Panorama sectors. Second quarter of 2014 CONTENTS. /02 Sector barometer by Khalid AIT YAHIA, Jennifer FOREST and Emmanuelle HIRSCH

Transcription

1 p a o r a m a THE COFACE ECONOMIC PUBLICATION Secod quarter of 2014 Paorama sectors Publicatio by the directio of the Ecoomic Research Group, Paris CONTENTS /02 Sector barometer by Khalid AIT YAHIA, Jeifer FOREST ad Emmauelle HIRSCH /05 Electroics i Asia: iovatio, egie of growth ad risk factor by Christophe BARBE, Emmauelle HIRSCH, ad Rocky TUNG We start this first 2014 Paorama dedicated to our global sector barometer, which assesses credit risk by key ecoomic sectors i three of the world s major regios. North America remais o track, with compaies postig costatly improvig results. Their cofirmed fiacial stregth stabilises sector risks at relatively comfortable levels. I Wester Europe, the retur to ecoomic growth may oly be gradual, but it is real. Without makig ay major chages, we ote that sector risks ted to stabilise, particularly i the coutries most affected by the last recessio. Fially, Emergig Asia is ow a cause for cocer. The ecoomic slowdow i Chia reveals structural difficulties that impact corporate profitability. Sectors sufferig from overcapacity must ievitably restructure ad this uavoidable process carries with it higher risks. The risk assessmet of the metals idustry, which epitomises every possible excess, has deteriorated i this eviromet. We the propose a focus o the electroics idustry i Emergig Asia, a regio that has become i a matter of years the world s workshop for may electroic compoets. As Japa did previously, emergig coutries i Asia have positioed themselves as key sector players. However, the model has its limits, ad credit risk ow teds to icrease, as cofirmed by the Coface survey of Chiese compaies: medium-sized Asia players deped excessively o large foreig firms. Their margis are shrikig ad they have to ivest icreasig amouts to keep up with rapid chage. It is the case for Mailad Chia but also to a lesser extet for Taiwa ad Hog Kog. Asia compaies i the sector symbolise the success of emergig ecoomies ad are ievitably movig up the value chai. But do they have what it takes to limit the associated icrease i risks? RESERVATION This documet is a summary reflectig the opiios ad views of participats as iterpreted ad oted by Coface o the date it was writte ad based o available iformatio. It may be modified at ay time. The iformatio, aalyses ad opiios cotaied i the documet have bee compiled o the basis of our uderstadig ad iterpretatio of the discussios. However Coface does ot, uder ay circumstaces, guaratee the accuracy, completeess or reality of the data cotaied i it. The iformatio, aalyses ad opiios are provided for iformatio purposes ad are oly a supplemet to iformatio the reader may fid elsewhere. Coface has o results-based obligatio, but a obligatio of meas ad assumes o resposibility for ay losses icurred by the reader arisig from use of the iformatio, aalyses ad opiios cotaied i the documet. This documet ad the aalyses ad opiios expressed i it are the sole property of Coface. The reader is permitted to view or reproduce them for iteral use oly, subject to clearly statig Coface's ame ad ot alterig or modifyig the data. Ay use, extractio, reproductio for public or commercial use is prohibited without Coface's prior agreemet.please refer to the legal otice o Coface's site. THE COFACE ECONOMIC PUBLICATIONS 1

2 SECTOR BAROMETER Khalid AIT YAHIA, Jeifer FOREST ad Emmauelle HIRSCH, Ecoomic research departmet, Coface Although the ed of the recessio has bee cofirmed, sector risk levels i Wester Europe remai relatively high accordig to Coface, particularly i the costructio, metal, ad automobile idustries. Risig risks i Emergig Asia have bee the highlight of the first quarter of the year, as evideced by the declie i the metal idustry ad by the impact of the Chiese domestic slowdow o the coutry s compaies. Credit risk idex Sectors Emergig Asia North America Wester Europe * Agro-Food Retail Textile-clothig Trasportatio Electroics, IT ** Sources: Datastream, Coface * See credit risk idex chart page 3 ** Electroics, iformatio techology ad telecoms Moderate risk Medium risk High risk Very high risk TEXTILE-CLOTHING TRANSPORTATION This sector reported mixed results depedig o the subsector. Luxury clothig remais buoyat ad techical textiles are attractig iterest i Idia, which is startig to move upmarket. Wester Europe If compaies i the textile-clothig sector have geerally see their sales expad by 15.5% over 2013, discrepacies remai. Luxury players, o the clothig side, are doig well, despite slower growth i Asia. «Fast fashio» players such as Iditex ad H&M have experieced growth as a result of good sales performace. As for techical textile, Thuase (i Frace) for istace has reported a 7% icrease i sales. Emergig Asia I 2013, corporate sales i the regio icreased by 11%, while profits gaied 3.9%. Chia remais the leadig world exporter of clothig, but because of higher productio costs, it ow faces competitio from coutries such as Idoesia. I fact, we estimate that productio costs i the Chiese clothig idustry have icreased by 160% sice North America Better days are expected for this sector i the Uited States. Labour costs ad the cost of fibres, the two mai cost items, have come uder cotrol, ad reasoable GDP growth (2.7% accordig to our forecasts for 2014) should boost sales i both textile ad clothig. Compaies i the sector, which reported a 8.8% icrease i turover i 2013, expect to make ivestmets of more tha US$4 billio i The sector could thus geerate more tha 6,000 ew jobs. The maritime ad air trasport sector, which comprises global compaies that operate i all three regios, had to udergo restructurig sice 2009 to face lower traffic due to slower ecoomic growth. The situatio is improvig overall i 2014, despite some persistet problems, such as overcapacity i maritime trasport, amog others. Credit risk has therefore stabilised at a medium level, but the tred remais positive. Wester Europe Air trasport is gatherig mometum i the Europea Uio, with passeger ad freight traffic icreasig by 6.7% ad 6%, respectively, betwee Jauary 2013 ad Jauary After several years of restructurig, maritime trasport is achievig some growth, despite strog competitio ad high oil prices. Trasatlatic traffic, for istace, grew by 2.5% betwee 2012 ad The outlook for 2014 remais favourable. Geerally speakig, trasport compaies have a healthier fiacial situatio. Betwee 2012 ad 2013, their turover has i fact icreased by 7.7% ad their cash by 9%. At the same time, their debt has falle by 5%. North America North America compaies beefit from the ecoomic recovery ad from their attractive positioig i emergig coutries. As a result, their turover at the ed of 2013 was up 5% year-o-year. Emergig Asia Asia compaies i the sector remai very dyamic with a 11.2% icrease i passeger traffic, maily due to strog demad i their domestic market. As such, i Chia, turover from passeger air traffic has icreased by 20% betwee Jauary 2013 ad Jauary Maritime trasport is also improvig, despite cotiued overcapacity. This mometum drove a 10.8% icrease i turover ad a 13% icrease i profits. We should oetheless remai vigilat give that debt has icreased by 15% betwee 2012 ad THE COFACE ECONOMIC PUBLICATIONS 2

3 Credit risk idex Sectors Emergig Asia North America Wester Europe * Automotives Metals Pharmaceuticals Services Eergy Sources: Datastream, Coface * See credit risk idex chart below Moderate risk Medium risk High risk Very high risk METALS World productio of crude steel reached 1,607 megatoes i 2013 (+3.5% vs. 2012). Growth comes essetially from Asia ad the Middle East. Steelmakers struggle to push through price icreases of about 4% per metric toe, i.e. 470 Euros, which is affectig their margis. Wester Europe I 2013, compaies i the sector reported a 2.6% declie i turover ad a 54% drop i profits. They have i fact purchased 30% less steel last year. Eve if the Europea auto idustry seems to be recoverig, the costructio sector, which cotiues to face persistet difficulties, represets 35% of the steel market. I the first two moths of 2014, productio is oce agai o the rise (+6.6% vs. 2013). ArcelorMittal, which produces about 25% of Europea steel, expressed iterest i takig over Ilva to stregthe its positio i souther Europe. First cotacts with Ilva ad the Italia govermet have bee made. North America Although the turover of compaies i the sector has declied by 2.4% i 2013 vs. 2012, steel demad should rise i the Uited States i 2014, as a result of strog mometum i the auto sector ad sufficiet ecoomic growth to stimulate the costructio sector. Competitio from low value-added Chiese products will however cotiue to weigh o the sector. CREDIT RISK INDEX Hierarchy sectors i Wester Europe VERY HIGH RISK Automotives Metals Emergig Asia Chia produces 49% of world steel, but its overcapacity is affectig the market by pushig dow prices. The results of Chiese compaies are affected, with a moderate icrease i 2013 turover (+2.9%), a 13.7% drop i profits, ad a sigificat icrease i late paymets accordig to the Coface survey of Chiese compaies. AUTOMOBILES Wester Europe faces a more favourable outlook i 2014, after very difficult years i 2012 ad I North America ad Emergig Asia, the auto sector remais o track with a favourable outlook. Wester Europe The regio is experiecig six cosecutive moths of sales growth (from September 2013 to February 2014), boosted by the itroductio of ew models ad by a more beig macroecoomic eviromet. This icrease cocers both premium ad mass market brads. The recovery i sales should improve factory utilisatio rates, which have bee weak. Net debt was reduced by 1% betwee 2012 ad The mometum is therefore positive but will have to be cofirmed later i 2014, give a still weak recovery i Europe. Emergig Asia Risk remais moderate i this regio. Auto sales are still i a upward tred. Profitability stads at 12% at the ed of 2013, whereas turover is growig strogly (+16% betwee 2012 ad 2013). North America The market remais buoyat. At the same time, the average price of vehicles sold cotiues to icrease (+1.4% late March 2014 vs. late March 2013). Turover has icreased by 3% betwee 2012 ad 2013 ad cash flows by 6%. Give this comfortable fiacial base, sector risk is cosidered moderate by Coface. HIGH RISK Costructio Chemical Paper-wood Pharmaceuticals Electroic-IT MEDIUM RISK Egieerig Eergy Trasportatio Retail Agro-food Textile-clothig Services THE COFACE ECONOMIC PUBLICATIONS 3

4 Credit risk idex Sectors Emergig Asia North America Wester Europe * Chemicals Egieerig Paper-wood Costructio Sources: Datastream, Coface * See credit risk idex chart page 3 Moderate risk Medium risk High risk Very high risk CONSTRUCTION A key sector of the ecoomy, costructio is more tha ever at the heart of govermet, household, ad compay cocers. The associated risk level varies from medium to high depedig o the regio: it is visibly improvig i the Uited States ad remais high withi the Europea Uio. Wester Europe Cautio is still required towards Europea compaies i the sector whose credit risk idex remais very high. These compaies cotiue to suffer from weak activity i most coutries i the regio. Cosequetly, corporate profitability i the sector has falle by 12.2% betwee 2012 ad The situatio is uchaged at the start of I February 2014, the Eurostat cofidece idex for the sector remaied strogly egative (-29, the weakest level sice August 2012). Order books cotiue to fall: -10% i Jauary 2014 vs. Jauary 2013, ad prices are still expected to drop over the ext three moths. Europea Uio coutries are however facig differet situatios. Compaies i Spai, Frace, Portugal, ad Italy are severely pealised by the poor sector outlook, with buildig permits still decliig. I the Uited Kigdom, the sector experieced a slight slowdow i late 2013, maily due to poor weather coditios. I Germay ad Demark, a slight recovery is uder way i the sector. Emergig Asia The costructio sector remais buoyat i this regio ad offers a medium credit risk. Strog household demad provides support. Turover is therefore up 11.4% i 2013 vs The sector oetheless faces some difficulties. Property prices cotiue to rise, amely i Chia. We have i fact see prices rise over the past 21 moths, eve i the face of measures take by the authorities to cotai them. Prices ow appear too high for a large sectio of the populatio. Meawhile, the costructio sector i Idia is facig a slowdow i the pre-electio period. North America The risk idex i the regio remais medium with a 11.4% icrease i sector turover ad a 14.3% reductio i paymet failures registered by Coface. This good performace is due to America compaies that beefit from the sector s mometum. For istace, i February 2014, the umber of buildig permits icreased by 5% (compared to February 2013). Property prices, which are still low, have cotiued to icrease sice October 2012 (+7.8% over the last 12 moths). Moreover, costructio expeditures were up 9.3% at the ed of February 2014 year-o-year. Compaies beefit from a oce agai dyamic market, favoured by access to more flexible credit as well as fallig stocks. The situatio is very differet i Caada. Compaies i the sector are pealised by overvalued prices i the property market. While a dowward correctio is expected, the idex for ew property prices has icreased by 1.5% betwee Jauary 2013 ad Jauary Additioally, household debt is very high ad limitatios to property loas are weighig dow the sector, particularly for residetial ivestmet. Buildig permits were dow sigificatly i late ENGINEERING Ecoomic activity i Wester Europe is slowly pickig up, while growth appears sustaiably established i North America. This positive backdrop improves the outlook for the egieerig sector i these two regios. Emergig Asia remais oetheless bogged dow by pealisig structural difficulties, despite experiecig sustaied growth. Wester Europe Domiated by Germay, the egieerig sector is experiecig some reewed cofidece i the regio. Cash flows expaded by 16% i 2013 year-o-year, while turover grew by 8% over the period. Compaies i the sector are beefitig from sustaied ivestmet i North America (particularly favourable for Germa compaies). Risk levels remai medium. North America The outlook is positive for the mai North America compaies. Their growth appears well supported. They have «pile of cash» to esure sustaied ivestmets. The egieerig sector offers strog profitability (aroud 17.5%). Compaies cotiue to reduce debt, with a 4% drop i et debt betwee 2012 ad The short-term outlook is favourable. Risk is medium. Emergig Asia The profitability of Asia compaies i the sector is dow 10% at the ed of 2013, ad et debt icreased by 8% betwee 2012 ad Overcapacity i Chia i metals (steel ad alumiium), petrochemicals, ad i the cemet idustry is holdig up ivestmet i fixed assets, ad cosequetly weakeig the outlook. These sectors will ecessarily have to make adjustmets to absorb the excess capacity. Risk therefore remais high. CREDIT RISK INDEX METHODOLOGY: Coface s assessmets are based o the fiacial data published by over 6,000 listed compaies i three major geographic regios: Emergig Asia, North America ad Wester Europe. Our statistical credit risk idicator simultaeously summarises chages i four fiacial idicators (turover, profitability, et idebtedess, ad cash flow) completed by the claims recorded through our etwork. THE COFACE ECONOMIC PUBLICATIONS 4

5 ELECTRONICS IN ASIA: iovatio, egie of growth ad risk factor Christophe Barbe, Emmauelle Hirsch, Group ecoomic research, Coface Rocky Tug, Group ecoomic research, Hog Kog The electroics idustry (1) is youg; emergig oly after the Secod World War, but it has gradually become essetial to all other idustries. Strog competitio betwee sector players ad rapid product cycles have led to fast chages, both with regard to techological chage ad global market structure. This capital itesive idustry has become a essetial player i the world ecoomy. Global electroics productio is estimated i 2012 at close to 1,500 billio ad should experiece a growth rate of more tha 3% per aum util Its productio ad iovatio cetre of gravity has moved from the «triad» coutries (North America, Europe, ad Japa) to Emergig Asia, maily Chia ad South-East Asia (South Korea, Taiwa, Sigapore, Malaysia). Accordigly, the triad coutries that supplied 70% of world productio i 2000 oly represet 40% today. At the same time, the share of the Chiese electroics idustry wet from 12% to early half of world productio (40%) (chart 1). While cosidered dyamic, is this sector devoid of risk, eve cosiderig its epicetre, which is Asia? Does it suffer from the weak growth i most developed ecoomies as well as from the ecoomic slowdow i Chia? Does the itroductio of ew products, of ew coected services that require substatial ivestmets i research ad developmet, impact corporate solvecy? After recallig the idustry s recet history over 4 key periods, we will aalyse the curret turig poit, characterised by stiffer global competitio ad the emergece of ew risks ad challeges for the compaies i the sector. Fierce competitio from Asia players ad the cost pressure of the major players are placig compaies, maily Chiese compaies, i difficulty. There is also evidece of risks i Hog Kog ad Taiwa. Margi pressure is likely to last. Noetheless, the Chiese govermet (2) is takig measures i favour of log-term ivestmet ad of cooperatio o iovatio betwee Chiese ad foreig compaies. CHART 1: World electroic productio by regios 22% 18% 14% 27% Europe North America 14% 15% 12% 38% Japa Chia 13% 15% 11% 36% 16% 20% 16% 3% 5% 6% (forecast) Other Asia Pacific Rest of the world Source: DECISION, March 2014 SECTOR VITALITY IS GROUNDED IN RAPID CHANGES TIED TO INNOVATION A - FLEXIBLE SECTOR, ADJUSTING TO SHIFTS IN DEMAND The electroics idustry has udergoe four mai developmet stages sice its post-war origis, durig which its scope has broadeed to all other idustries. These developmet stages illustrate how electroics have spread through icreasigly varied uses to all matters of ecoomic, idustrial ad persoal life, to cotribute to improved competitiveess ad greater productivity for coutries, compaies ad people. The differet stages of evolutio of the sector s product/market pair were fairly liear, impacted oetheless by two severe crises: ad : 1. Military-idustrial uses (the post-war «golde years»). The markets for electroics are essetially idustry-orieted, icludig the defece sector, ad thus maily aimed at govermets. 2. Expasio to the corporate world ( ). The opportuities arisig from the characteristics of electroics favour its spread from govermet uses to corporate uses, maily through idustrial computig ad umerical-cotrol machies. Computerisatio allows compaies to icrease their productivity. 3. Idividual uses ( ). This third developmet period is uprecedeted as electroics fid ew persoal uses. It is the boom of mobile telephoy, persoal IT (PC, games, etc.), MP3 players, etc. It is also the time of the first electroics idustry crisis i 2001, which maily affects developed markets. (1) Our study will address idustrial electroics (compoet maufacturers, etc.) ad cosumer goods (high-tech productio, such as smartphoes, etc.). We will ot cover electrical household appliaces (white goods ad small electrical household appliaces) or operators. (2) IC Market Chia Coferece: Chia Semicoductor Idustry Associatio speech, Wuxi, March THE COFACE ECONOMIC PUBLICATIONS 5

6 They have i fact ot aticipated the shift i demad towards Emergig Asia. The bulk of ivestmets ad productio has shifted over to this part of the world. Chia is sustaiably established i the market as a producer: its market share i productio doubled betwee 2001 ad Today, emergig coutries that are less affected by the 2008 fiacial crisis ad that beefit from a attractive growth outlook ad relatively low productio costs, cotiue to attract direct ivestmets. At the same time, a ew growth cycle is emergig as electroics expad ito other persoal markets: the eviromet, health, or safety. These ew «high-ed» societal uses, with their ow characteristics i terms of structure ad cycle, ope up ew opportuities for idustries i developed markets. Iovatio has, of course, drive this extraordiary flexibility. B - INNOVATION HAS HAD A MAJOR IMPACT ON THE VALUE AND SUPPLY CHAINS If the bulk of past iovatio came from the Uited States, Europe, ad Japa, globalisatio has led to a ew kowledge orgaisatio ad greater kowledge mobility. Multiatioal firms (MNF) spearheaded this developmet ad as such, ecouraged the spread of GPNs (3). These have eabled the rise of Asia. They were followed by GINs (4), which have gathered mometum while chagig traditioal learig eviromets; because MNF saw i them a way to icrease their retur o ivestmet ad peetrate emergig markets to drive growth. It also had a impact o the supply chai. The electroics idustry supply chai ca iitially be broke dow ito 2 mai categories of players: electroic compoet maufacturers ad electroic equipmet suppliers (chart 2). CHART 2: Mai milestoes of the electroic value chai Commodities Electroic compoets Silico Semicoductors Ceramic Copper Alumiium Passive compoets Film Tatalum Ferrites Itercoects etc. Itercoexios Source: DECISION, étude sur la filière et les métiers de l électroique Board assembly ad electroic modules Equipmet suppliers Subcotractors Ï Ï ÏÏ Ï Services providers Maiteace ad repair Distributors All of these compoets ca the be segmeted ito 3 mai markets, each with their specific kow-how ad idustrial logic. Semi-coductors are at the heart of iovatio ad geerate the mai sales volumes. They were at the heart of the 20th cetury digital revolutio. The market has expaded by more tha 5% i 2013 to reach global reveues of more tha 315 billio of dollars. Itel cosolidates its world leadership for the past 22 years, with a 15.4% market share. The mometum of «memory» sales was at the oset of the rise of SK Hyix ad Micro Techology amog the first world leaders. Their turover icreased by more tha 30% ad 70%, respectively. This costat improvemet of micro-processors should mark a halt by I fact, accordig to Robert Colwell, former head of Itel s Petium Pro project, Moore s law statig that the capacity of a similar sized chip should double every 18 moths, should come to a ed i the ext few years. Will fial cosumers be prepared to pay more for their laptops? Tablets ad smartphoes will i fact oly offer mior improvemet (storage capacity, data trasfer speed, etc.) i their eyes. Meawhile, huge ivestmets, amoutig to billios of dollars, will be required to improve by 5% or 10% the chip s productivity. Will large groups, icludig Itel, cotiue to ivest if they caot pass o part of the costs to the fial cosumer? TABLE 1: Top 6 Semicoductor Vedors by Reveue, Worldwide, 2013 (millios of dollars) Rak Rak market Vedor Coutry reveue reveue growth (%) share (%) 1 1 Itel Uited States 49,089 48, Samsug Electroics South Korea 28,622 30, Qualcomm Uited States 13,177 17, SK Hyix South Korea 8,965 12, Micro Techology Uited States 6,917 11, Toshiba Japa 10,61 11, Source: Compaies reports, Garter Ic. (April 2014) (3) Global Productio Networks are defied by Sturgeo (2001) as a set of iterfirm relatioship that bid a group of firms ito a larger ecoomic uit (4) Global Iovatio Networks are collaboratios ad iteractios betwee differet firms ad orgaisatios producig ad exploitig ew kowledge i a global scale for purposes of fosterig specific iovative activities beyod geographic boudaries. THE COFACE ECONOMIC PUBLICATIONS 6

7 Passive compoets (trasistor, resistor, ad capacitor) ecompass a large pael of techology ad kow-how. I 2013, global reveues of this sub-sector stood at aroud 21.7 billio of dollars. Taiwa, the Uited States, Mailad Chia, South- East Asia, ad Japa are the mai productio cetres. Japa domiates with a market share of 52%, which is expected to rise further as a result of the depreciatio of the ye. By compariso, Chia, which cotrols oly 7% of the market, is essetially specialised i maufacturig low-ed products. The productio of passive compoets is largely automated, resultig i a limited productio area. May compaies, whether they are Japaese or America, prefer i fact to produce locally ad tur to Chia ad South-East Asia for low valueadded products. TABLE 2: Top 6 of leadig passive compoet producers worldwide by reveue (millio of dollars), 2013 Rak Compay Coutry 2013 reveue reveue growth (%) 1 Murata Japa 5,100 4, TDK Japa 4,356 4, TAIYO YUDEN Japa 1,910 2, SEMCO Uited States 1,685 1, AVX/KYOCERA Japa 1,414 1, Paasoic Japa 1,210 1, Sources: RIC Global ad Chia Passive Compoet Idustry Report Itercoectio compoets (coectors, prited circuits) are used to trasit electrical sigals ad to itercoect the other differet compoets. This electroics sub-sector is a iche idustry, with more tha 1,000 maufacturers across the world. May of these compaies are hyper specialised ad market leaders for their products. The presece of large groups should ot overshadow the existece of small compaies which, through their presece i a give area, market or type of product, ca offer the best turaroud times, a more advaced techology for a give applicatio, ad more competitive prices. I 2013, the sub-sector s turover amouted to 48.9 billio of dollars, up 2.7% vs Global sales icreased by 4% i I Asia-Pacific, sales grew by 5.8%. I 2012, the first te maufacturers of coectors, which cotrolled 59.8% of the market, had a strog global presece, a wide rage of techically advaced products likely to have a impact o sector competitiveess. The sector is also udergoig cosolidatio, as over 300 acquisitios sice the 1980s have bee idetified by the firm Bishop & Associates. TABLE 3: Top 6 coectors maufacturers, aual sales (millio of dollars), 2012 Rak Compay Coutry 2012 reveue reveue growth (%) 1 TE Coectivity Switzerlad 8,476,0 8,482,0 0.1 (headquarter) 2 Ampheol Uited States 3,676,2 4,015, Molex Ic Uited States 3,581,8 3,580,3 0 4 Foxco (Ho Hai) Taiwa 2,718,0 2,682, Delphi Coectio System Uited States 2,521,7 2,588, Yazaki Japa 2,176,0 2,278,0 4.7 Sources: Compaies reports, Bishop & Associates These differet compoets are the iputs for producig either itermediate products or fiished products (havig differet ed users). We should therefore cosider two differet types of products: Productio for mass markets requirig high productio volumes ad where ecoomies of scale are sought through ivestmet, while offerig global coverage ad very short time-to-market to satisfy demad (produce quickly ad i large quatities). So-called «idustrial» markets, where value-added comes from itegratio ad where productio facilities must adapt to smallad medium-scale rus, which require sales support. I the first case, the productio chai has gradually moved to coutries where productio costs are low (Chia, South Korea, etc.). This trasfer is particularly visible i labour-itesive segmets (such as assembly or semi-coductor testig), whereas semi-coductor maufacturig requires less labour. THE COFACE ECONOMIC PUBLICATIONS 7

8 The flyig geese paradigm (5) is a illustratio of movig up the global value-chai. Japa was the first coutry to demostrate this theory, which describes how its electroics idustry has moved upmarket. I the first stage, maufacturig low value-added products geerated low margis. Subsequetly, risig productio costs drove productio to move to lower cost coutries such as South Korea, Taiwa, Sigapore, ad Hog Kog. At the same time, Japa cotiued to move up the chai by maufacturig higher valueadded products. Whe the former coutries experieced i tur risig productio costs, productio was further trasferred to other places such as Thailad, the Philippies, Malaysia, or Chia. Curretly, icreases i Chiese costs could result i the productio of certai elemets to move back to Europe ad the Uited States. Competitio i the electroics sector is exacerbated by rapid techological chage, as well as by strog market resposiveess to rapid product obsolescece. Dieter Erst, a member of the East- West Ceter for research, defies iovatio i the electroics idustry as: «a capacity to combie lower costs, rapid market peetratio, ad product differetiatio through improved returs. This explais why iovatio i the electroics idustry is cumulative ad o-discreet» (6). If we add to this defiitio the idea of kowledge dispersio, the traditioal value-chai is threateed. This favours the implemetatio of vertical itegratio both i productio ad iovatio. C - INNOVATION IN THE MOVE TOWARDS SPECIALISATION: THE CASE OF CHINA Movig up the value chai is the motto of Asia ecoomies, particularly Chia. For istace, Chiese Premier Li Keqiag said i the CPC meetig i March 2014 that the coutry would focus o iovatio ad to move up the global value chai via upgradig its idustries (7). This has bee echoed by researchers, icludig those i academic istitutios ad iteratioal agecies. Accordig to Koopma, Zhi Wag ad Shag-Ji Wei (2013), value-added domestically i the Chiese exports accouted for less tha half the value of the coutry s processig exports i 2004 (8). I her speech at the 17 th Chia Iteratioal Fair for Ivestmet & Trade (CIFIT), Kari M. Fikelsto, vice presidet for Asia Pacific of the Iteratioal Fiace Corporatio, expressed that «Chia eeds to shift up the global value chai» (9). But what exactly does it mea? I order for us to get a sese of what it meas, we ca refer to Sta Shih s smilig curve. The chart below (chart 3) is a adaptatio of the smilig curve first itroduced by the ow-retired fouder of Acer. I a utshell, Sta Shih tried to illustrate the idea that value added to the fial product varies across differet steps i the product-makig process. Usig the value allocatio illustratio as below, much of the value is captured at the earlier ad later parts of productio process amely research & developmet (R&D) ad customer services while maufacturig ad assembly activities cotribute the least value-added to the product amog the differet activities alog the productio process. (5) Akamatsu s third flyig geese paradigm is a model for iteratioal divisio of labor i East Asia based o dyamic comparative advatage. The paradigm postulated that Asia atios will catch up with the West as a part of a regioal hierarchy where the productio of goods would cotiuously move from the more advaced coutries to the less advaced oes. (6) Dieter Erst s study: A ew geography of kowledge i the electroics idustry? Asia s role i Global Iovatio Networks, das Policy Studies 54, 2009, East West Ceter, Etats-Uis. (7) Xi Hua (March 2014) (8) Xi Hua Net (March 2014) (9) Kari M. Fikelsto s speech at the 17th Chia Iteratioal Fair for Ivestmet ad Trade (September 2013) (10) Lide, Dedrick ad Kraemer (Jauary 2009) (11) Xig ad Detert (December 2010) (12) Lide, Dedrick ad Kraemer (2009) CHART 3: Adaptatio of Sta Shih s smilig curve Valuedevelopmet Research & Developmet Desig Parts ad compoet Maufacturig Source: Coface, adaptatio of Sta Shih s smilig curve Delivery & logistics After-sales services Sales & marketig Productio phases The smiley curve above is illustrative of how the global productio etwork is operated. I academia, various studies have bee coducted to dissect the meaig of value-added. Particularly, productio of Apple s products, icludig the ipod study (Lide et al. 2009) (10), ad the iphoe study (Xig ad Detert, 2010) (11) amog the others are key examples of such studies. The commo groud of these products besides beig Apple products is that they are labeled «Made i Chia», ad they are cotributig tremedously to the Chiese exports figure usig the traditioal calculatio methods. Although these products are «made i Chia», most of the parts ad compoets are ot origially from this coutry. Ideed, as suggested by Xig ad Detert (2010), most of the major ad most costly parts ad compoets are imported ito Chia, where they were later assembled ito a fiished good, i.e. iphoe 3G, ad shipped from Chiese ports to various parts of the world, icludig the US. Udeiably, the assembly process itself is geeratig a lot of beefits to the Chiese ecoomy, most particularly via providig lots of lowskilled job opportuities. I the case of ipod s maufacturig process it did create demad of jobs partly due to the abudace of lowskilled labour i Chia (i.e. umber of job). Yet, as suggested by their study (Lide et al., 2009), eve though Chia represets 29.8% of ipod related jobs, wage eared is 2.2% of the total wages eared by relevat workforce (12). Such fidigs suggest that positive ifluece o Chia s participatio i ipod s value chai specializig i the maufacturig ad assembly processes may be overestimated from the macro perspective. TABLE 4: ipod related wages ad jobs by coutry Coutry Uited States 745,868,260 13,920 Chia 23,591,100 12,270 Philippies 13,380,000 4,750 Japa 102,380, Sigapore 16,115, South Korea 35,664,000 1,200 Thailad 2,355, Taiwa 9,000, Other 116,000,000 5,125 Total 1,064,354,310 41,170 Sources: Lide et al ipod-related wages (USD) ipod-related jobs THE COFACE ECONOMIC PUBLICATIONS 8

9 The uderstadig of value-added cocept is importat for us to uderstad what each coutry is really beefitig from the productio chai. I the case of Chia s participatio i the electroics space if fidigs from the studies of Apple s products are applied across the board the Chia s cotributio to the idustry ad its beefits from such idustry could be sigificatly lower tha what was reported i gross-value term. BUT THIS FLEXIBILITY GENERATES RISKS ARE THEY UNDER CONTROL? A - COMPONENT MANUFACTURERS UNDER PRESSURE Apple is oetheless a example that shows the weight of large groups i the value chai ad the resultig possibilities to dictate price terms for semi-coductors, cotrol the product road-map, ad obtai guaratees regardig delivery times. This weight is a geuie competitive advatage allowig Apple to offer high techology products at lower prices tha competitors. By itegratig software (13) ad hardware (14) compoets, Apple has completely removed soft ad hardware providers from the supply chai. It has demostrated that the value of a product does ot oly deped o the value of its compoets, but also o the way the differet parts work together. CHART 4: Estimated world evolutio of the relative market share of IT actors CHART 5: EBITDA Margis (i %) Asia small compoets maufacturers, reveue i the rage of USD 25 millios to USD 300 millios, (sample of 676 compaies) CHART 6: EBITDA Margis (i %) Apple et Samsug First quartile Source: CapitallQ, ANZ Media Third quartile Apple Samsug 0 Over-the-top Operators 199X 200X 201X Network providers Termial providers Semicoductors Sources: Michel Levy, Iovatio, Nouveaux Services et Modèles d'affaires das les Télécommuicatios Iovatio ca be foud amog players at either ed of the market, i.e. semi-coductors that offer more ad more complex products ad Over-The-Top (15) players (chart 4) that create ew offers (such as Google with Adroid). The substatial resultig beefits do ot trickle far eough dow the supply chai. This results i lower margis for compoet maufacturers, particularly medium-sized players with turover betwee 25 ad 30 millio of dollars (chart 5), whereas the margis of ew service users (Apple, Samsug with Adroid) are expadig (chart 6) Source: CapitallQ, ANZ The itroductio of ew products such as smartphoes, tablets, games, ew software ad olie services have further chaged the traditioal value chai. This part of the electroics idustry aimed at cosumers has allowed for the emergece of two major players: Apple ad Samsug. Together, they have geerated as much turover as all the other compaies i the sector put together (16). I 2012 for istace, Apple s turover icreased by 45%, that of Samsug gaied 22%. The «other remaiig compaies» iclude «The Next Four» (Paasoic, Soy, LG, ad Sharp) ad «Everybody Else». Their combied 2012 turover has falle by 7% ad their profits by 28%. While some compaies i this group are profitable (such as game maufacturers), others (audio compoet maufacturers) are sufferig from shrikig margis, regardless of their coutry of origi. (13) Refers to computer programmes (14) Refers to computer equipmet (15) Sofrecom (a subsidiary of Orage) defies Over the-tops or OTTs as holdig a strategic positio i a value chai. OTT providers use existig structures istalled by aother player to provide a service. (16) A Tale of Two Tiers, The 2014 Global Cosumer Electroics Outlook AlixParters. THE COFACE ECONOMIC PUBLICATIONS 9

10 CHART 7: Profitability ratio per coutry for IT compaies (%) 60% 50% CHART 8: Growth of idustrial sales value, electroic idustry (%) 70% 60% 50% 40% 30% 40% 30% 20% 20% 10% 10% 0% % Chia Hog Kog Japa South Korea Sigapore Taiwa Sources: CEIC, Coface CHART 9: Number of electroics eterprises i Chia ad margis (%) Sources: Datastream, Coface 7.0% 25,000 At the other ed of the chai, semi-coductor maufacturers suffer from the domiace of Apple ad Samsug. As the domiat buyers o this market with respective compoet purchases amoutig to 30.3 billio dollars for Apple ad 22.2 billio dollars for Samsug, they ca impose their coditios to their suppliers. 40% of Foxco s turover for istace depeds o Apple. I this situatio, Foxco aims to reduce this depedece by developig parterships (Mozilla) ad by ivestig i higher value-added products (robots, software developmet). As Chia accouts for more tha oe third of the world electroic productio, its compaies are particularly cocered by this pressure o costs ad margis. 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% ,000 15,000 10,000 5,000 0 Net profit margi Number of electroics eterprises B - WHY IS THE SECTOR BECOMING MORE RISKY IN CHINA? The rise of electroic sectors i Chia started i the 1980s, but accelerated i the 90s, roughly about a decade after Chia has re-egaged the global ecoomy. It did ot take log before the Chiese ecoomy has emerged as a mai idustry participat i the global platform, ad the spectacular growth cotiued to sustai util today. With Chia s accessio i the WTO as a catalyst, growth was particularly strog betwee years 1997 ad 2007, with a record compouded aual growth rate of 31.6%, before growth mometum was slowed by the global fiacial crisis. Idustrial sales value of the electroic idustry has reached RMB 9.4 trillio i 2013 comparig to the RMB 1.7 trillio i Low cost of o-tradable factors, highlighted by the abudace of lad ad low-skilled labour, were the mai driver of the success. Sources: CEIC, Coface CHART 10: Electroic equipmet productio growth rate (i %) per year Durig the course of expasio, the idustry did ot grow withi ay headwids, however. With low barrier to etry to participate i the market, more competitio comes ito the market ad margi squeeze was a result of the fierce competitio. As illustrated i the chart below, average et profit margi slid from over 6.5% i 2000 to 3.3% i 2008 amid the global fiacial crisis, while umber of electroic compaies grew 4.6 times durig the same period (chart 9) * 2015* 2016* 2017* Chia Asia Pacific Japa * Estimated Sources: Cabiet Décisio, World Electroic idustries (March 2014) THE COFACE ECONOMIC PUBLICATIONS 10

11 From the owards, Chiese electroics maufacturers, as well as other busiesses i Chia, were facig headwids both domestically ad iteratioally. Demad was weakeed, labour cost was o the rise, ad iput (e.g. commodity ad admiistrative) prices were risig rapidly. Remibi has also appreciated quite drastically agaist the USD, makig Chiese made products less pricecompetitive comparig to years ago. At the same time, compaies were facig tighteed credit facilities (i.e. heighteed iterest rate ad required reserve ratio) from the regular bakig system. These various factors combied have drive almost 6000 electroics compaies- represetig 28.3% of the firms i the idustry i out of busiess i With such developmet, it is oteworthy that the lesser competitio has i tur led to the otably higher profitability i recet years. As discussed above, risig labour cost ad RMB appreciate are two mai factors drivig busiesses out of the market i Pressure from these two factors remai, but has declied dramatically sice As we ca see from the chart below, growth of miimum wages has declied sigificatly i Shezhe area, a good proxy of labour cost for the electroics sector. Moreover, Coface estimates a moderate 2.5% omial exchage rate appreciatio of the RMB agaist the USD, amidst recoverig demad from the advaced ecoomies. With such developmet, pressure from risig labour cost ad currecy appreciate should be see as margial for CHART 11: Shezhe miimum wages CHART 12: Average overdue days i household electric/electroic appliaces sector i the past 3 years. 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Less tha 30 days days days days Source: Coface Chia Paymet Survey Report days More tha 150 days CHART 13: Average overdue days i idustrial machiery ad electroics sector i the past 3 years. 30% RMB 1,800 40% 25% RMB 1,600 35% % RMB 1,400 30% 25% % RMB 1,200 20% 10% RMB 1,000 15% 10% 15% RMB 800 5% 0% Sources: CEIC, Coface Shezhe miimum wages level Shezhe miimum wage chage (LHS) RMB 600 Noetheless, stricter evirometal stadard ad affiliated measures would become the biggest headwids for electroic idustry participats i Govermet s stricter policy stace o pollutig idustries icludig the removal of subsidies ad the govermet s itetio to itroduce eviromet protectio tariff i 2014 (17) ad the proper executio of these policies, will hurt idustry participats that have yet followed the existig evirometal stadards. Addig to the existig worries about the sector is the worseig paymet behavior. Accordig to Coface s recet publicatio o corporate paymet experiece i Chia, there are sigs of deterioratio i the electroic sectors, icludig household electroics as well as idustrial electroics ad machiery sectors (18). (17) ifeg News (March 2014) (18) Coface (February 2014) (19) McKisey (autum 2011) 0% Less tha 30 days days days days Source: Coface Chia Paymet Survey Report jours More tha 150 days I the aforemetioed report, it was idicated that more compaies i these sectors i Chia have experieced log overdue overdue that has ot bee settled after 180 days sice expiry date of its agreed credit-term. It is Coface s experiece that 80% of these overdue paymets would ot be paid after all ad thus ivestors ad busiess parters have to watch out for these customers. Particularly, it was metioed i the report that computer machie maufactures are of higher risk usig 2013 data, as the debt-toequity ratio remaied at high level (i.e. 357%), while profitability was razor-thi (i.e. et margi at 2.4%). These idicators are poitig to potetial o-paymet or deferred behavior of customers i the sector. Accordig to a report by McKisey (2011), while producig 33% of the total semicoductors i the world, reveue comig from Chiese semicoductor desig ad selectio activities i major compaies cotributed lower tha 4% of total market share (19). THE COFACE ECONOMIC PUBLICATIONS 11

12 Nevertheless, such tred is set to chage or perhaps, the chage is already happeig. Accordig to Paul Satabarbara (2011), the techology itesity of Chiese exports has chaged drastically betwee 1995 ad 2007 (20). It is the authors estimate based o COMEXT data that high-tech, medium-tech, ad lowtech export weighed 33%, 33% ad 34% i 2007 comparig to 7%, 24%, ad 69% i 1995 respectively. The cotiuatio of such tred is i-lie with the policy-toe set by the Chiese Premier, «climb up the value-chai». C - WHEN COMPETITION FROM MAINLAND CHINA WEIGHS ON OTHER ASIAN PLAYERS FOCUS o the paymet experiece of Coface i Asia Christophe Souquet, Coface Group Risk Uderwritig Departmet If our paymet experiece i Asia is geerally satisfactory, it is worth differetiatig it by coutry: Japa is probably the coutry with the lowest level of paymet failures i the regio. This is partly due to the Japaese corporate culture i which meetig commitmets to creditors is essetial, particularly if they are also Japaese. Our experiece i the electroics/it sector is good, despite the problems ecoutered i the last few years by several large Japaese groups i the sector (Sharp, Paasoic, Soy, Olympus ). Their margis o mass market cosumer goods (B to C) collapsed due to South Korea ad Chiese competitio, ad they are redirectig their efforts towards higher valueadded busiesses, maily i idustrial computig (automobile, medical, etc.). I South Korea, several system itegrators recetly faced the difficulties of their paret compay (it was the case for STX or Togyag). Belogig to a large group is therefore ot ecessarily a safety guaratee for creditors. South Korea PC distributors are also udermied by competitio from olie stores ad discouters. Fially, the move abroad of some of Samsug s productio cetres led to some difficulties for some South Korea suppliers i Depedig too much o a large group ca therefore be a liability i some cases. I Hog-Kog ad Taiwa: Our paymet experiece is rather good. However, the characteristics of these two territories are very differet. Hog Kog compaies i the IT/electroics sector are for the most part small, family-owed busiesses with very limited fiacial trasparecy (ot required to publish their fiacial statemets). Paymet icidets occur maily with local distributors (very strog competitio betwee them, price ad margi wars). Hog Kog s high depedece o Chia (its primary market) makes the Hog Kog ecoomy vulerable to the ecoomic slowdow of its powerful eighbour. This depedece has icreased ow that all of Hog Kog s idustry has moved to Chia. It is particularly true of the IT/electroics sector (maily the Guagdog provice). Hog Kog compaies ow face tremedous competitio from their Chiese couterparts. It is also with Chia that Taiwaese compaies face icreasig problems. Taiwa s share of world productio is still 75% for PCs, 25% for semi-coductors, ad 20% for mobile phoes. It is icreasigly tied to its large Chiese eighbour, either through the locatio i Chia of its productio cetres or through exports ito the mailad (which will be either re-exported towards the USA ad the Europea Uio, or sold o the Chiese market). Taiwaese compaies are larger tha their Hog Kog couterparts ad located higher up the productio chai. The most famous example is Foxco (Ho Hai group), which is a supplier to most smartphoe maufacturers. These compaies are highly depedet o the activity level of their customers, who are themselves heavily impacted by both domestic (Chia) ad foreig (Uited States, Europe, ad icreasigly Asia) demad. Our paymet experiece i Taiwa remais rather good but we observe however late paymets o sales by Taiwaese compaies to their Chiese couterparts. Mailad Chia As highlighted i the Coface 2013 survey of the paymet behaviour of local compaies, we are seeig a legtheig of paymet terms i this coutry. 82% of the Chiese compaies surveyed by Coface have experieced late paymets last year. The IT/electroics sector features amog the hardest hit. It is maily composed of private compaies. These compaies suffer from the ecoomic slowdow see i Chia ad from the tighteig of bak credit towards the private sector, which cotributes to the developmet of alterative fiacig, maily iter-compay fiacig. «Shadow bakig» is resposible for the failure of may compaies (maily small, family-owed) icapable of payig back loas grated at excessively high iterest rates. We estimate i fact that debt i the private Chiese sector has goe from 129% of GDP i 2008 to 200% today. Aother importat problem i Chia is the poor quality of iformatio (difficult access to the fiacial statemets of Chiese compaies, opaque accoutig, lack of cetralised data o corporate paymet icidets, etc.), as well as a difficult corporate eviromet for creditors (amely i terms of legal protectio). The icreasig importace of Iteret sales i Chia (Alibaba, Tecet, etc.) has also udermied the traditioal distributio of cosumer IT/electroics, forcig the leaders Suig ad Gome to revise their commercial approach ad to develop their ow e-commerce platforms. I South-East Asia, we differetiate betwee saturated markets (Sigapore), mature markets (Thailad, Malaysia) ad emergig markets (Idoesia, Vietam, Philippies, Idia). Sigapore The Sigaporea market is saturated. The city-state ca o loger compete with its eighbours o low cost products. Vietamese competitio is, i this respect, a good example. Sigapore is therefore focused o advaced techology ad high value-added products, with govermet support for ivestmet i techology ad R&D (creatio of clusters for istace). Here also, it s very high depedece o exports makes the Sigaporea ecoomy very sesitive to a slowdow i global demad. The paymet experiece i Sigapore is rather good. This coutry probably offers the most trasparet busiess eviromet i all of Asia to ivestors ad creditors. (20) Pula et Satabárbara (mars 2011) THE COFACE ECONOMIC PUBLICATIONS 12

13 Malaysia Malaysia has bee movig up the value chai for the last te years. May foreig groups (Uited States, Europe, Japa, Sigapore) have established themselves locally, beefitig from tax icetives o ivestmet. Our paymet experiece is adequate, although it is marred by rather frequet trade disputes. Thailad It is oe of the mai ivestmet cetres of Asia electroic IT groups (icludig Japaese groups based there for several decades). Specialised i electroic compoets, the Thai idustry caters to diverse markets such as automobiles, telecoms, IT, etc. It beefits from a premium geographic locatio ad a qualified work force. Frequet political turmoil ad atural disasters (floods) have ot yet sigificatly impacted our paymet experiece, eve though they erode foreig ivestors cofidece i this coutry. The mai paymet failures occur with cosumer product distributors (cosumer IT, televisios, cameras facig icreased competitio from Smartphoes) because of fierce competitio o prices ad margis, ad ofte high debt levels. They also put a lot of pressure o their suppliers to sell products (while domestic demad teds to declie). Fially, the itroductio of ew high-tech products udermies the sale of products such as cameras ad GPS (that compete with Smartphoes) or PC/laptops (replaced by tablets). It is ot rare to see Thai corporate leaders disappear overight, overwhelmed by debts ad uable to meet their paymets. Boosted by very strog iteral demad ad the emergece of a middle class, Idoesia, the Philippies, ad Vietam are experiecig a IT/electroics/telecom boom. The peetratio rate of high-tech products i these coutries is still low, eve though it is growig very rapidly. It is the case for mobile telephoy for istace, where a group like Samsug is very aggressive. Our paymet experiece is for the time beig rather adequate, particularly i the private sector. However, the lack of corporate fiacial trasparecy ad a difficult busiess eviromet (corruptio) make it difficult to assess credit risk. Additioally, these markets are very fragmeted, highly competitive (hece ofte sufferig from very weak margis), ad cosolidatio is uavoidable i the moths ad years to come. Fially, local compaies still have very limited access to bak fiacig, which sigificatly hampers their capacity to develop. Beyod the importace of corporate strategies, political ad regulatory chages have modified the eviromet electroics compaies operate i. Govermets are icreasigly aware that attractig compaies i this field geerates qualified jobs. The Iformatio Techology Agreemet (ITA, siged i 1996), which allows for reduced tariff barriers, has drive the sector s globalisatio. The market share of segmets related to ICTs represets two thirds of the world ecoomy but they do ot drive the most growth. O-board electroics i fact (automobile ad aeroautics) will be the key growth driver. The challege will be to meet the growig demad of emergig cosumers who wat to cosume: the growth of the auto market will cotiue as a result of the risig purchasig power of Asia cosumers. The ext geeratio of plaes reachig the market will be eve more highly equipped with electroics. Electroics for the medical sector are gatherig positive mometum: the agig populatio of developed markets, the miiaturisatio of devices (scaers, mobile termials). TABLE 5: Electroic equipmet productio growth rate per ed-sectors CAGR Aerospatial, defese ad security 1.7% 2.6% 3.0% 5.4% 5.0% 5.5% 4.3% Audio-Video -8.7% -1.0% -4.3% -0.2% 4.9% 0.6% -2.0% Automotive 4.9% 5.0% 6.1% 7.0% 8.2% 8.9% 7.0% Data processig 2,4% -0,3% 3,2% 1,1% 1,2% 0,5% 1.1% Home appliaces 6.4% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Idustrial et medical 2.6% 3.5% 7.8% 6.9% 7.2% 7.3% 6.5% Telecoms 5.2% 3.5% 2.1% 3.1% 3.7% 1.8% 2.8% World 2.2% 2.2% 3.2% 3.6% 3.5% 3.6% 3.2% Sources: Cabiet DECISION, World Electroic idustries (March 2014) THE COFACE ECONOMIC PUBLICATIONS 13

14 Questios to Dr. Michel Levy Telecom Paris-Tech (1975) Michel Levy teaches the semiar o «Iovatio i Telecommuicatios» at Télécom Paris-Tech. He is a coach with the Paris-Tech Icubator ad member of the Board of Directors of the operator Hub Oe. Do you thik that we are eterig a ew stage i iovatio, that is to say that we have moved from a period whe techological iovatios directed the market to oe where it is iovatio i terms of ew services that directs the market ad cosequetly the resultig (hard & soft) techological iovatios? Absolutely: let's take the example of Smartphoes: what the user otices is the service that he receives. Ad that s where the mai iovatio lies. Ideed, the implemetatio of these services, for example global positioig, search egies, etc., requires techological iovatios, such as a icrease i the speed available i mobile phoe etworks ad the applicatio servers that stock ad maage the iformatio. Without such services, these techological iovatios, which ofte precede them, would ot ecessarily have as much relevace. Do you thik that we are movig towards products with higher added value ad that this will result i a redistributio of the major players i the sector? Yes, certaily. The iformatio ad commuicatio techologies sector ca be segmeted ito five categories. While i the 1990s, the domiat players were operators ad etwork services providers, the latter have see their ifluece ad therefore their relative market share reduced over the period i favour of ew players such as the Over the- Tops (21) which hold aroud oe third of the market, ad are geerators of added value ad ofte have sizeable cash flow. Amog them are Google, Microsoft ad Apple. O the opposite side, we fid maufacturers of semi-coductors who through their more complex offerig, have see their relative market share icrease ad hold aroud a fifth of the latter. Network equipmet suppliers which have maitaied their positio o the market are domiated by several large players, such as Apple ad Samsug, ad are ofte followed by diversifyig etwork suppliers such as Huawei. Compoet maufacturers such as Samsug, Itel ad TSM accout for more tha 50% of ivestmet betwee them i productio capacity i Will they have the meas to fiace this medium- ad log-term ivestmet race? Are alliaces possible? Yes, compoet maufacturers cotiue to grow. My persoal view: 20 years ago, they tested their specificatios at system itegrators, which focused o iovatio ad specifyig their eeds. Now compoet maufacturers icreasigly itegrate complex fuctios, such as a Modem ADSL ad a femto base statio, ad offer modules usig their compoets. May ca be programmed by their customers, thus icreasig the added value of suppliers. Regardig Chia's chage of course, illustrated by ZTE dedicatig over 10% of its aual budget to R&D ad more tha 30% of its workforce to basic research, is there a ew redistributio of the roles of the differet coutries i the Asia zoe, with redeploymet, for cosumer goods, towards low-wage coutries such as Vietam ad Idoesia? Regardig Asia, it has for a log time bee claimed that iovatio is i South Korea, Japa ad Sigapore, with Chia's role beig to maufacture. This is less ad less the case; high-tech Chiese compaies, Chiese start-ups are ow at the forefrot. Takig for example Tecet, based i Shezhe, offerig the world a equivalet to Whatsapp amed WeChat. Ad it is the same i other high-tech areas, such as medical, M2M, etc. Asia is usually associated with the electroics idustry, what is the place of Europe i the iovatio race? As a coach of the Paris Tech Icubator, what are the major treds i iovatio? Europe plays a major role i the iovatio field, through traiig of its researchers ad egieers, who are recogised worldwide. Oe problem is the brai drai to the Uited States. A example is a recet deploymet of MOOCs (Massive Ope Olie Courses) that idetifies the best talet i the world, ad offers them attractive scholarships. So we must be careful. Major treds are mobile/smartphoe apps, Cloud architectures, ad Machie-to-Machie (M2M)/Iteret of Thigs, Big Data, ad robotics/artificial itelligece. Ad all compoets must be liked, such as remotely maaged commuicatig objects from servers that store ad process iformatio through Cloud-type architecture ad therefore more efficiet telecommuicatios etworks (3G-4G). Oe of the iovatio catalysts is the permaet coectio of idividuals ad objects. Costatly ew applicatios ad techological iovatios to eable them, uceasig progress i the itegratio of compoets to develop embedded ad commuicatig electroics. This is what we fid i the ParisTech Icubator, ad more geerally i the ecosystem which icludes egieerig colleges/uiversities, icubators ad idustrial parters that ca trasced the iovatio of a start-up i a idustry with maufacturig methods, cost optimisatios, etc. CONSOLIDATION IS ON ITS WAY Iteret players (Over -the-top) Operators (telecoms historicals ad alteratives) Network services providers Horizotal cosolidatio Network equipmet suppliers Semicoductors maufacturers Vertical cosolidatio Source: Michel Lévy, Iovatio, Nouveaux Services et modèles d'affaires das les télécommuicatios (21) Sofrecom (a subsidiary of Orage) defies Over the-tops or OTTs as holdig a strategic positio i a value chai. OTT providers use existig structures istalled by aother player to provide a service. THE COFACE ECONOMIC PUBLICATIONS 14

15 CONCLUSION The Asia players of the electroics idustry were very profitable up util the years 2000 because their maufacturig was essetially aimed at low value-added products. As they move up the value chai, medium-sized players are reportig slower turover growth, particularly compared to sector majors, ad their margis are egatively affected. As such, they suffer from the market power of the very large players. They must i fact cotiue the process of movig up the value chai ad pursue their efforts i research ad developmet. This eed to ivest massively combied with slower growth keeps margis uder pressure i the short term. Medium-sized players also suffer from lower growth prospects i the mai advaced ecoomies ad particularly i Chia. To emerge from this bad patch, the Asia electroics idustry must reivet itself. The regio ca rely o its may assets to bouce back. The importace give to iovatio i the face of icreasigly rapid product obsolescece, their capacity to adapt to versatile cosumers, ad the fact that they have leared to bridge the gap betwee them ad the large groups, should eable these medium-sized compaies to remai amog the frot ruers. COFACE SA 1, place Costes et Bellote Bois-Colombes Frace