Mexico’s Electronics Industry reaches for Innovation
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Beyond “Fast, custom and bulky”
By Sergio L. Ornelas, Editor MEXICONOW Gordon Moore co-founded Intel, the chipmaker, in 1971. At that time, he coined a prediction known as “Moore’s Law”; a concept that estimated computing power would double about every two years. He was an engineer who recognized that there was a way to continuously pack smaller and smaller transistors onto silicon wafers, boosting performance and reducing costs. After 45 years, Moore’s Law has given billions of people hundreds of thousands more computer power in a smart phone than the capability a U.S. university room-size computer had back in the early 70’s. Digital electronics have contributed to world economic growth in the late twentieth and early twenty-first centuries. Moore's law describes a driving force of technological and social change, productivity, and economic growth. But in the past few years it has been evident that Moore’s Law is not sustainable any more affecting the global computing industry. Mexico’s electronics sector has not been immune to this occurrence. In this article, we will briefly review what is happening in the world of computing and then we will scrutinize how and why Mexico’s electronics industry is influenced by the breakdown of Moore’s Law and other noteworthy global developments.
Global Computing Trends
Nothing in the world has evolved faster than computing and electronics. Just a few decades ago only scientists and the military had access to the Internet, we were carrying brick-size portable phones and our only business address was the office’s. Today, after many years of progress, we are experiencing the diminishing returns of computing power growth. So, does this mean that we have reached a plateau in the evolution of computing? In terms of hardware the answer is yes. In the coming decade or so the cost of further reducing the size or design of transistors and improving silicon qualities will eventually surpass the benefits; unless researchers and developers discover new and better materials and technologies, but this is highly unlikely in the foreseeable future. But two other significant developments in the field of computing and electronics will more than compensate for the slower growth in computing hardware’s speed and power. The first one is “The cloud”. This term refers to huge computing data centers that provide services via the Internet such as storage capacity, processing and special software. In a nutshell, if you use services in the cloud, your PC, laptop or phone need no longer have large hard disk capacity or speedy processors. As long as you have a good, broadband Internet access you can store and process your data in the cloud. The cloud can also be utilized for custom made applications and processes, things that require a lot of computing power, allowing the user to carry, literally in his pocket, “tons of transistors”. The second important development is software specialization. Consider for example that the human brain, at a mere 3.3 pounds of mass, surpasses IBM’s Watson super computer, one of the most intelligent artificial systems. The average human brain has a storage capacity for the equivalent of 500-pages 20 million books; it boasts 10 billion neurons with over 100 trillion neural connections. Yet, recently, software Google program called “AlphaGo” defeated South Korea’s Lee Sedol, the world’s leading player, at a five game series with a score of 4-1 at the game of “Go”. This ancient game has a far greater complexity than chess and billions more board positions. As hardware computer potential dwindles, software becomes a more important factor in developing artificial intelligence (AI). In the case of AlphaGO, the software works like the human brain, learning from experience and relying a lot less on hardware power. Even custom made chips with task specific software may be developed and kept in the cloud to be activated when needed by the corporate, academic researchers and other institutional users. In summary, leveraging on the cloud and specialized software the power of computing will continue to expand, possibly even at a faster pace than during the best times of Moore’s Law. And yes of course, the giants of computing Apple, Facebook, Google, Amazon, Alibaba and others have a new and exciting racetrack.
Mexico’s Electronics Industry
During the past seven years, Mexico’s electronics manufacturing sector has been struggling to recover from the 2008 great recession. Unlike Mexico’s auto industry that emerged very strong from the extreme economic downturn, the electronics industry is still trying to find its pathway to the success it enjoyed in prior years. Exhibit #1 compares the export volume for the auto and electronics industries and clearly illustrates how the latter is lagging the former. During the period 0f 2008-2015, the electronics sector grew only 7.9% while automotive exports had an explosive 110% growth. Mexico’s electronics sector was able to survive the crisis of the year 2000 when thousands of jobs were lost as companies, particularly in the electronics sector, flocked to China. After 2000, Mexico fought back and established itself as a competitive global electronics platform by adopting and redefining a three-tier strategy: Fast, custom and bulky. It did not take long for electronics firms, specially the smart Taiwanese manufacturing service contractors (EMS) to realize the huge advantage of Mexico’s location to fill the U.S. market appetite for prompt “next day” deliveries. The likes of Foxconn, Celestica, Flextronics, Wistron, Jabil and others filled their existing facilities and aggressively opened large new ones along the U.S. – Mexico border. They currently occupy over 20 million square feet of industrial space. U.S. consumers did not only want fast deliveries, they also demanded custom made PCs and laptops with their own choices from the specifications menu; they did not like the off-the-shelf products made in China in large volumes for big retailers.
This practice referred to as “Low-volume / high-mix” of production proved to be a great success for locating final assembly, testing and shipping on Mexican turf, letting China keep the “High-volume / low-mix” production. Mexico’s electronics sector was also very successful in assembling bulky items such as flat TV screens. “Fast, custom and bulky” has kept the foreign direct investment ball rolling for the electronics sector in Mexico as graphed in Exhibit #2. But the level of investment since 2011 is not as impressive as in prior years.
So what has changed?
The world of electronics has changed, both technically and business wise. You may remember how most users bought a new laptop every time Intel marketed a more powerful chip following Moore’s Law. And for sure you remember the smart phone revolution that started relatively recently in 2011, leading to a reduction in the sales of PCs and laptops and the seemingly endless phone options: Apps, cameras, GPS, receivers and others up to their latest waterproof properties. And what about the “Invasion of the tablets” and the long expected advent of “Virtual Reality” graphics and games? Not to mention the “Internet of things”, a concept that will connect billions of sensors everywhere to devises for myriad applications such as self-driving vehicles, pollution control in cities and the alarm system in your house. And that cloud and those specialized software programs we briefly explored above. On the business side, industry leaders are spending billions of dollars in Research & Development for new technologies and materials, all within a setting of reduced profit margins and intense competition. Manufacturers are indeed in what we can call the “3P” conundrum or challenge of and between Power, Portability and Profit; because manufacturers do not engage in R&D for the sake of technology, they do it to develop marketable products in order to make money. In summary, in simple terms, the general trend in the global electronics industry is a shift from a concentration on hardware to a passion for software and innovation; all within a more complex technical and business environment. So how can Mexico better contribute to this evolving value chain and benefit in this new and changing global electronics industry?
What to do?
“Fast, custom and bulky” will probably keep Mexico’s electronics’ ball “rolling” at a confortable pace, but how can the sector mimic at least a fraction of the success of the auto industry? First, Mexico’s electronics manufacturers’ managers and policy makers need to realize that this sector has the fastest changing technical and business environment of any industry. There’s no place in the electronics industry for a Darwing evolution pace; but there is certainly a cutthroat Darwingnean selection of species: Be competitive or be gone. And secondly, Mexico needs to recognize that it needs a “new architecture” for the electronics sector. It needs new policies, new “out-of-the-box” ideas, new players and new initiatives. Concisely, Mexico needs to INNOVATE its electronics sector. The rest of this article explores the opinions and ideas that may be considered to do so. But first, lets talk about what “Innovation” really is. This word is often used and abused in the business world as filler, without meaningful intent. There are many definitions of the word “innovation”, here is the one we like the most: Innovation is the action required to create new ideas, processes, products or policies which when implemented lead to positive effective change. We like to think about innovation not as a word but as a concept, as a continuum way of solving problems or creating new things, markets, means or ways of doing business. If you need to define and measure innovation, here is a simple “rule of thumb”… Definition: “Innovation is significant positive change.” And based on your experience and knowledge of your business environment, for measurement and evaluation, you can interpret your own value for “significant” such as: “Significant is a 25% or more improvement in… something.”
Heard from the players on the field…
The agenda for innovating Mexico’s electronics industry is extremely broad and merits extensive analysis that we cannot cover here. But we can provide a taste of it. Following is what some of the most knowledgeable electronics industry players had to say about the sector and innovation. Rogelio Garza, Sub-secretary of Industry and Commerce for the Federal Government, is an executive with many years of experience in the electronics and Information Technology (IT) private sector. He said in a public speech: “Too often in the past, innovation in the electronics industry has been stifled by a low spend in science, technology and research, as well as an incipient culture of innovation.” “There were disjointed efforts of regional and sectorial development, few innovative government launches and a disconnection between academia and the productive sector. And there was also insufficient generation of specialized human resources, low-level use of IT and a little number of patents registered by Mexicans. None of that was helped by an absence of financial markets that support innovation in a specific manner.” Dr. Sergio Carrera Riva Palacio, Executive Director of the Center of Research and Innovation in Information and Communication Technologies told MEXICONOW: “Innovation is a matter of culture and alliances. You need a very open environment in order to recruit talent and have a process of innovation by system. And making an alliance is also very important because you have to realize that your company doesn’t stand alone but is part of an ecosystem and you must be in contact with other companies - suppliers, clients and competitors.” He added: “However, I doubt that the electronics industry in Mexico is sufficiently open to that. We need to open more in Mexico where the industry operates in a close circle with a lot of sub-contractors. We need to be more open to those outside skills in order to develop new products, new opportunities and use the experience of external bodies.” Alejandro Bustamante, founder and Chairman of Tijuana-based Plantronics, a man who is renowned throughout the electronics industry in Mexico as one of the sector’s leading lights told MEXICONOW: “Innovation is going to save the electronics industry, through many ways. One of them is to be able to have a competitive edge in whatever you do. It could be applications, it could be software, it could be new methods of how to assemble your products, how you work with your customers or how you work with your people.” “Maybe other electronics companies have been slow to adopt those methods in increasing innovation. I think it is a matter of leadership and in some cases it is a matter of limitation because of the lack of knowledge, not being able to benchmark or attend conferences to learn what is going on in the industry. The information is out there and it is the responsibility of management to be able to learn and apply competitive innovation.” The above comments indicate that we need innovation in the electronics industry at the macro level (i.e. policies and education) and at the micro level (i.e. management openness and academic links).
A value chain unchained
Most everyone that we talked to in the electronics industry attributes part of the cause for the slowdown in Mexico to the general global negative economic conditions, which have reduced financial margins in the industry and slowed foreign investment. But here in Mexico, besides that problem, there are others of structural nature. One of them is that the electronics value chain in the country exists from the middle to the right. Unlike the auto industry, which has a lot of Tier-1 and other lower Tier suppliers near the assembly plants, in the electronics industry, in general, most of the supplies come from Asia. Francisco “Pancho” Uranga, Corporate Vice President and Chief Business Operations Officer for Foxconn Latin America told MEXICONOW: “I really hope that the Mexican Government will develop a program for electronics similar to the program created 25 years ago for the automotive industry. One that will enable the electronics sector to make a mark on the global map just as the automotive sector has done.” Without an industrial policy that requires a progressive domestic minimum content, Mexico’s electronics industry will continue to be “unchained” and without the left-hand side of the value chain. Uranga added: “Japan, Taiwan, South Korea and now China as well as India and, more and more, Singapore and Indonesia – have become very competitive in the electronics market and if we don’t do more in Mexico, we stand the risk of becoming nothing more than a large assembly plant.”
“Hong Kong, Mexico”
We need to build our own supply base on this side of the ocean. Now that the federal government wants to promote economic development via the Special economic Zones and the Strategic Fiscal Zones, what about creating one for Asian manufacturers and suppliers? It may be a wild idea, and one that we have contemplated since ten years ago, but in order to attract the full Asian electronics supply chain to Mexico, we need to have a large scale Asian-culture and electronics industry dedicated urban development. The concept would not be just a large industrial park but a higher level project similar in composition to the Special Economic Zones (SEZ) that exist throughout China since the 1980’s which were the pillars of its very successful economic development. Let’s imagine an ideal project: A track of land in the Pacific side of the Baja California Norte Peninsula, close to the main highway, with an ocean front suitable of a sea port or with at least ready-access to an existing port with intermodal facilities. The total area of the SEZ in Mexico would be about 400 square kilometers in a 20x20 kilometer site and not too far south from Ensenada, Tijuana and San Diego. Let’s lease them the land for 99 years and have them pay for all the infrastructure and facilities. This area would be, of course, under Mexican sovereignty but it would be classified as a free –trade zone under the current customs regulations with all the standard tax advantages provided for by law. The land zonings in the project’s 40,000 hectares land extension would include light industrial, innovation and incubators, housing, schools and commercial areas. But foremost, the new development would have a hybrid culture of Asia and Mexico to accommodate the business, logistics and cultural Asian traits as well as those of the Mexican workers. Plan it and they will come and they will build and pay for the infrastructure and factories, there are vast funding sources in Asia for a SEZ in Mexico dedicated to the Asian electronics industry.
Education, education, education
It is a no-brainer that these are the three most important words in the electronics industry. Victor Gutierrez, President of CANIETI, the umbrella organization for the electronics and IT industries in Mexico said in a public address: “It is interesting to note that 70% of professionals consider there is insufficient professional preparation for current activities, that they are unable to work with state of the art technologies and that there is an insufficient supply of college courses on the subjects.” “A total of 59% of IT companies have difficulties finding talent, they say there is a lack of technical training or certification, that the more sophisticated the service, the more difficulties there are to find talent and that the demand for specialized talent grows at the highest annual rate.” The electronics cluster in Guadalajara is making a great effort to fill this void. According to The Network, Cisco technology’s news site, Guadalajara has a strong education component with 20 universities offering engineering and IT degrees. Cesar Castro, IMMEX – West head of Innovation told MEXICONOW: “We have the Secretariat of Innovation, Science and Technology in Jalisco and we are working very hard with the Jalisco government to develop talent – talent in innovation.” “What we call The Triple Alliance between Government, education and business is very important and we are working closely with the Digital University, which be 100% about innovation, forget about the old system.” “We make profiles of the students at our universities and colleges and link them with job openings and work contracts with electronics companies.”
Thou shall incubate and diversify…
Mexico’s electronics industry employment stalled during the recession as illustrated in Exhibit #3; and although it is slowly recovering, Exhibit #4 shows that it is now well behind the auto industry’s share of total manufacturing employment, a statistics the electronics sector led a decade ago. Mexico’s electronics industry needs to market-innovate and find new niches beyond the traditional consumer devises it now mostly deals with. These opportunities may be found down in the food chain pyramid at the inception of projects (incubators), up in the higher value added products and services (specialized software) and in the middle or sideways in other industries. Carlos Cortes, Director General of Hewlett Packard Mexico told MEXICONOW: “To secure a bright future for our industry in Mexico, we have to work around major trends like working with the cloud, technological advances and changes in the workplace.” “The electronics industry in Mexico has suffered a slump in growth over the past five years or so but if we are able to move our transactional business into more of a solution based field - in a word, innovation - then we should be doing a whole lot better this time next year.”
Cortes added: “Business incubators are also important programs that help facilitate mentoring relationships vital for smaller businesses and non-traditional policy efforts such as promoting the use of crowd-funding and incubator programs, building and expanding innovation clusters can help drive innovation in the short-term.” Autos are increasingly moving to being computers with wheels capable of self-driving. With Mexico’s auto industry booming, this represents a huge opportunity for electronics manufacturers. According to a Technology Forecasters Inc. study, two-thirds of EMS executives interviewed reported that their companies are building and/or enlarging facilities in Central Mexico in large part to keep up with Tier-1 automotive suppliers' demand for high-reliability electronics manufacturing there.
True innovation is very hard to come by. It develops within an ecosystem of four main components: government, infrastructure, funding and community. The main role of government should be uniting and enhancing all the aspects of the innovation ecosystem. This is easier said than done, particularly in Mexico, where the official rhetoric is good, but the implementation is quite problematic given the bureaucratic maze the government has. Fortunately, there are extraordinary leaders in the ranks of the electronics manufacturers community that can carry the torch for the long haul without letting the fire extinguish. Innovation is about imagination and creating a future that does not exist in the present. It is about making the intangible tangible, the unseen a reality and the there a here. Innovation is born from stories and tales, from dreams and serendipity. Don’t just get the right idea, give it form, shape and a name; produce the magic of transforming the impalpable virtual gold into a useful, significant improvement.