,” Chalhoub said.
Transportation and logistics costs are also directly proportional to the cost of oil. Since the increase in oil prices, many consumer electronics manufacturers are adapting their localization strategies in order to transfer the costs of logistics and transportation to local partners. “If oil prices continue to be high then transport and logistics [costs] will be a major reason to reallocate manufacturing in domestic markets in order to reduce such major costs,” Chalhoub pointed out. Retailers are also feeling the oil crunch when it comes time to pay the bills. “Oil is affecting freight prices and affecting our expenses in terms of delivery and general fuel consumption,” said George Khoury, CEO of Khoury Home. “Our energy bill is now multiplied by two or three times what it used to be comparing 2008 to 2007.”
There is, however, some light at the end of the consumer electronics tunnel. As price erosion increases demand levels across the board, a balance is being struck between revenue and energy expenditure. “The pace of technological advance is lowering prices and this is creating some sort of balance in terms of retail prices,” Khoury admitted. Referring to increased energy costs, he concluded, “If we look at it in terms of a consumer basket globally there is a balance overall.”
Making it Right
Increased costs associated with oil prices is mainly at the manufacturing level, starting with procurement costs of raw materials. “Raw materials prices have been increasing and this is having an [adverse] effect on manufacturing,” stated Karl Zalum, commercial manager of Philips’ exclusive agent in Lebanon. More specifically, the pace of recent product cycles are adding to the burden of this increase in manufacturing costs as consumers want the latest products faster than ever and with less regard to actual product durability. “Cellular phones, flat-panel TVs, and computers are still operational when the consumer decides that they want to change these products,” said Khour, “because new technology exists and it is playing the biggest role in this paradigm. In the past you would change your television set because it stopped functioning. It’s not about life-cycles anymore.”
This faster product cycle is having a reverberating effect on both the manufacturers and consumers as products appear and are absorbed by the market like never before. “What the industry is noticing in general is that the change from one [driving] technology to the next used to take around 10 or 15 years to happen, but now change is happening much faster,” said Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon. The speed of technological advancement is also forcing distributors in the region to take on the costs of price erosion during supply cycles. “There are about six or seven weeks from the time we buy our orders from the factories until they arrive in our warehouse,” Cherfan explained. “During that period we sometimes have to absorb the change in cost of certain products in order to stay competitive in the market.”
In order to deal with the near break-neck speed of product cycles brought about by the pace of technological development, as well as maintain reasonable costs of manufacturing at such rates, major brands are implementing more flexible manufacturing models and moving away from vertical manufacturing models and the associated in-house expenditure and infrastructure.
Asian nations are providing a much needed respite from recent increased manufacturing costs in the consumer electronics industry. Major manufactures have relocated core manufacturing to countries like China and Indonesia to take advantage of lower labor costs and are maintaining supremacy over value brands through quality control. “It is the same old players who are now operating factories in China, Indonesia, Thailand, Malaysia, and India,” said Antaki. Chalhoub added, “Outsourcers are reliable enough also because quality control is always monitored by the brands themselves and this helps to reposition prices to reach optimum levels.”
According to market research firm In-Stat, Asia’s contract electronics manufacturing (CEM) market will grow from $121.5 billion in 2006 to $281.8 billion in 2011. The region will capture 55.1% of the global electronics manufacturing services (EMS) market in 2011, up from 45% in 2006, and China is forecast to account for about 76% of the Asian EMS/ODM (original design manufacturing) markets by 2011, driven by growth from the consumer electronics and communications segments. Additionally, emerging manufacturing hubs like India, Indonesia, Thailand, Singapore, and Malaysia will emerge as leading players in global CEM. According to the World Bank’s World Development Indicators online database, in June 2007 East and Southeast Asia account for more than 40% of the world’s combined GDP for exports of manufactured products. Market analyst iSuppli forecasts the Southeast Asian contract manufacturing market will rise to $24.9 billion by 2011, an increase of about $9 billion from $16.2 billion in 2006. By 2011, Southeast Asia is expected to account for 7% of global electronics contract manufacturing revenue, up from 6.3% in 2006.
Consumer electronics manufacturers are also moving into local markets not only to decrease the costs of transportation and logistics, but also in order to take advantage of local tastes and buying habits. “Localization of manufacturing gives you great advantage and also a focus on local tastes. For instance, in Saudi Arabia they like shiny products. If you go to Europe the style is more or less black and dark colored products,” stated Antaki.
Make it lean and make it green
Green initiatives have taken the forefront recently in Europe and North America as populations in developed countries are taking the ‘green factor’ into consideration when deciding on which products to purchase. This trend is also beginning to take hold in the Middle East as countries across the region become more environmentally conscious and responsible. Regional governments are beginning to invest heavily in alternative energy sources in order to diversify their energy portfolio. Earlier this year the UAE announced that it would make an initial investment of $15 billion in projects targeting solar, wind and hydrogen power, carbon reduction and management, sustainable development, education, manufacturing, and research and development.
This phenomenon can also be observed in the consumer electronics industry as manufacturers implement energy efficient practices. Initiatives such as using recycled plastic, decreased packaging, greener factories, dimming screens, and reducing CO2 emissions as well as e-waste have become mainstream practice across the board. However, regionally, at least for the time being, consumer behavior is not being influenced by these manufacturing practices. “The manufactures are working on such issues because they don’t only sell in the region,” Antaki said. “[But] our consumers in the area don’t care,” he added. Nevertheless, environmental awareness is increasing in the region and may soon have an impact on consumer behavior. “I think this explosion of information access will enhance the awareness of the population whether in Lebanon or in Africa,” said Chalhoub. “Thus, definitely the consumer here will feel more comfortable when finding a green packaged product and it will start to effect their buying habits strongly as it has in the US and Europe.”
Ultimately, however, the major consumer electronics producers seem to be producing goods with green processes regardless of local attitudes. As Cherfan pointed out, “At the end of the day when the developed areas of the world adopt these technologies we will adopt them whether we like it or not.”
