2 - The Changing Landscape of Contract Manufacturers in the Electronics Industry Global Value Chain

Summary

Introduction

The global electronics industry GVC has experienced significant changes in recent years. Increased competition and restructuring amongst branded firms, technological advancements and opportunities presented in emerging economies have shaped outsourcing, upgrading and transformations in the industry. An important group of supplier firms affected by these changes are contract manufacturers. Contract manufacturers are a small group of first-tier suppliers that carry out most of the manufacturing of electronic products for branded firms in the GVC. According to estimates by the European Commission, branded firms outsourced 80 per cent of their manufacturing to only five contract manufacturers (European Commission, 2012). They are Foxconn, Flex, Jabil Circuit, Celestica and Sanmina-SCI. The majority of these contract manufacturers originated in North America (Jabil Circuit, Flex and Sanmina-SCI in the United States and Celestica in Canada. Foxconn is a Taiwanese firm). Over the past ten years, contract manufacturers have transformed into suppliers with a wide range of capabilities that include design, engineering, technological and manufacturing innovation, alongside diversification strategies that have moved them into higher value-added operations for a variety of industries. In 2015, the contract manufacturing industry was worth US$430 billion (New Venture Research, 2016).

This chapter begins by discussing the changing landscape of contract manufacturing in the electronics industry GVC in light of wider global market dynamics. It aims to update earlier conceptualizations of contract manufacturers in the GVC literature in three ways. First, since the rise of contract manufacturing

in the 1990s, these suppliers have moved beyond solely manufacturing for lead firms in GVCs. They have increased their capabilities, both organically and through strategic mergers and acquisitions (M&As), towards design, innovation and engineering work. Second, this increase in their capabilities has occurred in conjunction with diversification into new industries such as the automotive, aerospace, defence and health. Finally, emerging market locations in Asia such as China have opened up further opportunities for expanding design centres. These factors have shaped the upward trajectory of upgrading and growth amongst contract manufacturers. Through these changes, contract manufacturers show a variety of paths to upgrading which challenge earlier descriptions of contract manufacturers in the GVC literature as suppliers with ‘generic capabilities’ which are interchangeable, easily substitutable and present low switching costs to lead firms (Gereffi, Humphrey and Sturgeon, 2005).