Earlier in this chapter, we have covered the three key components of "driving the arena" and explained why they drive a high-growth and highly dynamic competitive environment. This section will further explore the key role of "digitalization" in the formation of these three components, and how these three components have come together to contribute to the thriving of today's major arenas.
Digitalization: the core force to promote the escalation of competition
The advancement of digitalization has greatly expanded the range of industries that can achieve fierce competitive dynamics, and has become a key driver for the simultaneous rise of the three "magic potion ingredients". For example, traditional brick-and-mortar retailers are not investing as efficiently in reducing unit costs as online retailers. While traditional retail marketing investments are only effective within the physical confines of the store, e-commerce can market nationwide and even globally, significantly expanding the reach of the target market.
Network effects explode at an accelerated pace. In a number of areas, digitalization amplifies the role of network effects. For example, the more users a social media platform has, the more valuable it is to each user; The higher the number of search engine users and the richer the data accumulation, the more accurate and valuable the results will be. E-commerce platforms exhibit a "two-way network effect" – the more merchants there are, the more consumers they attract, and vice versa. A similar effect exists in consumer electronics and the operating systems behind it, such as iOS and Android: the more users you have, the more developers you develop your app, which in turn attracts more users.
Promote globalization. Digitalization has also broken down geographical constraints, enabling products and services that would otherwise only operate locally or regionally to go global. This is especially true in areas that rely on the Internet, such as cloud services, consumer Internet, e-commerce, and software. For example, the global popularity of K-pop is a reflection of the increased ability of global media distribution before the popularity of streaming. Digitalization has also had a profound impact on the information-driven business services sector, where companies are investing to meet the new demands of a globalized market as the knowledge economy accelerates.
How the Three Key Elements Led to Today's Arena (in order of 2020 revenue)
Here's a look at how these three key components work together to drive the development of some of today's iconic arenas.
Industrial electronics: outsourcing manufacturing model detonates growth
There are two main groups of companies in this space: contract manufacturers (e.g., Foxconn, Jabil, Flex) and equipment manufacturers (e.g., Panasonic and Schneider Electric). Among them, the rise of contract manufacturers has benefited from the popularity of the manufacturing outsourcing model, which has transformed the business model into a highly competitive arena.
Taking Foxconn as an example, its main customers include international brands such as Apple and Sony, and its outsourcing orders have driven its continuous expansion of production capacity, and also prompted it to continue to upgrade its capital expenditure and R&D investment. We can see this model of "input upgrading-output growth" from the investment dynamics of Foxconn and its competitors:
In 2005, Foxconn's revenue was already higher than that of Jabil and Flex, and 5% of its revenue was spent on capital expenditure;
In comparison, Jabil and Flex accounted for 3% and 2% of capital expenditures, respectively.
As customer orders continued to grow, Foxconn was able to maintain a high-investment strategy, while competitors did not increase their capital expenditure ratio to 5% until 2015.
By 2020, Foxconn's revenue will continue to lead, although the proportion of capital expenditure in revenue will drop to 1.2%, but the actual investment is still increasing, but the revenue growth is faster;
In the same period, Jabil's capital expenditure accounted for 3.6%, which is still catching up.
Figure: Foxconn's capital investment has been accompanied by revenue growth
This escalating investment and return forms a positive cycle that allows Foxconn to stay ahead of the curve in the arena.
To a certain extent, contract manufacturers' capital expenditures are more about expanding capacity than significantly improving quality, so they are relatively less aggressive from an "upgrade investment" perspective.
In contrast, original equipment manufacturers (OEMs) are ushering in new growth opportunities, driven by the technological change of "equipment digitalization". As devices and hardware products become increasingly digitalized, OEMs are increasing capital investment and R&D spending to develop new manufacturing processes and embedded software to drive product upgrades.
For example, Panasonic announced as early as 2006 that it would stop producing analog TVs and fully shift to the field of digital TV; Siemens, for its part, invested around $10 billion throughout the 2010s to build capacity in its "digital factory" business.
The demand for digital products in the downstream market continues to grow, driving not only the revenue of OEMs, but also the revenue growth of upstream electronic component manufacturers. The industrialization of developing economies has largely contributed to the rapid expansion of demand in this sector.
According to a McKinsey report, the field of industrial electronics was the largest "arena" in terms of revenue in 2005 ($389 billion) and 2020 ($987 billion).
Related:
18 Potential Arenas of the Future That Could Reshape the Global Economy (1)
18 Potential Arenas of the Future That Could Reshape the Global Economy (2)
18 Potential Arenas of the Future That Could Reshape the Global Economy (3)
18 Potential Arenas of the Future That Could Reshape the Global Economy (4)
18 Potential Arenas of the Future That Could Reshape the Global Economy (5)
18 Potential Arenas of the Future That Could Reshape the Global Economy (6)
18 Potential Arenas of the Future That Could Reshape the Global Economy (7)
18 Potential Arenas of the Future That Could Reshape the Global Economy (8)
18 Potential Arenas of the Future That Could Reshape the Global Economy (9)
18 Potential Arenas of the Future That Could Reshape the Global Economy (10)
18 Potential Arenas of the Future That Could Reshape the Global Economy (11)
18 Potential Arenas of the Future That Could Reshape the Global Economy (12)
