World Investor Week丨Electronics industry with equal emphasis on technology and manufacturing (Part 1)

Editor's note:

To understand a listed company, you must be familiar with the industry environment in which the company operates. In order to help investors master the basic skills of financial analysis in different industries and improve their investment decision-making ability, the Investment Education Center of Shenzhen Stock Exchange, together with KPMG, Haitong Securities, Changjiang Securities, and Industrial Securities, jointly launched a series of investment education articles on “Industry from a Financial Perspective”. This article is the eleventh article, which introduces the development status and characteristics of the electronics industry for you. Let's take a look.

The electronics industry with equal emphasis on technology and manufacturing attributes (Part 1)

The electronics industry is usually divided into TMT (Technology, Media, Telecom) industry categories, representing the development direction of information technology, but also shouldering the heavy responsibility of manufacturing, with dual attributes of technology and manufacturing. Therefore, combining the characteristics of industry development and relevant financial indicators, analyzing the electronics industry from an investment perspective is particularly important for grasping industry development trends and improving investment decision-making capabilities.

First, the development status of the electronics industry   

(1) The electronics industry is huge in scale and has a long industrial chain

The electronics industry has a long industrial chain, which can be roughly divided into three major links: upstream (chip design), midstream (component manufacturing), and downstream (electronic manufacturing such as packaging and testing, modules, and assembly). From the perspective of sub-sectors, the electronics industry can be divided into seven major sectors, including semiconductors, passive devices, PCBs, panels, LEDs, consumer electronics, and security. Among them, semiconductors and consumer electronics are the core sectors of the electronics industry.

The electronics industry is huge. According to WSTS statistics, the global sales of the upstream semiconductor segment in 2020 has exceeded 440.4 billion US dollars, with a growth rate of 6.81%; of which, domestic sales in China reached 151.5 billion US dollars, accounting for more than one-third of the world's total. .

(2) my country is mainly involved in electronic manufacturing, and there is a lot of room for industrial development

The development of my country's electronics industry is relatively late, conforming to the wave of global division of labor, and currently mainly involved in electronics manufacturing. After 2000, a large amount of capital and labor poured into the electronics industry in my country. Under the combined effect of scale effect and cost advantage, my country has gradually conquered areas with relatively low technical thresholds and relatively single product specifications, such as panels, PCBs, and LEDs. In addition, the growth of my country's electronics industry has been synchronized with the development of smartphones. Through modules, components and other links, it has gradually become the backbone of the smartphone industry chain.

At present, the controllers of core electronic fields such as chips, materials, and equipment are still companies from Europe, the United States, Japan and South Korea, and the participation of domestic companies is low, which is related to industrial technical barriers, industry ecology, and external support. As the world's largest producer, exporter and consumer of consumer electronic products, my country's electronics industry's global industrial status and competitiveness cannot match it, and industrial development still needs to be developed.

2. Industry profit model and characteristics   

(1) Industry profit model

The main profit model of the electronics industry comes from earning the difference in sales between upstream and downstream. Generally speaking, the chip design links that are more upstream and have higher technical barriers tend to have higher gross profit margins. Core components, materials and equipment also belong to high value-added links, while electronics manufacturing is at the end of the smile curve – with higher gross profit margins. It is low and requires a large investment to meet mass production. In recent years, domestic electronic manufacturing enterprises have begun to take the road of platform development, and improve their core competitiveness by providing integrated manufacturing solutions.

(2) Dual attributes of industry technology and manufacturing

To understand the "manufacturing" attribute of the electronics industry, it is first necessary to understand the impact of "demand fluctuations" and "cost control" on the industry. Electronic manufacturing requires a lot of human and material resources. From the perspective of human resources, taking consumer electronics manufacturing as an example, the global glass cover leader needs to recruit more than 70,000 production employees every year; from the perspective of material resources, taking investment in panel factories as an example, A 10.5-generation high-generation line with a monthly production capacity of 120,000 pieces requires an investment of about 40 billion yuan. Huge fixed assets and labor costs are behind the creation of "Made in China", but there are also hidden concerns, such as high pressure on depreciation of fixed assets during periods of sluggish demand, no window for investment due to technological changes, gradual reduction of demographic dividends, and low-barrier links are prone to vicious competition. and many more. Therefore, improving cost management capabilities, having a forward-looking vision, and implementing "lean" manufacturing, such as improving production processes, accelerating turnover rates, and improving employee quality, are required courses for electronic manufacturing companies.

The "technology" attribute of the electronics industry is generally linked to R&D strength. The reason why companies such as Europe, America, Japan and South Korea can gain an advantage is, in the final analysis, the moat they have with technology. From the perspective of R&D investment, overseas technology companies generally attach great importance to R&D. For example, in 2020, Intel's R&D expenditure will account for 17% of operating income, and Texas Instruments will account for 11%. In terms of patents, there is a strict patent protection system, such as the 337 investigation in the United States and the high royalties of Qualcomm. If Chinese electronics companies want to break the past growth model, they need to pay more attention to core technology research and development capabilities, acquisition and protection of intellectual property rights, etc., to achieve breakthroughs in the upstream of the industrial chain.

In general, the technological end of the electronics industry promotes growth through innovation, which is the driving core of profitable growth; the manufacturing end uses capacity expansion, share acquisition, operation management, and production process improvement to reduce costs and increase profits, which is the key to optimizing profitability. It is also an important foundation for technological innovation. In the 5G era, with the vigorous development of AI, Internet of Things, automotive electronics, smart wear, etc., the electronics industry may also usher in new development opportunities.

(This article is contributed by Mo Wenyu of Changjiang Securities Research Institute)

(Disclaimer: This article is published for investor education purposes only and does not constitute investment advice. Investors operate on this basis at their own risk. Shenzhen Stock Exchange strives to ensure that the information contained in this article is accurate and reliable, but does not guarantee its accuracy or completeness. does not make any guarantees on the timeliness and timeliness, and is not responsible for the loss caused by the use of this article.)