Industry Analysis - Consumer Electronics - Research Paper Example

 Table of Contents 1 Executive Summary 4 2 Consumer Electronics Industry: An Introduction 4 2.1 Consumer Electronics (CE) Value Chain 5 3 Market Overview 6 3.1 Market Size and Growth 6 3.2 Market Share – Geography wise 6 3.3 Market Share – Segment wise 7 3.4 Key Players 7 3.5 Key Drivers of Growth 8 3.6 Key Issues and Challenges 9 4 Channel Analysis 10 5 Market Environment: Function of Product Life Cycle 12 12 6 PESTEL Analysis 13 6.1 Political Factors 13 6.1.1 CEA and the Political Action Committee 13 6.2 Economic Factors 13 6.3 Social Factors 14 6.4 Technological Factors 14 6.5 Environmental Factors 14 6.6 Legal Factors 15 7 Porter’s Five Forces Analysis 15 7.1 Threat of New Entrants (Low) 15 7.2 Bargaining Power of Buyers (High) 16 7.3 Bargaining Power of Suppliers (Low) 16 7.4 Intensity of Competitive Rivalry (High) 16 7.5 Threat of Substitute Products or Services (Low) 17 8 Works Cited 17 1 Executive Summary “Everything that can be invented has been invented.” stated Charles H. Duell, US Commissioner of Patents, in 1899 (Quotations Page, 2005). Duell was clearly off-mark considering the amount of innovative technologies has surfaced primarily in the Consumer Electronics Industry. The rapidly changing landscape of the industry was hard hit by the economic crisis in 2008-10, seeing volume and value sales drop for the first time since 2002. Other trends in this industry include emergence and rapid growth of technology convergence such as smart phones, Blue-Ray 2.0 video players and multimedia content delivery. This report analyses the consumer electronics industry in detail, studying both internal and external factors and complexities driving the market. 2 Consumer Electronics Industry: An Introduction Consumer electronics refers to a device that contains an electronic circuit board and is intended for everyday use by individuals. The umbrella of consumer electronics includes televisions, cameras, digital cameras, PDAs, calculators, DVDs, audio devices, headphones, camcorders and many other home and business products. Entertainment, information and communication are the main fields of application of these products. Since the term “consumer electronics” encompasses a diverse range of products from home theatre systems to cellular phones to personal computers, it is important to further classify the industry into mutually exclusive segments, which are: 1. Computers and Peripherals: This segment includes desktops, laptops, and all other peripherals such as optical and magnetic storage, monitors and keyboards. 2. In-Home Consumer Electronics: In-home consumer electronics segments include home audio and cinema products, televisions and projectors and video players. 3. In-Car Entertainment: This segment includes in-car media players, in-car navigation system, In-car speakers and other in-car entertainment. 4. Portable Consumer Electronics: Portable consumer electronics sub-segment includes cameras, camcorders, portable media players and mobile phones (wireless telephone handsets only). Since the latitude of this industry is very wide with no standard boundaries of the industry, home electrical appliances such as refrigerators, washing machines, dishwashers, air conditioners etc. are not considered consumer electronics in this report. 2.1 Consumer Electronics (CE) Value Chain There are different business models under which consumer electronics industries operate. Based on these business models, the value chain for the sector can change. Consumer electronics engage in OEM (Original Equipment Manufacturers), ODM (Original Design Manufacturers), OBM (Original Brand Manufacturers) or a combination of all. Many companies concentrate on R&D in their home country and place their manufacturing activities in other parts of the world (FHKI, 2010). Following would be a generic value chain for the CE industry. Most global companies such as Apple, Sony etc. design, produce and market their products on their own. 3 Market Overview This part of the report will analyze the market trends for the CE industry. 3.1 Market Size and Growth According to EuroMonitor’s report on Global consumer electronics, the total value of global CE industry in 2008 was USD 739 billion in 2008 with a CAGR of 14.7% (Euromonitor International, 2009). The profit margins in this market range between 25-40% depending upon where you stand in the value chain with lesser profit margins in supply base (USA Today, 2003) and can be as high as 50% for highly innovative products such as iPad (PC World, 2010). Compared to other industries, it has a medium to high profitability index. Figures Source: Euromonitor Industry Report, 2009 3.2 Market Share – Geography wise Asia Pacific is the highest grossing geographic region with value sales of $232 Bn in 2008 and a good CAGR of 15%, followed by Western Europe sales of $200Bn and CAGR of 13%. North America has a total market value of $147.3Bn with 8% CAGR, majority of sales coming from US. The market share of other regions in global consumer electronics industry is Latin America: $64.5bn (15%CAGR), Eastern Europe: $46bn (25% CAGR), Australiasia: $14Bn(10%CAGR) and Middle East and Africa: $34.8Bn (13.6% CAGR). 3.3 Market Share – Segment wise The following figures depict the market shares of the industry with respect to segments. As you would notice, the biggest and most profitable segment is that or Portable consumer electronics (47% MS), followed by In-home consumer electronics (42%MS). In-car consumer electronics is the fastest growing segment of the industry. Figures Source: Euromonitor Industry Report, 2009 3.4 Key Players The competitive landscape in this industry depends upon which segment and which part of the value chain are you engaged in. The competition and key players in each segment are discussed below: (1) In-home Consumer Electronics: As you can observe from the market share breakdown below, the In-home consumer electronics sub-segment is highly fragmented sector with the top player (Hewlett- Packard) controlling just 12% of the total market. The top 5 players in this market are HP, Sony, Samsung, Logtech and Panasonic. Other top brands include Sharp, Toshiba, Lenovo, Canon, Pioneer, Acer, Lexmark, Fujitsu, Apple, Hitachi, Bose and Daewoo. Due to heavy competition, the profitability of this segment is low. (2) Portable Consumer Electronics: Competition in portable consumer electronics is not as intense as In-home CE but it still has a number of players in the sector. Nokia is the segment leader, controlling 15% of the total market, largely because of its dominance in the mobile phone sales. The top 10 players in this segment are Nokia, Motorola, Samsung, Sony, LG, Apple, Panasonic, HP, Canon and Sony Ericsson. (3) In-Car Consumer Electronics: Pioneer Corp is the global market leader in the in-car consumer electronics due to increased sales in China, Russia and South Korea followed by Sony, Alpine Electronics and Panasonic. (4) Computers and Peripherals: Computers is also a highly fragmented segment with HP leading the bandwagon with just 9.4% of market share. The other players in Top 10 bracket include Dell (8.9%), Lenovo (3.3%), Toshiba (2.5%), Apple (1.8%), Sony (1.6%), Fujistu (1.6%), Compaq (1.3%), Samsung (1%) and ASUSTeK (0.9%). s 3.5 Key Drivers of Growth The lifecycle of the products in this industry is very short due to constant advances in technology, consumer behavior and industry environment. Following the key growth drivers for the industry: (1) Innovation: Technological advances and innovation mostly drive Growth in CE industry. As more and different types of innovations such as 3D, HD, 3G etc hit the market; users are presented with new products that increase their level of satisfaction. Since this industry is driven by innovation, the product life cycles are also very short and tend to be obsolete in less than 5 years. (2) Economic environment: Since many of the products of consumer electronics industry cater to entertainment, luxury or an accessory, the sales of these products highly depend on the spending power of the customer. Economic crisis such as in 2008-2010 negatively affected the industry. (3) Technology convergence: Product innovation is closely followed by the trend of Technological convergence such as smart phones, interactive television etc that converge two or more technologies to enhance the experience of the consumer. (4) Specialist retailers: Major companies such as apple, sony etc are now also moving into creating specialist retail stores that exclusively sell their products and hence building customer loyalty and scope for added value services. (5) Consumer demand: Consumer demand is another key growth driver for CE, thereby pushing global companies to focus on emerging markets such as China and India. 3.6 Key Issues and Challenges Some of the key issues and challenges of competing in this sector are: (1) Constant or Destructive Innovation (2) Economic crisis (3) Aggressive competition – constant comparison on price, product features, relative price/performance, product quality and reliability, design innovation, marketing and distribution capability, availability of software and peripherals, service and support, and corporate reputation. (4) Seasonal demand 4 Channel Analysis Apart from Innovation, managing sales channels in a key factor that affects the profitability of consumer electronics companies. Sales channels management drives the CE manufacturers to know which channel is most valuable for their supply chain (IBM, 2006), fosters relationships with large retailers and distributors, define strategies to prevent channel conflicts and finally create channels that add to their brand value and revenues. As seen from the figure on revenue contribution by channel, OEM stores and online shops are the fastest growing retail channels for CE products. Following are channel analysis for different geographies and markets: (1) Western Europe: Hypermarkets and durable goods retailers remains popular in the higher end of the market while grocery retailers position themselves in the lower and middle tiers of the sector. (2) Eastern Europe: Hypermarkets and supermarkets are the prevalent distribution channels in Eastern Europe, while specialist shops are preferred in Russia. (3) North America: Best Buy, Circuit City and Wal-mart are big players in CE retail sector along with growing OEM channels such as Apple stores. (4) Latin America: Popularity of durable goods retailers and branded chain stores drive CE products sales. (5) Asia: Specialist stores such as Gome and Suning in China are major players in the Asian market. Online retailing is less than other developed markets but is growing at a fast pace. 5 Market Environment: Function of Product Life Cycle The industry environment is influenced by the extent of its competition, stage of its maturity, and its exposure to global competition. The market or industry environment is in turn related to the stage of product in its life cycle, whether it is introduced, growing, matured or declining. Likewise, different industries can be classified as emerging, fragmented, transitional, declining and global (Cravens, 2009). Since, consumer electronics industry falls in a big range of segments and products, it is natural that each product would have its unique product life cycle, closely related to the innovative component of the product. Hence, this industry also falls into not just one but also a number of different market environments based on segment, product and geography. For example, Transitional Industry: i.e. shifting from rapid growth to maturity such as iPad and smart phones. Fragmented Industry: i.e. no company has a strong position in the market such as in PC market. Emerging Industry: i.e new technology driven industries such HD or 3D television market. Declining Industry: i.e. fading away market such as in CDs or Walkman. 6 PESTEL Analysis PESTEL Analysis is conducted to understand and study the macro-economic environment of the industry in order to gain useful insights. Following points discuss the various “outside” parameters that have influenced the ecosystem of consumer electronics industry: 6.1 Political Factors Political leadership, geopolitical tensions, regulations are different ways or reasons that influence the consumer electronics companies. Due to geo-political reasons and strong data security measures of some governments can cause damage to global CE companies. Cases such as threat of banning blackberries in India due to security risks (BBC News, 2010) almost caused a loss of $2Bn to RIM (Research in Motion, manufacturer of Blackberry) in the emerging market. Other political factors include government interventions based on anti-competitive, anti-trust and compliance laws. 6.1.1 CEA and the Political Action Committee Consumer Electronics Association is a professional organization of more than 200 CE companies as its members. This industrial association (CEA, 2011) was build to (1) conduct market research about the industry (2) Mobilize networking amongst the industry professionals (3) Advocate for policies in favor of the industry practices (4) Provide Accredited training programs on CE and (5) Encourage member-to-member promotional activities. CEA's Political Action Committee (CEAPAC) protects the interests of CE organizations while engaging with the government. 6.2 Economic Factors CE Industry’s operations and performance depend significantly on worldwide economic conditions as customers (individuals or organizations) postpone their spending (to buy CE goods) in response to tighter credit, unemployment and negative financial news. Other economic factors affecting the industry are increases in fuel or energy costs, conditions in real estate and mortgage markets and access to credit 6.3 Social Factors Social factors such as education, income level, preferences, and other cultural factors influence the customer behavior and hence the demand of CE products. The education and income levels particularly affect the perception of a particular brand. For example, Apple tends to add a premium on its price because of its brand image of higher quality and a high-end product. Hence, it attracts customers with higher income levels and know-how about their products. 6.4 Technological Factors Consumer electronics industry thrives on technology and innovation. Technological advances can be used as competitive advantages by companies or can virtually disrupt an organization’s business model (film cameras). Technological advances also affect in reducing the costs of production of CE products and thereby reducing their prices. As the product life advances, the price would fall. 6.5 Environmental Factors Environment is another important influential factor in this industry that is growing its relevance day by day. Environmental issues confront all areas of CE industry, ranging from energy consumption to disposal of CE products. In an estimate, the CE industry spends $32Bn ($3Bn annual costs) to maintain compliance with environmental regulations in EU (CEA, 2008). 6.6 Legal Factors From a legal standpoint, consumer protection laws, antitrust laws, intellectual property laws and environmental laws affect the performance and operations of a CE Company. Data security litigations have pushed CE manufacturers to comply with the laws of that particular market. 7 Porter’s Five Forces Analysis The above figure succinctly describes the industry environment of Consumer electronics with respect to Porter’s five forces. The scale used from 0 to 5 indicates if the factor has low or high influence respectively. Following is the descriptive analysis of Porter’s five forces on CE industry: 7.1 Threat of New Entrants (Low) CE Industry clearly has low barriers of entry as shown by the highly fragmented market share charts of the different segments where the top 5 (and in some cases 10) players in the market had less than 30% of overall business. Low barriers to entry are attributed to low product differentiation, low capital requirements, less switching costs, ease in technological know-how and innovation, economies of scale production and liberal government policies. 7.2 Bargaining Power of Buyers (High) The bargaining power of buyers in this industry is high because of abundance of suppliers of raw materials and supply base, undifferentiated products from the suppliers, presence of online distribution outlets leading to more negotiation power to the buyers. However, buyers can face switching costs when switching suppliers. Often buyers are price sensitive yet demand high quality. 7.3 Bargaining Power of Suppliers (Low) CE industry provides relatively low bargaining power to suppliers since most of the times the buyers are big global companies with standard and state-of-art supply chain management tools, hence not giving much scope for negotiations for the suppliers. Also, many OEMs have integrated their supply chain vertically in-order to strengthen their bargaining power. 7.4 Intensity of Competitive Rivalry (High) Almost all segments of the industry face intense competition with over 20 players in each category. The competition is intense primarily because of low barriers to entry, low customer loyalty, short-life of products, lack of differentiation and low switching costs, ease in imitation of technology, high market demand for these products and high exit barriers. 7.5 Threat of Substitute Products or Services (Low) Products and segments of CE Industry face relatively low threat of substitute products and services. Owing to the high presence of innovation and constant changes in technology, there are few substitutes of these products outside the industry and if any, they are either obsolete or unpopular. For example paper maps for GPS navigation systems in cars or film cameras for digital cameras. 8 Works Cited USA Today. (2003, September 25). Dell to dive into consumer electronics market. Retrieved April 23, 2011, from USA Today: http://www.usatoday.com/money/industries/technology/2003-09-25-dell-cover_x.htm BBC News. (2010, August 17). India sets Blackberry monitoring deadline. Retrieved April 24, 2011, from BBC News : http://www.bbc.co.uk/news/technology-10998549 CEA. (2011, April 24). CEA Initiatives. Retrieved April 24, 2011, from CEA: http://www.ce.org/AboutCEA/CEAInitiatives/3495.asp CEA. (2008). GoinG Green Globally: How Global Ce Companies prepare for Government intervention in reCyClinG, reduCtion and reuse . Consumer Electronics Association. Cravens, D. W. (2009). Strategic Marketing (8th Edition ed.). New York: Tata McGraw-Hill. Euromonitor International. (2009). Global Consumer Electronics: Trends, Development and Insights. Euromonitor International. FHKI. (2010). Industry Situation Report CONSUMER ELECTRONICS. Trade and Industry Development. Kowloon: Federation of Hong Kong Industries. IBM. (2006). Not Business as usual: Changing channels in consumer electronics. New York: IBM Institute for Business Value. Quotations Page. (2005, August 26). Famous Misquotes. Retrieved April 23, 2011, from Quotations Page: http://www.quotationspage.com/weblog/2005-08-26-239/ PC World. (2010, January 31). Apple's iPad Profit: Breaking it Down. Retrieved April 20, 2011, from PC World: http://www.pcworld.com/article/188196/apples_ipad_profit_breaking_it_down.html Read More