Results of an IPC Survey on a Reverse Trend in Regional Sourcing in the Worldwide Electronic Interconnect Industry

January 2009

Produced by IPC Market Research

TABLE OF CONTENTS

Introduction ........................................................................................................................... 1 Sourcing Trends.................................................................................................................... 3 Drivers of Reverse Sourcing Trend....................................................................................... 5 Conclusions and Observations ............................................................................................. 7

This report is available electronically from: IPC – Association Connecting Electronics Industries® 3000 Lakeside Drive, Suite 309 S Bannockburn, IL 60015, USA Tel: +1 847-615-7100 www.ipc.org Inquiries about the report may be addressed to: Ms. Sharon Starr IPC Director of Market Research Tel: +1 847-597-2817 Email: [email protected]

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Regional Sourcing Trend – Survey Results

INTRODUCTION

About the Survey During November of 2008, IPC surveyed executives and marketing professionals at electronics manufacturing services (EMS), printed circuit board (PCB) and supplier companies in North America and Europe. Fifty companies responded, which produced an adequate and representative survey sample. The intent was not to produce statistically significant data, but to identify trends and gain insight on the underlying causes. There has been some speculation recently within the electronic interconnect industry that some customers may be changing their sourcing patterns and shifting some business back to North America and Europe from Asia for a variety of reasons. The goal of the survey was to confirm this trend, estimate the financial impact on the industry, and identify the drivers of the trend. This was a “Fast Facts” survey, conducted on a one-time basis by IPC in response to member inquiries to take the pulse of the marketplace on current trends.

Demographics Most of the responding companies are based or have major operations in North America. Survey Respoondents by Location

Europe 14%

North America 86%

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Regional Sourcing Trend – Survey Results

The distribution of responding companies among segments of the electronic interconnect industry was balanced and produced a representative sample.

Survey Respondents by Industry Segment

Supplier of Electronics Manufacturing Equipment 18%

EMS / PCB Assembly 14%

Other 12%

PCB Fabricator 27% Supplier of Electronic Chemicals and Materials 29%

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Regional Sourcing Trend – Survey Results

SOURCING TRENDS

Forty-two percent of responding companies cited changes in their customers’ sourcing patterns from Asia back to North America or Europe in the past two years. Percent of Respondents Who Have Seen Some Business Return from Asia in the Past Two Years

Yes 42%

No 58%

The percentage of manufacturers in most industry segments who saw evidence of the reverse sourcing trend was roughly proportional to their representation in the survey sample. One exception, however, is the EMS segment. The percentage of EMS respondents seeing the trend was notably higher than their representation in the survey sample, as shown in the graph below, which suggests that their OEM customers may be leading this trend. Industry Breakdown of Respondents Who Have Seen Some Business Returning from Asia

Suppliers of Electronics Manufacturing Equipment 20%

EMS / PCB Assembly 25%

Other 10%

Suppliers of Electronic Materials and Chemicals 25%

PCB Fabricator 20%

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Regional Sourcing Trend – Survey Results

Seventeen respondents saw customer orders returning from Asia and provided growth data. Their average total business growth, year-on-year, was 13.0 percent in 2007 and 6.5 percent in the first half of 2008. On average, they attributed 2.5 percent growth in both years to business returning from Asia, as shown in the graph below. Growth Attributed to Business Returning from Asia as a Portion of Total Business Growth 14.0% 12.0% 10.0% 8.0%

Growth from Other Sources

10.5%

6.0% 4.0%

4.0% 2.0%

2.5%

2.5%

2007

First Half 2008

0.0%

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Growth Attributed to Returning Business

Regional Sourcing Trend – Survey Results

DRIVERS OF REVERSE SOURCING TREND

Survey respondents were asked about the role and relative impact of the following key factors that might be driving the return of business from Asia: ♦ Quality concerns ♦ Transportation costs ♦ Currency exchange rates ♦ Long supply lines ♦ Product costs ♦ Communication difficulties ♦ Other They were asked to rate these issues as: ♦ A primary contributor (3) ♦ One of several key contributors (2) ♦ Some impact (1) ♦ Not a factor (0) The numbers in parentheses were used to weight the responses. All were identified as key contributing factors, with quality concerns emerging as the biggest contributor to the current trend in regional sourcing. It was identified as a primary contributor to the trend more than any other factor. The graph below shows the weighted averages for each issue. Overall Impact of Key Contributors to Regional Shift in Business From Asia 3.0

Average Score

2.5

2.0

1.9 1.6

1.6

1.5

1.5

1.4

1.4

Product Costs

Communication Difficulties

1.0

0.5

0.0 Quality Concerns

Transportation Currency Costs Exchange Rates

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Long Supply Lines

Regional Sourcing Trend – Survey Results

The graph below shows the ratings breakdown on each of the contributing factors in percentages of total responses on each of the factors. Based on this analysis, it becomes clear that the following factors were most often rated as primary or key contributors: ♦ Quality concerns (69 percent of responses rated it primary or key) ♦ Transportation costs (53 percent) ♦ Long supply lines (48 percent) ♦ Communication difficulties (47 percent) Role of Factors Contributing to Regional Shift 100% 11% 90%

11% 21%

5% 16%

32% 80% 70%

42%

16%

37%

26%

42% 3=Primary Contributor

60% 50%

2=One of Several Key Contributers

37%

1=Some Impact

26% 40% 30%

47%

5%

26%

32%

0=Not a Factor

32%

20% 32%

26% 10%

21% 16%

16%

Transportation Costs

Currency Exchange Rates

26%

0% Quality Concerns

Long Supply Lines

Product Costs

Communication Difficulties

Three respondents cited “Other” and identified the following additional issues as being “one of several key contributors”: ♦ Rising labor costs ♦ Inability to control remotely ♦ Shift in business model for Asia suppliers

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Regional Sourcing Trend – Survey Results

CONCLUSIONS AND OBSERVATIONS

Some respondents commented on the trend of movement of production within Asia, especially movement out of China due to rising costs. Vietnam and India are the major destinations for production movement within Asia. It was also reported that some production by U.S. companies that had moved to Mexico is returning to the home country as part of efforts at factory consolidation. While the prospect of some business returning from Asia is a positive trend for western manufacturers, there is still some movement continuing in the other direction. Also, the realities of the current worldwide economic recession should be factored in. Business losses during the second half of 2008 in Asia have been unprecedented, especially in China and Taiwan. This has created a serious problem of overcapacity, to which Asian manufacturers might respond with more aggressive strategies. This and many other variables, which are unknown at this point, could affect current trends in regional sourcing.

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