Computersight -

The computer industry is one of the fastest growing industries in the world. Over the past ten quarters, the global demand has increased by more than ten percent per quarter (Standard & Poor’s). The staggering rate of demand and growth in the computer industry has created a highly competitive business environment in which innovation and supply chain evolutions are crucial for survival.

In the late 1970’s and early 1980’s, the computer hardware and software industry was in its nascence. The industry was comprised of four main firms: Microsoft, Apple, Intel, and IBM. With far less competition than in today’s burgeoning global market, these firms were able to slowly develop their supply chains from private garages into transnational operations (Yost 166-178). With no inter-industry models to imitate, the early PC pioneers developed their supply chains based on those of well-established leaders in the appliance and automotive industries, such as Ford and General Electric (Yost 178). Following these models, IBM used vertical integration in order to structure its supply chain operations. (Yost 178).

IBM set the standard as a “box maker” by mass-assembling the hardware and using software provided by Microsoft or Intel to complete their PCs (Yost 194). IBM’s supply chain philosophy encouraged mass production and a reliance on brick and mortar sales outlets (Taylor). The disadvantages to this system were that IBM amassed a vast amount of inventory and was unable to offer its customers an array of options in order to personalize their PCs (Taylor).

In 1983, Michael Dell proved to be the catalyst that would forever change the computer industry and redefine the way supply chains are viewed. Dell’s innovations were spurred by the tremendous value-added activities in the industry. The average IBM PC was selling for $2,880; whereas its total hardware and software costs averaged a mere $600 (Yost 194). Thus, IBM averaged $2,280 in value-added activities per PC. Dell revolutionized the supply chain in order to produce competitively priced PCs while still reaping high industry profits. Dell was able to compete with the already well established firms because it effectively used a direct sales strategy, adopted just-in-time production, and mastered the process of mass-customization (Taylor).

In short, Dell’s corporate strategy focused on a buyer-driven industry. Dell’s success hinged on its ability to bypass warehouses and stores in order to sell its PCs and have them delivered to customers in a timely manner. Thus, Dell became the first firm to sell computers to customers by direct mail (Yost 194). In order to achieve its long term goals, Dell established a quasi-corporate campus for its assembly facility and the production facilities of its suppliers (Taylor). The result was Dell’s ability to minimize its inventory and risk by utilizing just-in-time production. In all, Dell’s revolutionary steps in clustering its production processes and bypassing traditional retail outlets (as seen in Appendix A) established its comparative advantage over other pre-existing and well-established PC firms.

Even though Dell’s act was hard to follow, other firms soon attempted to streamline and consolidate their operations in similar fashion. In 1997, Apple Computer was losing more than a billion dollars annually due mostly to supply chain inefficiencies (Taylor). In order to ameliorate its supply chain and transform its losses into profits, Apple reduced its product line from nineteen to four products (Taylor); thereby simplifying the production and, in turn, the supply chain. Within two fiscal years, Apple’s simplified and consolidated supply chain reduced inventory by 94% and increased gross margins by 40% (Taylor). Thus, Apple was successful in imitating the Dell model’s consolidated just-in-time production.

A new millennium also means new challenges for the PC industry. Even though firms have been continually refining their supply chains, they must also react to the inherent “demand-driven innovation” of the industry (O’Marah). The new information age means that firms have access to more information than ever as to what potential consumers want and how much they are willing to pay for specific products and services (O’Marah).

The new name of the game is not simply who can produce the cheapest goods, but which firms are flexible enough to produce customized products the fastest. In the last decade, there has been an increased demand for faster and smaller computers and electronics. Thus, the supply chains must be flexible and ever evolving in order to answer these demands. Since the computer industry is constantly in flux, there is the opportunity for new firms to specialize and further hone the supply chain. However, there is little room to compete with the already established production firms on the global level due to the tremendous capital barriers to entry.

Although American firms still control a vast amount of the global market share in PC sales, other nations are making great headway in challenging American dominance. The top three PC vendors are all American: Dell (18%), HP (16%), and IBM/Lenovo (7.7%) (Standard & Poor’s).

In recent years, American PC sales have begun to slow, whereas demand in Europe, Middle East, and Africa has increased greatly (Standard & Poor’s). This does not bode well for American PC firms because it will difficult for them to maintain their market share in foreign markets due to domestic loyalties to local suppliers (Standard & Poor’s). China is perhaps the greatest threat to the American firms’ market share advantage.

In 2002, China surpassed Japan as the world’s second leading producer of PC hardware, second only to the United States (ViewsWire). Experts predict that China will continue to increase its market share to nearly 20% of the world total by capitalizing on its advantages in skilled labor, capital, tax breaks, high local demand, and its recent admittance into the WTO (ViewsWire).

China has chosen to focus on the PC industry because the Chinese government wishes to maximize their value-added activities, and they believe that their best opportunity lies in this industry (ViewsWire). The Chinese government wants its computer industry to position itself as a world leader by “moving up the value chain” by focusing on telecommunications, software, and semiconductors (ViewsWire).

Despite China’s intensive local investment in the computer industry and its emergence as a research and development center, it currently lacks an adequate infrastructure to accomplish its ambitious goals (ViewsWire). However, China has proven to be a successful competitor in the Asian and global markets. China illustrated its emerging dominance in 2005, when a Chinese firm, Lenovo, purchased IBM’s PC hardware division (Cottrill). This acquisition proves that China can and will challenge the top American firms in the world arena.

The value chains for these competing firms in the conception and production of PC software and hardware as well as semiconductors all carry a theme common to the computer component industry and that is, again, the importance of innovation. Research and development is thus one of the most integral stages of the computer components’ value chain. The highly technical process that is semiconductor design and creation, for example, is highly capital- and skill- intensive in regards to its research and development stage (Dicken).

In addition to research and development, the creation of semiconductors is also highly specialized in the wafer-fabrication stage of the value chain (Dicken). The highest value-added activities of the semiconductor value chain are in these highly technical stages of development. The absolute, environmental purity needed for the wafer fabrication stage again is highly capital-intensive, yet results in high value added as the refined silicon is prepared for chip assembly (Dicken). While notably specific to the semiconductor value chain, the wafer fabrication stage joins the design stages and the research and developments so integral to the high risk, high volatility value chains of the computer industry as a whole.

While the innovations and engineering necessary to the completion of the highly technical stages of semiconductor production promote value-adding through capital rich concepts and results, the highest value-added stages are not necessarily the most profitable. While adding the most value to the end product, the intermediary capital consumed in the execution of the high value-adding stages trims the relative profitability of these stages.

On the other hand, the ability to offshore the final assembly of the product to low-skill, low-wage geographical areas, coupled with the simple transportability of the material in question is where cost-cutting is most possible and therefore plays most directly to the increased profit margins of the firm (Dicken).

The constantly and rapidly evolving products and processes of computer component value chains can act as drivers for the several new significant technologies motivating changes in the computer industry. For example, miniaturization of gadgets and cutting edge communication devices are revolutionizing the world of computer and electronics innovation (Young). Doug Young of The Washington Post highlights these changes in his article, “Technology Convergence Makes a Comeback in 2006.” Doug comments on this reality as he says, “Advances in miniaturization have yielded a bumper crop of newfangled multi-purpose gadgets in the last two years” (Young). By categorizing miniaturization as a new trend in technology development, Young touches on the nature of the consumer to participate in the producer-driven commodity chain.

Another new significant advancement driving changes in the computer and electronics industry is the marriage of television and computers. The company controlling this novelty, Intel Corporation, creates the chips used for this dual-featured device.

Intel said it is working with more than 40 companies around the world in the movie, music, television, gaming and photo-editing fields to deliver content to computers using the technology called Viiv (rhymes with five). (Levingston)

Steven Levingston of The Washington Post believes that Viiv equipped computers will improve the overall entertainment experience, as what was once simply a television screen can now perform any computer task. Not only is the Viiv technology efficient, Intel insists the Viiv platform computers will be easier to use. (Levingston)

Yet, while radical innovation is a necessary component of the liberal model of corporate governance, not all participants reap the benefits at all times. For example, there are several losers in the computer chip industry. In Asia computer chip makers such as “Chartered Semi Conductors, Elpida, and Samsung Electronics will talk about the challenges they face from wannabes trying to cash in on the latest chip trends and the wild gyrations their markets often face” (Young).

The imitation devices created by companies trying to keep up with the technological trends combine multifunctional products with low-cost advantages (Young). Thus the losers would be the companies who refuse to or are unable to reinvent multifunctional products at the pace of the leading firms in the industry.

Converging technological devices such as Apple’s video iPod, Motorola’s Palm Pilot cell phone, and Comcast’s internet/phone-service/cable-television, are some of the latest trends in this industry. Aloysius Choong, an analyst at International Data Corporation believes convergence is the wave of future in this industry.

Convergence has been happening in mobile phones for the longest time. First it was voice, then SMS, then it become your alarm clock, and your camera. These days, it’s become a bit of your TV as well and mp3 player. (Young)

Hence, the path of new technology in the computer and electronics industry is paved by converging companies, as the globalizing market demands more interconnectedness in every aspect of production and consumption.

Problems with labor standards in the semiconductor industry fall into two general categories: the lack of representation and protection for the workers and the lack of regulation of labor standards.

The central complaint of the medical community against the industry is the toxicity of the chemicals used in production; while environment protocol establishes the rules for dealing with such, these are insufficient in response to the effects on workers. Chemicals used in the manufacturing of chips allegedly cause cancer, neurological, vision, respiratory, and reproductive damage to workers (Fordfound). To this, there are few protections for the workers in the plants-the protective suits workers must wear in clean rooms are to protect the chips from contamination rather than people from carcinogens (Mazurek).

Furthermore, there is a decided lack of regulation for this problem. Labor-intensive production of chips has been widely off-shored to export processing zones (EPZs)-conditions in EPZs vary greatly, but governments generally lower labor standards to attract foreign investment. Workers are furthered disadvantaged as unionization is also discouraged by governments in EPZs (Krumsiek).

Workers in the semiconductor industry are historically non-unionized. In the case of low skilled production workers, layoffs are common during a market downturn. Though engineers are generally well protected from market forces, the same cannot be said for the average worker in the production line (Angel). Globalization has put upward pressure on wages for engineers and downward pressure on wages for workers (Brown).

Facilitated by demands to cut cost and wages consequently, firms hire women to the labor force almost exclusively as female workers are paid less than male counterparts. Producers hire immigrant women for production in the United States and young single women are hired for production abroad (Fordfound). Women are hired because corporations perceive women to be a more passive and controllable workforce-and, thereby, less inclined to join unions.

Managers encourage this idea by presenting the idea of unionization as adverse to the relationship between workers and management-managers themselves are rendered as a father figure and promote a patriarchal family view for the workers in relation to the firm (Grossman). Unsurprisingly, women are grossly underrepresented in supervisory or managerial levels. Employers seek to hire young women both to perpetuate this situation as well as to avoid problems of older employees who demand higher wages are less inclined to work overtime (Krumsiek). Poverty and government encouragement keep young women flocking to jobs in these firms despite health risks and exploitation.

The general attitude in the early 80s on the behavior of the semiconductor industry in terms of labor protocol was favorable; the firms in the industry were believed to enact good if not best policies for the treatment of the workforce. It was not until complaints surfaced about the chemicals used in production causing cancer in workers that there was more scrutiny placed on firms’ labor standards. The Silicon Valley Toxics Coalition (SVTC) found that OSHA standards were inadequate to provide for worker health and safety (Watterson).

While scathing reports were presented to regulatory bodies, there has been little progress in regulating semiconductor producers domestically or abroad. Even the Semiconductor Industry Association commissioned a study on the occupational hazards in chip production plants in 1989. The study concluded by recommending the elimination of certain chemicals in the production process, but was largely ignored and caused resistance to further studies (Krumsiek).

There are several ways firms in the semiconductor industry can circumvent the pressure of lobbyists and their call for regulatory measures. They state that the health risks of the chemicals used in production have inconclusive test results (Mazurek).

Additionally, because health problems in workers occur many years after initial exposure, firms dodge the blame. Data on chemical exposure is scarce globally and unavailable to the public, if not absent altogether. Governments also seek to protect the firms at the expense of labor standards to maximize profits and minimize costs (Watterson). Should regulation ever be passed for international standards for chip production, enforcement would remain problematic.

Within governments alone: there would be a lack of transparency and resources, an abundance of patronage and corruption, and disincentive to follow profit-compromising rules. Presently, international organizations such as the ILO and WHO can only play watchdog to labor issues in the semiconductor industry.