How to become a player in the Electronics and IT Market

Hello everyone, my name is Artem. I'm a CEO of the company "Deep Tech Partners". We have been providing consulting for deep tech projects and companies wich want to enter to deep tech market.

The purpose of this article is to familiarize the reader with the current situation in the global hardware development and production market and the opportunities available for IT companies aiming for a full-cycle services business model or those planning to create their own hardware product. The material will also be useful for anyone involved in making decisions about the company's development strategy and investments in new directions.

I will operate with a minimal amount of numbers and specialized terms to describe global market trends, their causes, potential development scenarios, and associated risks and opportunities. I will also provide examples of companies that have transformed during the current crisis, offering insights to readers on how to develop their own businesses.

Just like before.

Let's start with what semiconductors are and why there is so much hype around them. Less than 100 years have passed since the invention of the first transistor, but components based on this technology, such as microprocessors and LEDs, have firmly entered our daily lives in the form of gadgets.

What can we say when even modern light bulbs are already LED, gradually replacing incandescent lamps. It's that simple: everything that runs on electricity, especially if it has the word "smart" in its name, contains electronic components.

The global market is divided into two main segments: one consists of entities that design components and innovate new technologies and gadgets (developed countries like the USA, Great Britain, Apple, Cisco, Intel, etc.), and the other comprises those that produce components and assemble gadgets using local resources (China, Taiwan, and companies like TSMC, Foxconn, Jabil).

This is how the world industry historically developed before the pandemic: some companies design products and outsource production to Asia, while others extract minerals and offer outsourced services.

Donald Trump, Huawei and big changes.

During the 2016 US election campaign, then-presidential candidate Donald Trump criticized the policy of outsourcing goods to China and the stagnation of domestic production. The imbalance in trade between the countries led to the start of a trade war, the first step of which was Trump's introduction of a 30% tariff on solar panels imported into the country in January 2018.

And then there was the scandal surrounding Huawei, which resulted in legal restrictions on Chinese companies in US government contracts, access to new technologies and much more. Notably, some countries such as the UK, Canada, Australia, Japan and New Zealand have joined these restrictions in their markets, protecting themselves from Chinese companies and the associated risks.

A little later, the COVID-19 pandemic began, which presented us with lockdowns and problems in international logistics in 2020. Tensions have also increased significantly over Taiwan, where TSMC's factories produce more than 50% of all semiconductors in the world. All of this presented an industry accustomed to 8-10 week lead times for chips, a new reality of 60-80 week lead times for complex or scarce chips, as well as lobbying, price speculation, and more. And then there are environmental problems and the war in Ukraine.

What in the end? As a result, the global market started to slow down and lose money, lose a lot of money. And global companies and countries have asked themselves the question of where to safely produce components and hardware of any complexity, how to diversify the risks of supply chains from the extraction of raw materials to the manufacture of the final product, how to protect promising developments, where to safely place the outsourcing of services, what personnel will be in demand , how to reduce losses and much more.

All this forms a new, much broader list of criteria and requirements for future players, for project implementation regulations, and for financial partners.

Conclusions. The current players of the international market, one way or another, are forced to review their relationships with partners and contractors, and look for new ones that meet the new criteria.

Present and future

Right now, thanks to the emergence of electric cars (the share of electronics in the cost of a car has increased from 5% in the 1980s to 50% in 2022), widespread digitalization (with the vast majority of the population owning a phone, tablet, laptop, and smartwatch), a significant increase in data centers, and the trend in data processing and storage, the market has started to grow rapidly. The prospects of the global semiconductor market, according to McKinsey, are estimated to reach $1 trillion by 2030.

Naturally, all major players at the level of entire countries and geopolitical alliances want to obtain the maximum share of this market. At the same time, it should be understood that electronics now play a significant role in the economies of developed countries. The products of this industry include machines, wind generators, data centers, mobile phones, 4G-5G access points, drones, and the entire segment of military aerospace defense, making it a strategic component. Without modern electronics, there is no modern state.

All of the aforementioned factors, along with supply chain issues in the semiconductor industry, have contributed to a new trend - deglobalization and consolidation around regional leaders. It is no longer always profitable to outsource production to China. The risk of sanctions from the US or sudden lockdowns, coupled with the Chinese government's harsh response policy, can disrupt even the most meticulous business plans. The tension surrounding Taiwan is prompting a systematic search for ways to diversify risks, which has been ongoing for years.

The conclusions from this are quite simple: the more localized the entire chain of added value from the extraction of materials to the release of the finished product (e.g., mobile phone, tablet, airplane), the easier it is to manage, the faster it is possible to produce products, the lower the risks and financial losses, and the higher the redemption and return on investments. Outsourcing to Asia has led to a shift away from the label "made in China" on your favorite gadget. Instead, "made in NewRegion" is emerging as a new trend and reality.

Deglobalization and Regional Leadership in the New World

Among the regional leaders who entered the game, the following groups can be distinguished: the EU, the USA and its allies, and Asia, represented by China, Taiwan, India, and Japan, can be separately noted as an emerging environment.

Among the investment programs that illustrate the players' ambitions, the following can be highlighted.

The European Union has approved the program "The European Chips Act" with the ambitious goal of achieving a 20% market share by 2030. The United States has also approved a program to stimulate domestic production of semiconductors and is actively beginning to build factories. China is making significant efforts to establish a complete production cycle domestically and has announced investments totaling $143 billion to support its semiconductor industry.

All other countries and major players are faced with a choice: unite around regional leaders, seek points of contact, develop joint projects, and transform supply chains — or remain within the current economic model and attempt to survive.

Such localization leads to changes in laws aimed at protecting the domestic market from competing products, developing local products, increasing production, and stimulating demand through financial instruments, as exemplified by the case of solar panels in the US.

Conclusions: The trend of deglobalization is clearly visible, favoring unification around regional leaders, the formation of new supply chains, and consequently, a shift in the legislative landscape to safeguard the domestic market and its producers. This changes the historical rules of entire industries and offers significant opportunities for proactive players.

What examples we are already have

India as an example. Local consumers are pleased to purchase affordable mobile phones (priced up to $150) from China. When the amount of capital outflow exceeded the wildest forecasts, the Indian government began discussing a ban on purchases to protect local manufacturers and keep production domestic.

India has long had a program to support domestic development and production. This program makes it much easier to access local sales if the product is produced domestically. For example, Apple began assembling part of its iPhones at a local factory back in 2017, and J.P. Morgan predicts that by 2025, 25% of Apple products will be assembled outside of China.

Now let's compare it with Europe. The best-selling smartphone brands in Europe are Samsung, Apple, and Xiaomi. It is evident that not a single European company is among them, indicating that all products are manufactured in Asia.

The question is how long it will last and when EC will have a program that stimulates the development of its modern smartphone. Maybe it will be the second breath of the long-forgotten Nokia, Ericsson, or Alcatel, or maybe it will be a new player. The times of change give us many examples of rapid growth and success, such as Ajax, Ring, and DJI.

The example with mobile phones is indicative, but not the only one. In addition to consumer electronics, which is well-known, there are also other segments such as automotive, aerospace, defense, security, wireless communication, and others.

Conclusions: The criteria for solution providers are changing. Now, in addition to the price of services, factors such as the political system of the state where the solution provider is located, geographical location, climate, and the geopolitical union the country will join are important. This changes everything.

How to enter the deep tech market.

There are several options for companies that want to use the trends I described. Let's consider some of them - this is M&A, building a full-cycle services business model, developing our own hardware product.

For example, one of our partners (an equipment distributor in Ukraine) closed an M&A deal by buying a product company in its segment with an existing R&D department, hardware production, and a portfolio of clients.

In one easy movement, the company from a local distributor of equipment turns into a product company with a portfolio of clients in other countries, a catalog of manufactured products, and a recognizable brand. For the buyer, it is a great system solution that turns a company closed on the domestic market into an exporter with its own product, RnD and own production.

A few examples of the second strategy. Not so long ago, a local manufacturer of post machines approached us with the task of developing and adjusting the local production of electronics, completely replacing the Chinese supplier. The reason is simple - the price of shipping from China, which has almost doubled, and the lack of deliveries during the lockdowns, have led to significant financial losses due to the disruption of the terms of the concluded contracts, and due to a simple assembly line at the factory.

During the discovery phase, significant opportunities were found for the customization of products according to the requests of installers from the EU. And this is already a complex task, which includes both RnD and embedded support, the solution of which gives the client significant advantages in the form of expanding the functionality of the current model range, rhythmic production, cost savings, and more flexible customization.

Example number two. The company that manufactures GPS systems for "smart" agriculture from Europe requested to localize in Ukraine the prototyping and production of new developments and all processes related to this (supply of components, manual testing, support and support of embedded production, functional tests and many another). The reason for the request is the refusal of the current supplier of EMS services in northern Europe to comprehensively fulfill all the requirements of the project and the client's desire to optimize costs, since the company's RnD department was located in Ukraine.

Example number three. An engineering company from Europe, which is engaged in the installation of electrical equipment for warehouses, asked to develop under its brand a hardware device (NDA) with the possibility of compatibility with various types of sensors and to localize its production in Ukraine, while working out the possibility of installation in already existing projects, instead of outdated solution. The reason for the request is difficulties with the service of the current manufacturer from Asia, a long delivery period from the moment of subscription, the desire to receive a ready-made solution and service from one hand.

All three examples have in common the desire of customers to receive service from a single source, to be closer to their market and to change their current supplier.

Own product, cross-selling, digital transformation

Business is always an evolution, which sometimes leads to quite unexpected decisions and changes in the company's business model, the market changes - the business changes.

Amazon, with growing sales of online books, entered the market with its Amazon Kindle - and did a great job of strengthening its position and sales. Everyone knows what results this experiment has led to in our time and how the company's business model has subsequently changed.

The success of this cross-selling approach was recently repeated by the Steam company, releasing the Steam Deck game console. These are examples of how, knowing its customer, a company can expand its range of products in related domains. Whether it will be its own development or a joint product is already a matter of tactics.

These examples illustrate only a part of the changes in the global semiconductor market and related hardware development and production and the response strategies of market players. My main message and my opinion is that it will be impossible to ignore changes of this magnitude. The question is what strategy each of the market players will have and what implementation path he will choose, and there are a lot of opportunities waiting for us.