Global Electrical & Electronics Retail

Market
Value Chain Analysis
ML00027-004

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004

 Table of Contents

Complete Value Chain: Overview

Complete Value Chain: Overview (cont’d)
Raw Materials: Overview
Raw Materials: Analysis
Raw Materials: Burning Issue – Oil Prices
Component Production: Overview
Component Production: Analysis
Component Production: Burning Issue – Backwards Integration
Device Assembly: Overview
Device Assembly: Analysis
Device Assembly: Burning Issue – Working Conditions
Distribution: Overview
Distribution: Analysis
Distribution: Burning Issue – Counterfeit Goods
Retail: Overview
Retail: Analysis
Retail: Burning Issue – Showrooming
Appendix

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 2

 Complete Value Chain: Overview

The global electrical & electronics retail market’s value chain can be divided into five distinct stages: raw
materials, component production, device assembly, distribution/wholesaling, and retail.

Raw Materials Component Production Devise Assembly Distribution Retail

Brand name electronics

Base Materials Batteries Designing Department Stores
companies

Epoxy Chipset/processors Component Integration Buying Offices Factory Outlet

Gases Cable/Wires Soldering Trading Companies Manufacturing Stores

Glass Heating elements Fastening/housing Mass Merchandise Chains

Oil Microphones Cleaning Online Retailers

Precious Metals Plastic OS Installation Specialist Retailers

Silicon Screens QC testing

Speakers

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 3

 Complete Value Chain: Overview(cont’d)
The global electrical & electronics retail market’s value chain can be divided into five distinct stages: raw
materials, component production, device assembly, distribution/wholesaling, and retail. Different companies
operate at each stage of the chain, but a notable feature of the first three stages is the dominance of large-
scale companies.

Raw Materials Component Production Device Assembly Distribution Retail

ArcelorMittal HiSilicon Flextronics International Ltd Almo Corporation Amazon

Foxconn Technology Co.,

Barrick Gold Corporation INEOS Amber Distributors Best Buy
LTD

Company- branded stores

BP LG Display Pegatron Corporation CEF
e.g. Apple, Samsung

Manufacturing Bands
Chevron Otter Group Samsung Electronic Co., Ltd (Panasonic, Samsung, Sony, Metro AG
Etc.

Hebei Steel Qualcomm Sears

Norilsk Nickel TDK Suning Commerce Group

Shell Wal-Mart

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 4

 Raw Materials: Overview
Raw materials producers for this market are predominantly global giants. These mainly consist of petrochemical
giants and leading metals mining companies due to the scale required for successful operation.

Raw Material
Producers

Global
Global Mining
Petrochemical
Companies
Giants

Base Metals Precious Metals Oil Inert Gases

Aluminum
Gold Neon
Copper
Palladium Xenon
Nickel

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 5

 Raw Materials: Analysis

The raw materials used during the production process can largely be divided into two distinct categories:
metals and petrochemicals.

• The metals category can be segmented between precious metals and base metals.

• The first segment consists mainly of gold and palladium. Many electronic devices use low voltages and currents, and
gold is a very efficient conductor of these, making devices that use them more reliable. Palladium is used in multilayer
ceramic capacitors, as well as for connector plating and in soldering materials.

• Base metals used include aluminum for stylish, minimalist housing, copper in wiring, and nickel, which is a common
material used in circuits and batteries.

• Several countries are notable producers of at least one of the metals used in electronics. The most prominent
examples are Australia, China, South Africa, Russia, and the United States. Due to the costly nature of mining and its
associated operations, most of it is performed by large mining companies such as Barrick Gold Corporation and Norilsk
Nickel. Metals are then formed by large-scale producers like ArcelorMittal and Hebei Steel. SMEs are extremely rare as
operating on such a scale is often not viable.

• The situation is similar with the petrochemicals category. A number of countries, most evidently Russia, Saudi Arabia,
and the United States dominate production. Again, production of oil (which is a key input in the making of plastic) is
dominated by global giants such as BP, Chevron, and Shell who typically market and sell it themselves.

• Inert gases are used in plasma TV screens, although the technology is slowly becoming obsolete as LED technologies
supersede it. Neon gas is marketed by companies like Praxair, but shortages have been reported in recent years due to
political and economic upheaval in Ukraine, the world’s major producer of the gas.

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 Raw Materials: Burning Issue

OPEC is controlling oil production volumes in a bid to increase prices

With oil prices in freefall since mid-2014 and falling below $30 in early 2016, the Organization of Petroleum Exporting
Countries (OPEC) decided to act. On November 30, 2016, the organization agreed for the first time in eight years to cut
production by 1.16m barrels per day. The move worked, with the price of crude rising and leading to OPEC agreeing to
an increase in production levels in June 2018.

The move worked, with the price of crude rising to a four-year high of
over $80 a barrel in October 2018. This is significantly higher than the
sub-$30 lows seen in early 2016. OPEC once again agreed to cut oil
production by 1.2 million barrels per day for the first six months of 2019.
And again in December 2019; the OPEC and its allies had agreed to
deepen oil production cuts to 500,000 barrels a day through to March
2020. This brings the total production cut to 1.7 million barrels a day.
This has increased the cost of oil to plastic producers. If any significant
price rise is seen, these producers may be forced to pass that on to the
appliance manufacturers who will then need to decide if they can do the
same to a price-conscious consumer base.

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 7

 Component Production: Overview

Component production performed by specialists, both large and small.

Component
Production

Large Companies Smaller Companies

Independent Subsidiaries resulting

Companies from backwards Companies like
integration Amperex (now owned
by TDK) and Otter
Group are successful
Companies like LG thanks to specializing in
(screens through LG key components like
Display), and Huawei batteries and safety cut-
(chipsets via HiSilicon). outs.

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 8

Component Production: Analysis

Producers tend to specialize, leaving room for numerous players.

• Consumer electronics and household appliances contain many different components, each of which performs a
different, but vital function. The different nature of each component means that many of the manufacturers specialize in
producing only a few types, often even just one. Amperex (batteries), Otter Group (safety cut-outs) and Qualcomm
(chipsets) are examples of companies specializing in one component type.

• This specialist approach means there is room for a large number of players, although securing supply contracts for
large volumes is crucial for viability. Consequently, both large players and SMEs with a track record of providing quality
components are present at this stage of the value chain.

• Some of these specialists have grown to become extremely large corporate entities, but continue to focus largely on an
area of specialism. One such example is San Diego-based Qualcomm, which has grown to become a $24bn business
and the supplier of choice to most major smartphone manufacturers thanks to its successful Snapdragon range of
processors.

• There is also evidence of consumer electronics players backwards integrating in to this stage of the value chain. For
example, LG’s subsidiary LG Display not only provides the screen panels for LG’s own TVs, but is now also the world's
largest LCD panel maker and one of the world's largest manufacturers of thin-film transistor liquid crystal display
panels, OLEDs and flexible displays. Huawei has also integrated in this way via HiSilicon, which is quickly becoming a
serious rival for Qualcomm by virtue of its Kirin range of chipsets.

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 9

 Component Production: Burning Issue

Major electronics players are maximizing revenue streams via backwards integration.

Major electronics manufacturers are backwards integrating as they can save costs by
providing their own components. That is not, however, the biggest motivation for doing
so. Backwards integrating in to component manufacture allows them to become
suppliers to rivals, thus profiting from sales of devices that do not carry their brand.

A classic example is the relationship between Samsung and Apple. The two
powerhouses are striving for control of the global smartphone and tablet markets, but
the former has long been one of the latter’s major suppliers. Although the supply
agreement has been scaled back since 2011, it still supplied the DRAM chips for the
iPhone 7 and will continue to supply OLED display panels for at least one of the next
iPhones, as well as NAND flash memory chips. Despite being a competitor to Apple in
the mobile phones market, Samsung uses its supplier status to reduce its own
component manufacturing costs via bulk production and can still benefit from rival sales.

LG has pursued a similar path in the TV market with its LED display panels, and while
Huawei has so far used its Kirin chips in its own phones, it is only a matter of time before
they start to supply other manufacturers impressed by their speed and processing
power.

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 10

 Devise Assembly: Overview

Electronics companies mostly outsource manufacture/assembly to large contract manufacturing

companies (CMCs)

Located in low-
cost economies in
Asia,
Device predominantly
China.
Assembly

Major
electronics CMCs
brands

Assembly Limited
In-house
In-house design based on component
assembly
provided design manufacture

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 11

Device Assembly: Analysis

Asia remains the home of assembly thanks to low-wage environment

• The assembly stage of production is the point at which the device or appliance to be sold is constructed. Assemblers
take the components and through a series of assembly processes (cutting, soldering, gluing, software installation, etc.)
produce the final product.

• This stage is most commonly carried out by contract manufacturing companies (CMCs) like Flextronics, Foxconn, and
Pegatron.

• These CMCs work on contract for large electronics brands as certain volumes are demanded and these companies are
capable of satisfying them. They will often produce a number of product ranges for the same manufacturer and the
largest, such as Foxconn and Pegatron, will supply a number of leading electronics brands.

• These CMCs are predominantly based in China, which continues to serve as a low-cost manufacturing base. The large
factories in the south of the country and ready supply of workers means CMCs there are able to easily meet stipulated
production volumes.

• There are rare instances of electronics brands performing this stage themselves, the most notable being Samsung,
which manufactures many of its flagship phones at a huge facility in Gumi, South Korea.

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 Device Assembly: Burning Issue

Working conditions: Scandals have put the spotlight firmly on CMC practices

A major downside of outsourcing manufacture/assembly to CMCs is the fact that the likes of Apple, Dell, and Samsung lose (at
least to some degree) control of the production process. They conduct suitability checks before awarding contracts and audits
throughout the relationship but they cannot oversee the process at all times. This has led to some spectacular failings, which
have then attracted intense media intention.

This came to the fore in 2010 when reports about suicides at Foxconn’s Shenzhen factory surfaced. Stories of 12 hour shifts,
overcrowded work areas, cramped living areas for those living ‘on campus’, and a lack of employee downtime abounded.
Although many large companies used Foxconn, Apple found itself inadvertently thrust in to the center of the scandal and has
since moved some assembly work to Foxconn rival Pegatron (which has since found itself embroiled in working conditions
scandals).

By manufacturing a large number of Galaxy phones in its own Gumi facility, Samsung limits these issues as it can better
control conditions. When Business Insider reporter Steve Kovach visited the plant, he was impressed with its cleanliness, staff
lounge areas, and good quality subsidized worker housing. This is important for brand reputation and although it has not
happened on any mass scale so far, there is always a chance that particularly western consumers may boycott certain brands
if they feel the human cost of the product is too high.

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 13

 Distribution: Overview

Wholesalers are present, but many larger electronics players bypass them

Distribution

Major electronics
Wholesalers
Tend to focus on brands
products with
industrial
applications or
requirements. The larger brands (e.g.
Specialized Apple, LG, Samsung, Sony)
largely bypass the
distributors wholesale stage and sell to
retailers. This aids price
control.

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 14

Distribution: Analysis

Bypassing wholesalers is common as many retailers are large enough to deal with directly.

• Wholesalers can act as the link between electronics manufacturers and the retailers at the end of the value chain. They
import and export the goods as typically, manufacturing locations are in different countries.

• Wholesalers buy and store goods in large quantities and then sell smaller quantities to retailers, which in turn sell to the
general public. In this market, it is a straight forward on-selling operation, as there is little scope for value-adding
activities before the retail stage.

• Some large-scale retailers skip this stage by establishing strong relationships with the likes of Apple, Bosch, Samsung,
Sony etc. Retailers like Amazon, Metro AG, Tesco, and Wal-Mart are able to buy sufficient volumes to secure good
prices without the need for a wholesaler to help. This arrangement also helps the electronics companies as they can
set the prices at which the goods are sold in to the retailer, thus avoiding unwanted discounting.

• Smaller retailers do not share the same luxury, but can form part of a franchise chain or buying group. A good example
of this in operation in this market is Euronics, an international organization of over 10,000 independent electrical
retailers in 35 countries who have joined together to form a cooperative partnership.

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 15

 Distribution: Burning Issue

Counterfeit goods being sold through wholesale remains a problem.

Where there are successful, expensive products, there are counterfeit versions of
those same goods. Electronics have fallen victim to this trend in a big way and
many are being distributed by online wholesalers. Data from the US Department of
Homeland Security shows that 10% (3,388) of all seizures in 2018 were consumer
electronics, while 1% were computers/accessories. This actually represented a
reduction of 749 seizures from the previous year, but the fact that these two
categories totalled 3,838 seizures in 2018 shows the extent of the problem. The
true number may be even bigger as seizures containing goods from multiple
categories are simply included in an ‘All Others’ category. 54% of all seizures
originated in China, with a further 31% from Hong Kong. Many of these goods are
being sold by China-based wholesalers utilizing legitimate sites like Aliexpress.

Moreover, the rise of online platforms for buying and selling goods has fuelled a
rapid increase in fake merchandise sold around the world.

Many of these counterfeit products are unsafe and pose a risk to users, as well as
a huge potential brand equity or trust issue for the manufacturers whose mark
these goods carry. The fact that they are being sold wholesale shows that
counterfeits are supplying large numbers of such products.

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 16

 Retail: Overview

Retailers exist in a variety of forms

Retail

Mass
Department Speciality Manufacturer
Online Retail Merchandise
Stores Stores Stores
Chains

Debenhams Best Buy Amazon Apple Carrefour

Kohl’s BIC Camera AO.com Samsung Target

Sears MediaMarkt ebuyer Sony Wal-Mart

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 17

 Retail: Analysis

Specialty retailers remain the dominant distribution channel.

• Retailers of electronics and electrical products exist in a multitude of forms and sizes. The most obvious category is specialty
retailers and these remain the dominant channel. These focus on selling hardware such as household appliances, games
consoles, mobile phones, televisions etc., but sometimes also sell physical media like Blu-ray discs, CDs, and video games.
Examples of such retailers include Best Buy, BIC Camera, Currys, and MediaMarkt.

• Department stores such as Debenhams and Sears do not rely entirely on electronics sales but they do form a valuable revenue
stream. They therefore represent a significant part of this stage of the value chain and supermarket chains like Tesco and Wal-
Mart fall into the same category.

• Online retailers have grown in significance in recent years. The electrical & electronics retail segment was the global online
retailers sector's most lucrative in 2018, with total revenues of $376bn, equivalent to 31.5% of the sector's overall value. Online
specialists like Amazon and AO.com will go from strength to strength and put pressure on specialists operating brick and mortar
stores.

• Manufacturer branded stores are a feature of the market, particularly at the top end of the market. Apple is the most visible
example, operating an extensive global store network, and Samsung is trying to replicate the model via its ‘Samsung Experience’
stores. These stores aim to not only sell products, but to build brand value by associating it with a premium experience in an
attractive, futuristic store. This trend is even more evident in the case of exclusively high-end players like Bang and Olufsen.

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 18

 Retail: Burning Issue

Showrooming noticeable, retailers with physical stores must adapt.

Online retailers have grown in significance in recent years, The electrical &
electronics retail segment was the global online retail sector's most lucrative in 2018,
equivalent to 31.5% of this sector's overall value. Electronics are different to, say,
clothes. They do not need to be tried for size and so are an easy online purchase.
Many consumers do, however, still wish to see the product to see how it looks
aesthetically, look at screen quality etc. and so showrooming has become a trend in
this market. This involves consumers going in to physical stores to look at the
product that are contemplating buying, then checking the store price against online
prices on their smartphones while still in store.

Online prices are often cheaper and so the store loses out on the sale despite having
offered something of a service to the consumer. Physical store operators must adapt
to this trend or risk going out of business. One way they can do this is to actively
advertise a store as a showroom that would carry no stock, but which contains
terminals at which visitors can order a product that catches their eye. This may allow
them to downsize stores, thus saving money, which in turn would help them compete
with e-commerce specialists.

Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004 19

 Appendix
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Electrical & Electronics Retail Market: Value Chain Analysis - ML00027-004