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IndustriAll Project

« Strategic study on anticipation of

changes in the European ICT sector »

Phase 2 : sub‐sectorial analysis

February 2016

Table of contents

CHAPTER 1 – TELECOMS ........................................................................................................ 1 1. NETWORKS ........................................................................................................................... 3 2. DISRUPTIVE TECHNOLOGIES AND STRATEGIES OF THE SECTOR ........................................................ 4 3. SET‐TOP BOX AND GATEWAYS .................................................................................................. 8 4. MOBILE HANDSET ................................................................................................................ 11 5. WHAT’S GOING ON IN EUROPE? ............................................................................................. 16

CHAPTER 2 – SMART CARDS ................................................................................................ 17 1. OVERVIEW OF THE SECTORAL TRENDS ...................................................................................... 19 2. DISRUPTIVE TECHNOLOGIES AND STRATEGIES OF THE SECTOR ...................................................... 23 3. MAIN PLAYERS AND EMPLOYMENT IN EUROPE .......................................................................... 26

CHAPTER 3 – ELECTRONIC COMPONENTS ............................................................................ 31 1. OVERVIEW OF THE SECTORAL TRENDS ...................................................................................... 33 2. DISRUPTIVE TECHNOLOGIES AND STRATEGIES OF THE SECTOR ...................................................... 36 3. MAIN PLAYERS AND EMPLOYMENT IN EUROPE .......................................................................... 44

CHAPTER 4 – CONNECTORS ................................................................................................. 55 1. OVERVIEW OF THE SECTORAL TRENDS ...................................................................................... 57 2. DISRUPTIVE TECHNOLOGIES AND STRATEGIES OF THE ACTORS: ..................................................... 62 3. MAIN PLAYERS AND EMPLOYMENT IN EUROPE .......................................................................... 65

CHAPTER 5 – CONSUMER ELECTRONICS AND DOMESTIC APPLIANCES ................................. 75 1. OVERVIEW OF THE SECTORAL TRENDS ...................................................................................... 77 2. DISRUPTIVE TECHNOLOGIES AND STRATEGIES OF THE SECTOR ...................................................... 82 3. MAIN PLAYERS AND EMPLOYMENT IN EUROPE .......................................................................... 91

CHAPTER 6 – CABLES ......................................................................................................... 105 1. OVERVIEW OF THE SECTORAL TRENDS .................................................................................... 107 2. EMPLOYMENT IN THE EUROPEAN CABLES SECTOR: A DROP OF 15% SINCE 2008 .......................... 114 3. WORLDWIDE TRENDS OF THE SECTOR .................................................................................... 115 4. MAIN PLAYERS AND EMPLOYMENT IN EUROPE ........................................................................ 116

CHAPTER 7 – COMPUTERS AND INDUSTRY‐RELATED IT SERVICES ...................................... 125 1. OVERVIEW OF THE SECTORAL TRENDS .................................................................................... 127 2. DISRUPTIVE TECHNOLOGIES AND STRATEGIES OF THE SECTOR .................................................... 134 3. MAIN PLAYERS AND EMPLOYMENT IN EUROPE ........................................................................ 137

CHAPTER 8 ‐ INDUSTRIAL ELECTRONICS ............................................................................. 151 1. OVERVIEW OF SECTORAL TRENDS .......................................................................................... 153 2. DISRUPTIVE TECHNOLOGIES AND STRATEGIES OF THE SECTOR .................................................... 158 3. MAIN PLAYERS AND EMPLOYMENT IN EUROPE ........................................................................ 166

IndustriAll project "Strategic study on anticipation of changes in the European ICT sector”

Table of contents

Chapter 1 ______________________

Telecoms


2 Chapter 1 ‐ Telecoms


Chapter 1 ‐ Telecoms 3

At worldwide level, the telecom sector is made up of 3 main segments:

Networks 150 €b€ in 2014

STB (Set Top Boxes) & Gateways. 30 b€ in 2014

Mobile handsets. 200 b€ in 2014

1. Networks

1.1. Short overview

At worldwide level, networks are representing a 150€b market1. Around 50 b€ can be added with the enterprise networks market.

The network telecom market does not grow fast anymore due to the NSP’s cycle investment. Some analysts believe that the Wireless market may have peaked in 2015 and then might decrease in the forthcoming years due to the wait‐and‐see attitude of the NSPs before the 5 G ramp‐up. At best, the Wireless market might stay stable from now on to 2019.

Nevertheless, some segments in the market are still growing. That’s the case for instance of the critical point of IP routers. This segment should benefit from a steady growth. Other applications such OSS/BSS should also enjoy a strong growth.

SDN (Software Defined Networking) and NFV (Network Function Virtualization) are also growing a lot in a context of a datacenters boom and the virtualization of networks.

1.2. Overview of the sectoral trends

One of the main drivers of the networks market is the mobile subscriber growth.

According to Ericsson2, smartphone subscriptions might rise from 2600 million in 2014 to 6100 million in 2020! Tomi Ahonen Forecast3 is more cautious with “only” 3700 million smartphone subscribers in 2018… Nevertheless, this growth of the smartphone sales along a global growth subscriber of mobile subscribers, will feed data explosion in the forthcoming years.

Data and increasing traffic

Traffic is increasing at a stellar speed due to the rise of smartphones subscribers and intense use of video. This trend should continue during many years. It means that networks will have to support a growing amount of data and be flexible so as to face data explosion.

1 Digiworld Yearbook 2015. Idate May 2015. 2 Ericsson – smartphone – mobility report. May 2015. 3 Mobile Forecast 2014‐2018. Tomi T Ahonen. 2015



2. Disruptive technologies and strategies of the sector

In the telco industry, technological changes are uninterrupted. Wireless is a good illustration with 4G being currently deployed all over the world and further improvements such as VoLTE and LTE‐Advanced at their beginning. In the meantime 5G researches have already begun. As regards to fixed broadband, copper is still being upgraded with VDSL, VDSL2 and now G.Fast along fiber improvements. Telecom players do invest a lot in R&D. As a whole, it’s an R&D‐ intensive industry with R&D/Sales ratio of 12‐15%.

One of the major issues of the telco market is the rise of SDN and NFV. Because networks are supporting more and more users, data and needs, scalability and adaptability are key. SDN and NFV are being deployed like in Domain 2.0 AT&T program. SDN is the opportunity to centralize equipment control through software. Networks can become programmable. SDN is often linked to NFV. NFV is the virtualization that is softwarization, of major networks functions. Using commoditized equipments, these softwares are becoming the key part of the networks and are hosted in the cloud. This major trend will progressively redesign networks architecture and favor telecom and IT convergence.

As regards to IT & Telecom, it should be noted that a research institute such as IDATE has decided in its last edition to put together telecom infrastructures and IT infrastructures. This also illustrates the IT & telecom convergence that is taking place. IT players including Google, Accenture, Cap Gemini and so on are trying to enter the telecom market and are proposing applications and integration services to NSP’s. Tekelec’s acquisition by Oracle is an illustration of that trend. Some sub‐segment of the telco market such as OSS/BSS are a grey zone between IT players and telecom equipment providers.

Another major trend is M2M (Machine to Machine communication). M2M is emerging right now. It will constitute of the main drivers of the telco market. However it should be said that this is a major phenomenon. M2M whithers the telco industry and will impact the whole digital world and beyond i.e manufacturing. Automotive and utilities should fuel the M2M growth. M2M can be considered as an opportunity for NSP’s as well as telco equipment providers.

Source: Ericsson



2.1. Many M&A (Mergers and Acquisitions) are ongoing in the telco industry

Because NSP’s are merging and scale is becoming a crucial issue, telecom equipment providers have never ceased to merge.

These last 15 years or so, many players disappeared. Some were acquired (Marconi, Motorola, Panasonic…). Other merged (Alcatel + Lucent, Nokia + Siemens) or filed for bankruptcy (Nortel). In April 2015, Nokia announced a public exchange offer for Alcatel‐Lucent’s acquisition. This is the most important M&A since many years.

Ericsson proceeded many smaller acquisitions these last 3 or 4 years. Beyond some Nortel’s assets, Ericsson bought numerous companies such as Telcordia and Telcocell so as to strengthen its position in the OSS/BSS market. It also acquired several companies in order to get in the TV & Media market (Technicolor Broadcast, MediaRoom, Redbee Media). More recently, Ericsson focused on cloud related acquisitions: MetraTech, Apcera, Sentilla and added a telecom IT services business takeover in China.

Even though Cisco has much broader portfolio, it can be considered as a major telecom player. Cisco has been acquiring frenetically companies along the years: 6, 10, 11, 6 respectively in 2014, 2013, 2012 and 2011. In October 2015, 3 acquisitions were announced.

Because of the technological hype related to SDN and NFV, Cisco bought T‐fail, Ciena is currently acquiring Cyan and Infinera has completed the Transmode’s takeover.

Among the other M&A that could happen and as an answer to Nokia’s public offer, Ciena or Juniper might be an Ericsson’s target even though it announced that it had arbitrated in favor of organic growth. The story is not yet over.

2.2. Main players and employment in Europe

Ericsson has been the leader of the telecom industry for these last 15 years or so. In reality, it is a Wireless leader that has tried to enlarge its portfolio through services offer (managed services, professional services…). More recently, it entered OSS/BSS and IPTV. One of its goals is to reinforce in key markets such as IP routers in which it has been a marginal player up to now. It has realized relatively small‐scale acquisitions in order to get technologies and/or market share. Its domination is being threatened by the – irresistible? – rise of Huawei.

Due to the Chinese industrial policy – Chinese NSPs procurement policy, state export subsidies etc. – Huawei has been gaining market share in every Economic zone except in the United States. It is now the world leader in several markets such as Optics and GPON. The new Nokia – after Alcatel‐Lucent integration – will however be the number 2 behind Ericsson. Huawei has also become one of the world leaders of the smartphone industry. This successful development must be put into the context of the Chinese industrial policy. 20 years ago, China had announced its ambition to favor the emergence of a world leader in the telco industry.

Ericsson is still the leader but needs to invest deeply (internal and/or organic growth) on the most high growth potential products/markets. It has developed these last years beyond



its traditional market, that is wireless, so as to catch the growth of other markets beyond traditional services. Only a success in high growth new segments could allow Ericsson to remain the world leader.

Nokia’s takeover for ALU is an answer to the issues of scale, market share and portfolio. In the forthcoming years, Nokia will use a lot of energy so as to succeed at doing the integration.

The big players are now Ericsson, Huawei and Nokia (including Alcatel‐Lucent).

Cisco is another big player with a broad portfolio much wider than telecom infrastructures. Nevertheless, Cisco is major player with dominant market positions in routers for NSPs as well as enterprises. It is also present in many different segments such as ePC (Evolved Packet Core), SDN and NFV.

ZTE is another Chinese player, although smaller and less successful.

There are also some smaller players that are significant competitors in Optics (Ciena, Infinera, ECI…), in Fixed Access (Tellabs, Calix…), OSS/BSS (Amdocs, Comverse…).

Beyond Ericsson and Nokia/Alcatel‐Lucent, there aren’t European players anymore.

Employment decline in Europe

Employment in Europe of the telecommunications equipment manufacturers has been strongly declining these last 15 years. Many European players gave up or were acquired (Marconi, Siemens…). Major companies implemented many restructuring plans.

Fabless became the motto of most of the players. First, networks providers began to outsource to Electronic Manufacturers Services (Flextronics, Jabil…). The manufacturing units were quickly closed in Western Europe and were offshored either to Eastern Europe or to Asia. Almost all manufacturing jobs disappeared in the 2000’s. Even in Eastern Europe.

Then offshoring projects were launched in order to create Shared Services Centres, mostly in Eastern Europe (Czech republic, Poland…).

R&D at first began to be offshored but only in the case of legacy products. Quickly, things evolved and more innovative developments began to be offshored.

Nowadays firms such as Ericsson have at least 35% of their total headcount located in Asia4. In the case of Nokia – before ALU’s takeover –it’s around 40%5.

Global employment in telecom equipment is around a million jobs worldwide. Figures do not include Foxconn and other Electronic Manufacturing Services companies. These figures come from the top 60‐telecom companies. Some figures are not available. In some cases, Samsung or Apple, assessments have to made so as not to include retail employees for instance.

4 Ericsson website. October 2015. Facts & figures. 5 Nokia’s People & Planet Report 2014.



In Europe, the number of employees in the manufacture of communication equipment (NACE code 26.3) was around 180 000 in 2012. It must be lower today.

2.3. Outlook

Following the trend, these are the following features that should happen in the forthcoming years:

Chinese competitors are threatening. Huawei should become the telecom world

leader.

In the USA, innovation will continue to flourish due to an ecosystem with

heavyweight NSPs among the frontrunners. At the same time, European NSPs are

lagging behind and are slow to roll out next generation networks.

Boundaries are blurring: outsourcing from operators. IT companies getting in.

Telecom equipment market is one of the rare sub‐sector with European

companies leading.

5G will be launched early in South Korea and Japan. That won’t be the case in

Europe. Even though Europe has announced a 5G‐PPP (public private partnership)

with the European Commission, industry manufacturers, NSPs and researchers.

The EU has signed agreements with China and South Korea in the field of 5G. The

latter has budgeted an amount for 5G quite similar to the European Commission

for the whole UE!

Employment in Europe will continue to decline. The restructuring plan launched by

Ericsson in autumn 2014 is targeting employment in Europe including Sweden. It

will be followed by the synergies announced by Nokia that would lead to at least

10 000 jobs losses, with a large chunk in Europe. Subcontractors will also suffer

from these synergies (procurement policy).



3. Set‐top box and gateways

STB and gateways can be considered as a distinct segment or a component of networks equipment segment.

It represents a worldwide market of around 30 b€. STB represent the most important part of it, around 18 b€. The gateway market represents 12 b$. Some of the main players are also present in networks (Huawei, ZTE, Cisco…) or mobile handsets (Samsung).

MSOs (Multiple‐System Operator, cable or satellite provider) face an increasing competition coming from NSPs as well as OTT (Apple TV, Roku…). The latter provide specific boxes or sticks (Amazon, Google…) at very low prices. This is leading to a decline of Pay‐TV, the cable and satellite market should therefore decline in the forthcoming years. Combined with STB embedded in SmartTV or game consoles, the overall STB market should decline up to 2019.

Source : Infonetics research 2015. STB market.

On the other hand, because gateways are unavoidable, the trend is different. The gateway market should rise in the future but it will not offset the STB market decline.



Source: Infonetics Research. 2015. CPE.

The gateways or CPE market growth will be driven by the growth of subscribers.

The development of triple play bundles and multi‐screens usages will fuel the growth along with fiber growth as well as fixed LTE.

In the STB market, there’s a significant divide between developed and the emerging markets. In Western Europe and North America, operators have trouble attracting new subscribers and therefore propose more and more sophisticated devices and services. In the emerging countries, CPE are more basic.

3.1. Disruptive technologies & strategies of the sector

Several transitions are ongoing: DSL, CPE from ADSL to VDSL and G.fast. And from modems to broadband gateways. In the CPE cable market, there’s a transition from DOCSIS 2.0 to DOCSIS 3.0 so as to deliver multiscreen features. Beyond the competition between MSOs and between MSOs and NSPs (Network Service Providers), a more gigantic battle is taking place around the connected home.



The issue is which player or category of player will succeed in hosting and keeping the intelligence that allows to control not only telephone, internet and TV but also many other services such as: security, fire detection, temperature regulation, domestic appliances use etc.

NSPs, MSOs, OTT (“Over The Top” players like Apple….), domestic appliances manufacturers as well as STB/gateways manufacturers are all trying to find the solution so as to control the connected home. This battle could imply to shuffle again the cards.

The connected home evolution will drive the change of this in the forthcoming years.

3.2. Main players and employment in Europe

The market is not concentrated with dozens of Chinese and Taiwanese players. The leader is Arris that is currently acquiring Pace, the number 2, a British competitor. Huawei and ZTE are also major players along Samsung and Technicolor. Technicolor has entered into an exclusive agreement with Cisco. Its goal is to acquire Cisco Connected Devices, one of the big players. The transaction will lead to a strong number 2 vis‐à‐vis Arris. Furthermore, the 2 groups have announced that they will enter into a strategic partnership that will allow them to deliver and products and cooperate on Internet of Things Solutions and services.

Other important competitors include Echostar, Humax, Sagemcom, TP‐Link, Zyxel, Fiberhome among others.

Technicolor, a French company, will remain the only European and major competitor with a strong location in the US. Sagemcom is another player but much smaller. Beyond these 2, ADB (Swiss) and Netgem (French, really tiny) are the only other European firms.



As a whole, employement in Europe has been shrinking due to restructuring plans implemented by Sagemcom, Technicolor and Pace. Manufacturing sites have disappeared. Only R&D and some SG&A functions remain. But even R&D jobs have been offshored to China.

4. Mobile Handset

2011 2012 2013 2014 2015 2016 2017 20180

200

400

600

800

1000

1200

1400

1600

1800

2000

Mobile industry revenues Mds$

Source: Tomi Ahonen‐Mobile Forecast‐ 2014‐2018

Fueled by subscription development, mobile industry revenues have been growing fast. The mobile industry is the fastest‐ever to go to achieve one trillion dollars revenues in only 29 years. The growth rate is now slowing because voice revenues have reached a ceiling. Applications represent a tiny fraction of the whole.

Mobile Handset design and manufacturing is a highly competitive industry. The landscape changed completely in less than a decade and former world leaders such as Motorola or Nokia have disappeared. And Blackberry is struggling for its survival. Along these former giants, new competitors have these last years from Apple to Xiaomi and perhaps soon Indian Players.



4.1. Mobile handset sales

Because of smartphones, revenues from the hardware side are growing fast. But the penetration rate will soon reach a peak. 2 contradictory forces push Smartphones revenues: high‐end smartphones on one side and Moore Law on the other side. High‐end smartphones integrate a growing number of features that push the price up. Moore Law on the other side contributes to push down the price.

New handset sales will continue to rise up to the end of the decade but the growth will slow. Features phones prices have fallen below 20 US$. But 2/3 of handsets sold are smartphones. The 2 billion phones per year mark was reached in 2015.


Consumers quickly switched from basic phones to smartphones, allowing smartphones sales to grow quickly. The one billion mark was passed in 2014 and the 2 billion will be reached in 2018.



2011 2012 2013 2014 2015 2016 2017 2018

0

500

1000

1500

2000

2500

476

695

990

1290

1560

1800

1980

2140

New smartphones sales in units


The average sales price (ASP) is going down given the Moore law. Basic phones are now really cheap. But even smartphones prices are declining quickly. As a whole the rise of smartphone lead to a growth of the whole mobile handset market. Apple, Samsung and Google transformed this market and at the same time were fueled by its growth. It changed the balance of power with Networks providers in favor of the former.

Another major feature of the mobile handset market is cannibalization. Because mobile handets have progressively integrated a growing number of functionalities, many other markets have been impacted: cameras, recorders, GPS devices…

In terms of manufacturing, Foxconn is obviously the major producer even though not all competitors outsource to EMS. Nevertheless, China is hosting the largest chunk of plants and employees. One should mention that these last years, plants were opened in other countries such Brazil, Malaysia and Vietnam. In Brazil, this has to do with high import taxes



that can be avoided in case of local manufacturing. In India, new plants are opening due to Chinese firms (Huawei, Foxconn…) willing to comply to Indias’ policy. Originally Indian companies that began to emerge quite recently were dedicated to design and were outsourcing production in China. This situation might be changing with some Indian companies opening plants in India. This must be related to “Make in India” governmental policy.

4.2. Main players & employment in Europe

As regards to shipments, Samsung is the world leader. Apple is number 2. Looking at profits, Apple gets a huge proportion of the whole sector’s profits. It took 93% of mobile profits last quarter 2014. Samsung got only 9%. Microsoft lost money as well as Blackberry, Sony Mobile and HTC. Apple sold smartphones at an average selling price of 698$ compared to an ASP 206$ for Samsung!

Beyond these two leaders, many Chinese players are becoming stronger. Huawei has been well ranked these last years. Its sales are growing in 2016 at an impressive rate. Lenovo was reinforced by its takeover of former Motorola’s mobile handset business. But the most impressive success to date is the spectacular rise of Xiaomi, another Chine player. Founded in 2010, it became the largest smartphone maker in China in 2014. Xiaomi was also the 3rd largest smartphone maker in the word according to IDC and Strategy analytics. 6. Huawei actually captured the number 3 position in 2015. Xiaomi ranked 4th.

Major players such as Apple and Google are trying to move along the value chain and are seeking for new markets such wearable. These 2 players are for instance also planning to enter the automotive market.

Samsung’s got another strategy being an integrated player: chipsets, screens, batteries and sensors are designed and produced internally. Samsung’s got also its own plants and does not outsource. Huawei is following a similar strategy.

IDC. 29 October 2014. Worldwide Quarterly Mobile Phone Tracker.



Regarding the future, Tomi Ahonen predicts that Samsung will stabilize after difficult years. Apple should loose ground as regards to market share and its focus on high‐end smartphones. And Chine manufacturers will continue to grow (Huawei, Lenovo, Xiaomi and TCL).

Additionally, the numerous Indian firms that are flourishing nowadays might become serious competitors before the end of the decade.



Regarding mobile operating systems, according to Tomi Ahonen, the most likely scenario is of the picture to remain frozen like it is today. The author does not exclude a Tizen flop (Samsung Operating System), an iPhone surge, a Tizen surge, a Blackberry comeback and Windows comeback by order of likelihood.

5. What’s going on in Europe?

Almost all European players have disappeared. Many of them gave up: Alcatel, Ericsson, Nokia, Phillips, Sagem and Siemens among others along with numerous other players in Japan or in the USA (Motorola).

In Europe, only a handful of SMEs remain or emerged.

Former Nokia employees have launched a new firm, Jolla. It has developed Sailfish

OS a new operating system (OS) based on MeeGo that had been developed by

Nokia. It’s a company with 125 employees that has faced recently some financial

troubles. It has secured however a new financing.

Archos was created in 1989. This French company designs smartphones, tablets as

well as connected devices. It has been struggling with a declining turnover and

losses. 2015 might be the year of a bounce back with a turnover rising for the first

time since 2011. It employed 179 people end of 2014.

Few other SME exist in Europe such as Fairphone that sells Fairtrade phones.

Fairphone will use the new Sailfish OS.

Vertu is a British designer of luxury mobile handsets owned by a private equity

fund. The company has 1000 employees.

It’s difficult to imagine how things might change in Europe and how some big players could emerge in the short/medium term.

Chapter 2 ______________________

Smart cards


18 Chapter 2 ‐ Smart cards


Chapter 2 ‐ Smart cards 19

1. Overview of the sectoral trends

1.1. Smart cards have been, and will probably be a dynamic market in the mid term

Smart cards are used to transfer and store data. They lie at the very heart of the last years’ telecommunications boom, since the telecoms (cell phones) have been the main end market for smart cards. This market was around 2,3Bn€ worldwide in 2013.

Financial services (credit cards, which represent a market of 2,1Bn€), public services (ID cards and national health services cards, which represent a market of 2,4Bn€), and transports (contactless transport cards) are also important drivers for the sub‐sector.

Please note that there is a distortion between an analysis of end markets by volumes (where telecoms clearly lead the way) and an analysis of end markets by value (where there are three important markets). This is due to the fact that telecom smart cards (SIM cards) are becoming “commodities” and have then a lower price than more value oriented cards such ID cards or bank services.

In 2014, smart cards production has kept growing

More than 8Bn of cards have been delivered in 2014, that is a growth of 10%. The average annual growth between 2009 and 2014 reaches 12, 2% (in volume), the sign of a dynamic market.

Fueled notably by financial services growth, short and mid‐term perspectives are good

In 2015, production is expected to reach 8,8Bn of cards, increasing by 9% from 2014. The 2014‐2020 CAGR should amount to 7% per year.

However, those high figures have to be handled carefully: they reflect the dynamism of the demand in smart cards. The figures should be lower when focusing on the value of the market (the revenues of the players).

Production of microprocessors "smart secure devices" (Millions of units)

2011 2012 2013 2014(f) % of total 2014/2013 CAGR 2014/2009

Telecoms 4 700 5 100 4 850 5 100 63% 5,2% 8,4%

Financial services 1 050 1 200 1 550 1 950 24% 25,8% 21,1%

Public‐Health 240 310 350 390 5% 11,4% 19,5%

Others (transport…) 305 480 580 600 7% 3,4% 23,4%

TOTAL 6 295 7 090 7 330 8 040 100% 9,7% 12,2%

Source : Eurosmart



The sector has been through bearish trends regarding prices in the last years:

Competition is increasing, with some major players being very price aggressive, and some new players (mainly from Asia) slowly rising;

Basic SIM cards are in the process of commoditization, though prices are still kept high in some sub‐markets (next‐generation SIM cards, financial services).

2009 2014 (f) 2015 (f) 2020 -

2 000

4 000

6 000

8 000

10 000

12 000

14 000

3 400 5 100 5 250 5 900

750

1 950 2 350

3 500

160

390 440

900

210

600 750

1 700

Forecast for production of smart secure devices (millions of units. Source : Euros

Others (transport…)Public-HealthFinancial servicesTelecoms

Telecom market should keep growing at a moderate pace, carried by next‐gen SIM cards

SIM cards are, and will remain the first end market for smart cards sector. However, the growth should slow down in the mid‐term (forecast of 2014‐2020 2% CAGR according to Eurosmart). Demand has been fed by increasing equipment of emerging countries as regards to mobile devices, 4G networks roll‐outs, and development of machine‐to‐machine technologies. Asia and America are the most dynamic regions… While Europe is already a mature market, where the main boost for demand should lie in the 4G and 5G network updates.

Financial services opportunities are flourishing, thanks to standards harmonization and emerging countries’ growth

Demand for credit smart cards should be buoyant in the mid‐term, with a 10% CAGR between 2014 and 2020. This is explained by :

Fast development of contactless credit cards ;

Transitioning to EMV (international Mastercard Visa standard) of three major markets: China, India and the US.

Sharpening need for security and extra services.



Demand for electronic ID cards is dynamic, though the volumes are lower

The « public » market (ID, health and social security) should keep growing in the years to come (expected CAGR of 19% between 2014 and 2020). More and more governments and public services are choosing safer, hence, “smart” identity documents. Today, e‐ID documents stand for a small third of ID documents; the share should rise to 50% in 2017 (source : ABI Research). It is true both of developing countries and the EU.

1.2. Smart cards employment: Europe still hosts a significant part of jobs

From a statistical viewpoint, smart cards industry is mixed among NACE code 261, along with EMS, microelectronics and connectors. As a result, a statistical approach to assess the number of employees does not seem relevant.

Since smart cards industry is a concentrated market, with few and well‐known actors, it seems appropriate to compute the number of employees through a bottom‐up approach, relying on the competitors and adding up the numbers.

According to public sources:

The leader Gemalto is thought to have around 6000 employees in EMEA (EMEA is a larger region than Europe in itself, but we assume that almost all EMEA employees are European).

Oberthur headcount is close to 6400 employees all around the world. We assume that half of them are employed within Europe (France, UK, Spain).

At the end of 2013, G&D employed more than 6000 people in its Mobile security (= smart cards) division. We assume that half of them are employed within Europe (mostly Germany), which means about 3000 people in the business in Europe.

We assume Morpho, for its E‐documents division, has around 1000 employees in Europe.

Those estimates lead to a 10K‐15K European headcount for smart cards industry. We will consider the mid‐point 13K employees as our estimate.

Indeed, smart cards are one of the few, if not the one and only, sectors where Europe is still clearly leading the game:

All top players are European (French or German) ;

Europe is still the region concentrating the largest headcounts;

What’s more, Western Europe still has a strong industrial footprint, and not only R&D.



The figures are then clearly in favor of Europe, but… the trend is plainly less positive. European headcount has been oriented downwards in the last years. However, it is not the case for smart cards players’ global headcount. The bulk of employees and the recruitments are shifting from Western Europe to emerging countries: Eastern Europe, South America, Asia.

The “soft” way is to give minimum work load to western European factories and staff, rely on retirement and resignation to diminish the number of employees, and concentrate the work load (both in manufacturing and R&D) in emerging countries.

The “hard” way” is to close plants in Europe and/or initiate programs of collective redundancies… and, still, concentrate the work load (both in manufacturing and R&D) in emerging countries.

All players have been using those strategies, in a way or another:

Gemalto headcount has been increasing, but the role of France (and of Western Europe more generally) has been shrinking. French plants get minimal load, and the rest goes to low‐cost factories. Even though the European R&D employees still play a key role in the company, there have been numerous recruitments of engineers in low cost countries too.

In 2014, G&D started a cost‐cutting plan, the so‐called “P100” program, which aims at increasing profitability by 100M€. It involves several locations in Europe, and mainly Germany, causing some protests to rise, all the more important since it was the first restructuration of that scope in G&D’s history.

The Munich headquarters would be closed and moved to Leipzig;

The Munich plants would also be moved to others German plants;

950 jobs would be cut (around two thirds in Germany), with “re‐dimensioning” of administrative and commercial structures;

150 German employees would have to be relocated.

This plan is to be carried out in 2014, 2015, 2016, and has already created restructuring costs of 74M€ in 2014.

Though keeping a significant footprint in France, Oberthur has relied on outsourcing (for example, in Ukraine and Philippines) in the last few years, both for manufacturing and R&D. What’s more, they have launched a major restructuring program in 2014, with several projets :

Closure of two plants in Europe (one in UK and one in Spain), the remaining workload being transferred to a French plant (Vitré) or to Asia ;

Closure of two small plants in France ;

Around 400 job cuts in Europe (UK, Spain and France).

Headcount of the only remaining manufacturing location in Europe, Vitré, would moderately increase (+50 employees).



The number of employees of Morpho is on an upward trend, notably through the numerous acquisitions realized over the last years. However, Morpho is also carrying out cost‐control strategies. Morpho launched a restructuring program of its smart cards division, with one site closure in Germany (300 people impacted) : the R&D and manufacturing activities will be transferred to France and India (R&D) and Czech Republic and Colombia (manufacturing).


2.1. Game changer technologies: softwarisation, and the tide of M2M

Smart cards sector is no exception to the general IT trends. More specifically, the movement of softwarisation (with a shift of value added from hardware to software and related services), and the machine‐to‐machine technology are currently some major stakes the players have to tackle. This also leads to more fragmentation in the market. From an oligopolistic situation, where strength is based on economies of scale for hardware production… new players, IT giants or specific and smaller software companies, are entering the game.

Main drivers for the sector in the years to come should be:

Next‐generation SIM cards (4G and 5G) and embedded SIM cards;

Sharpening need for security and safer transactions;

Digital identity;

Financial services on mobile devices;

Machine‐to‐machine technology.

Strong potential for contactless technologies

In 2014, contactless smart cards amount to 16% of total volumes, but this share has been steadily rising in the last years (as a comparison, the share was only 9,5% in 2012). This is mostly explained by the rise of new types of financial services: electronic wallet, contactless credit card (or carrying both contact and contactless technologies), Near Field communication (NFC) technologies embedded in smartphones as a payment device…

In Western Europe, contactless credit cards should be the main driver of an already mature market, whereas credit card penetration is still at stake in Eastern Europe.

Production of contactless smart cards (Millions of units)

2013 2014 2015 2014/2015

Financial services 590 800 1 000 25,0%

Public ‐ Health 200 230 260 13,0%

Others (transport) 250 250 280 12,0%

TOTAL 1 040 1 280 1 540 20,3%

Source : Eurosmart



The growth of mobile payment represents a risk of market fragmentation and could negatively affect the smart cards companies

Payment on mobile phones is obviously one of the top challenges in the sector and object of a fierce struggle between diverse companies. Traditional hardware smart cards companies face the risk of being bypassed by payment companies, such as PayPal or Square, which develop their own payment schemes, or over the top companies (Google).

Today, the secure element of mobile payment is located in the phone SIM card (result of cooperation between smart cards producers and MNOs) but could:

Be directly welded to the phone, or be located in a card dedicated to payment. In the first case, smart card players could offer related services to payment identification, without offering the card itself. In the second case, smart card players could offer the specific card, in addition to the traditional SIM card.

Or the secure element could disappear. This directly to the Google project of ‘”host card emulation”: payment would be directly handled by Google, without smart card and without the control of MNOs.

In either situation, revenues of smart card players could be hit, and they will have to prove their ability to offer extra services, even without the hardware part.

Biometric identification is also expected to be a big opportunity in the longer‐term, and could allow French players, among them Morpho, to have a say in the race.

Machine‐to‐machine technology is spreading and could be a game changer for smart cards firms

The expansion of M2M objects (automotive, consumer and industrial electronics…) is a megatrend of the ICT world currently, and smart cards take their share.

From traditional SIM cards (allowing secure access to mobile networks) the SIM card is changing and embedded SIM cards with remote management are spreading.

A new specification was adopted in 2014 by GSMA7, and this should boost the development of M2M objects:

SIM card will be embedded in the M2M product during its manufacturing (car, consumer electronics…) and will be managed (customization, validation…) by remote control.

This is expected to facilitate:

maintenance (for instance, if a SIM card is located in a sensitive part of a car or a smart electricity meter, it is easier to control remotely than to change the whole part);

7 GSM Association is a worldwide association representing interests of MNOs.



swap of MNO (instead of changing the SIM card, the MNO will just have to remotely activate/deactivate the embedded SIM by radio).

Embedded SIM cards are still new, and companies are still working on the construction of hardware/software/services/ offers. Nevertheless, they are bound to be a game changer both for smart cards sectors, and more globally for ICT megatrends.

The rise of related services and software, beyond the hardware, leads to the rise of new software players

Digital identity services (digital signature, online identification for a firm’s employees…) is a promising market, where smart cards actors are struggling to have a role, faced with lack of standards and the arrival of IT security players (from corporate markets or payment processors).

The issues of security and the privacy of interactions, on the web and the cloud, are already major and should become even more critical in the future.

The leaders in this highly fragmented field are RSA, Vasco, Entrust, Symantec or Gemalto. Neither Oberthur, G&D or Morpho are thought robust enough in this regard. Other firms also enter the game (Atos, Microsoft, IBM…).

Trusted Services Management (TSM) activities, though not new, are a good example of the growth of related‐services activities. In the mobile payment field, smart cards competitors play the role of a “neutral third party” or intermediary (the role of the “TS manager”) between MNOs and banks, managing the software platforms that enable mobile payment transactions.

2.2. Strategies of the players

Cost‐cutting and outsourcing programs have impacted the whole sector, though highly profitable

Indeed, the sector is going through important price pressures on some markets, though the pressure is limited because of the oligopolistic structure of the sector. Those price pressures come from the fierce competition between the top players themselves, and from the local players (most Asian), gaining coverage and shares.

Those constraints have served as a justification to start cost‐cutting programs, and to develop low cost R&D and manufacturing locations (cf.infra with company overview).

This outsourcing trend is a way to reduce costs, but also to get closer to the biggest markets (China, India, South America).

Consolidation over the last years… and more to come?

The smart cards players have tried to adjust to the “softwarisation” of the sector, and to try to answer to the new and buoyant technologies (NFC…). One of the answers has been a strong movement of concentration: the 4 majors have bought a lot of smaller software companies to extend their technological offer.



After this movement of external growth, the sector could step up to the next phase of concentration… with M&As involving the 4 major players. What is at stake:

the ability to compete against IT giants, while the borders between smart cards, IT services, financial services, telcos are being blurred;

For the numbers 2, 3, 4, the ability to catch up with the fast pace of Gemalto.

In the wake of its restructuration, G&D could split up its activities8 (bank notes production, smart cards for telcos and banking, ID smart cards, digital ID…).

This sector, already highly concentrated (with top 4 gathering 80% to 90% of the revenues) could then concentrate even more. This would be a response to technological and strategic issues… but also a step towards increased profitability, even though the players already enjoy good performance.

3. Main players and employment in Europe

3.1. Overview of the main competitors

The leader Gemalto is in good shape

Gemalto is a smart card « pure player », and the leader with a market share of 40%, benefiting from a complete portfolio, both in terms of end markets (telecoms, finance…) and in terms of value chain position (from hardware – card‐ to software and extra services). It holds a strong footprint on the e‐identification sub‐segment.

This French‐Dutch group is publicly listed in Paris, and relies heavily on financial communication to the stock exchange markets. It keeps releasing top results, and achieves the targets.

In 2014 too, results were be good: revenues were up, notably thanks to the Payment and identity Business division (EMV transition). Even though the operational and net profits are slightly lower than previous years, this is mostly explained by heavy restructuring charges (30M€), because of reorganizations and lay‐offs (both in manufacturing and R&D). The structure is still solid.

In 2015, Gemalto bought two companies:

Safenet, a company specialized on data and software security ;

The Secure documents Division of Trüb AG.

8 Source : media.



With weakening results, Giesecke & Devrient has launched restructuring and outsourcing programs in the last two years

Giesecke & Devrient (G&D) is a German family group, and one of the sector top 3 players. It is mainly committed into “reliable transactions” business (bank notes printing is the first business line of the company), with a smart card division.

In 2014, sales amounted to 1,8Bn€ (5% growth), among which 778M€ for Mobile security, the smart cards division (6% growth). G&D has generated positive results over the last years, though lower than those of the leader Gemalto. However, it was not the case in 2014, because of heavy restructuring expenses (74M€ in 2014). From 3,4% of sales before restructuring, the OP sank to 0,6% of sales after that.

G&D has indeed launched major restructuring programs in Europe, including cost‐control policies, plant closures and lay‐offs. Some manufacturing activities were outsourced to Asia, and especially China.

There were rumors about splitting up the firm into several pieces (banknotes, mobile security…). There have been tensions among the management, and some key managers left the group over the last year.

Oberthur must meet with LBO ambitious financial targets, and find new sources of financing

After being bought by an investment fund (Advent), Oberthur is now a French pure player, but used to be a competitor in money printing business. It is one the top 3 players, with revenues of 1,3Bn€. Oberthur is strong in financial services sub‐sector, but weaker in Identity division.

M€ 2012 2013 2014Revenues 1 789 1 754 1 833 Operational profit 97 61 11 -

% of revenues 5,4% 3,5% -0,6%Net profit 39 3 73 -

% of revenues 2,2% 0,1% -4,0%Net cash 156 - 250 - 235 -

Main results of Giesecke & Devrient

M€ 2009 2010 2011 2012 2013 2014Revenues 1 602 1 906 2 015 2 246 2 384 2 465 Operational profit 134 163 183 239 283 270

% of revenues 8,4% 8,6% 9,1% 10,6% 11,9% 11,0%Net profit 118 167 161 201 258 221

% of revenues 7,4% 8,8% 8,0% 8,9% 10,8% 9,0%Net cash 381 236 309 348 449 493

Main results of Gemalto



Oberthur is a profitable company, but it must comply with very aggressive financial targets since it was bought, under Leveraged‐Buy‐Out scheme, by the Advent investment fund… leading to short‐term, aggressive and “cash‐oriented” management. Oberthur has to pay back the LBO, which means increasing levels of operational profit and cash flows. Oberthur has also chosen an aggressive commercial strategy, whose goal is probably to gain market shares. Oberthur may be in a difficult position, with financial as well as commercial pressures, and may be experiencing difficulties to keep up with the other competitors. Its future is pretty uncertain.

Oberthur has recently chosen to start an IPO process, and should complete the procedure at the end of 2015. Advent would stay the majority shareholder. The firm is looking for new financing in a very competitive and capital‐intensive business.

Nb : Oberthur does not release any of its financial results.

The number 4 Morpho is trying to catch up with the front pack in main end markets

Morpho is a subsidiary of French MNC Safran, and number 4 of the sector. The company progressively tried to broaden its portfolio towards telecoms and banking, from a solid position in identification and security. Morpho relied on external growth (acquisitions) to do that, and strengthen its technological position. Among others, Morpho bought Dictao, focused on digital identity, in 2014.

The mother company Safran has been supportive of this strategy over the last years, but the “pay back issue” is still in the picture: when will the cash invested (in R&D and acquisitions to extend the portfolio) generate higher sales, higher market shares and positive cash flows ?

Morpho sales amounted to 1,5Bn€ in 2013, steady in comparison to 2012, and positive OP. But the company nevertheless embraced the cost reduction strategy of its fellow players. It is especially the case in Germany.

More globally, a key element for the future lies in the the behavior of Safran towards its subsidiary. The nomination of a new CEO, with “a telco and digital profile” is clearly a step in the right direction. Morpho is thought to gain traction, with major wins and a “security‐oriented” profile that should help stay in the innovation race as regards to topics such as e‐identification or confidentiality software and services.

3.2. Trends for the employment in Europe

As a reminder (cf. 1.2), we consider the mid‐point 13K employees as our estimate for the smart cards industry in Europe.

Main trends underlying our scenarii

Smart cards industry, as a global market, is dynamic and presents good opportunities in the future, both in terms of end‐users (emerging countries’ growth, e‐payment, security…) and of products (hardware and growing needs for software and services).



However, the major markets are shifting to Asia or Latin America, while Europe is mature.

Smart card players have generally presented positive results, and the industry is thought to be profitable. However, the industry is capital‐intensive, with lots of investments required to keep up the pace, especially the pace of Gemalto. Moreover, the competition is increasing (local players, in Asia for instance) and the rise of software component is reshuffling the game.

In terms of skills, European employees are still considered as top‐level regarding R&D (especially as far as patents issuing or quality go), but the differences with other countries, mostly Asia, are gradually disappearing. Regarding manufacturing, there is no major difference.

As a result, over the last years, the smart cards players’ strategies have been harsh to European jobs. All firms have carried out cost‐cutting policies, with European plant/site closures, outsourcing to low‐cost locations, massive job cuts in Europe. The low‐cost outsourcing is also said to be a response to the shift in the biggest end‐markets (getting closer to the clients, hence India, China, Latin America…).

Most manufacturing locations still remaining in Western Europe are closing down (Oberthur) or used at minimum level.

As a necessary response to the software and services innovation race, all competitors focused on software innovation over the last years, with critical technical developments, and as a result, growth of headcount to adjust to those issues. It seems that many developments are now on track, and that some of innovative R&D jobs will shift to application software development. This may lead to headcount “optimization”, with global headcount decreasing, and sharpened shift from Europe to Asia.

Finally, a major event could disrupt the smart cards field in the next years: further consolidation with two players merging (within the top 4) could arise as a response to enhanced competition and ever‐greater financial needs. Such an event, which appears if not certain, as least likely. It would induce “synergies”, and, thus, restructuring and job cuts (at least at the corporate functions level, which are mostly located in Europe).

Hypotheses and conclusions of the two scenarii

Business as usual scenario

In this scenario, we suppose:

“Natural” diminution of jobs in European manufacturing, the bulk of production being gradually transferred to low‐cost locations.

R&D functions would slightly decrease in Europe, as all major players would start rationalizing business lines, including software and services‐related activities. Moreover, R&D is developing in Asia and Latin America.

On‐going restructuration programs are completed.



Most importantly, a merger occurs between two key players in the industry, which leads to :

restructuration of corporate functions (HR, finance, supply, IT…), and to job cuts in Europe (which still hosts a good part of those functions) ;

restructuration of R&D activities, and maybe plant closures.

Given those hypotheses, our “business as usual” scenario forecasts a 20% reduction of the number of European employees up to 2020.

Chapter 3 ______________________

Electronic components


32 Chapter 3 ‐ Electronic components


Chapter 3 ‐ Electronic components 33


1.1. Semi‐conductors sector has been buoyant in 2014 and this should continue in the mid term9

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Semi-conductors world revenues (K$. Source : WSTS)

Semi‐conductors sector evolves in close correlation of with world Gross Domestic Product. Because of a highly capitalistic structure and potential pressures on plant capacities, the sector generally amplifies the economic trends, with strong price changes. Moreover, semi‐conductors industry is at the very heart of several manufacturing value chains and a key vector of innovation.

In 2014, the semi‐conductor market grew by 9,9% (far beyond the GDP change) and reached 336$Bns, and almost all regions (except Japan) benefited from the movement.

The main driver was the demand for memories (24% of total market), with an increase of 17% in 2014. However, all products proved dynamic in 2014.

9 Data from WSTS : World Semiconductor Trade Statistics

Forecasts WSTS of semi‐conductors revenues (autumn 2014, K$)

2013 2014 2015 2016 2014 2015 2016

Americas 61 496 65 763 69274 71 432 6,9% 5,3% 3,1%

Europe 34 883 37 923 38491 39 732 8,7% 1,5% 3,2%

Japan 34 795 35 239 35133 35 452 1,3% ‐0,3% 0,9%

Asia‐pacific 174 410 194 226 201648 208 656 11,4% 3,8% 3,5%

World 305 584 333 151 344 546 355 272 9,0% 3,4% 3,1%

Discrete Semiconductors 18 201 20 441 21347 21 980 12,3% 4,4% 3,0%

Optoelectronics 27 571 29 498 30958 31 983 7,0% 4,9% 3,3%

Sensors 8 036 8 627 9151 9 624 7,4% 6,1% 5,2%

Integrated Circuits 251 776 274 586 283090 291 685 9,1% 3,1% 3,0%

Analog 40 117 44 217 47429 49 175 10,2% 7,3% 3,7%

Micro 58 688 62 211 63144 64 240 6,0% 1,5% 1,7%

Logic 85 928 89 547 91488 93 927 4,2% 2,2% 2,7%

Memory 67 043 78 611 81029 84 343 17,3% 3,1% 4,1%

Total 305 584 333 151 344 546 355 272 9,0% 3,4% 3,1%



Smartphones stand for the major part of revenues, but Internet of things revenues should rapidly increase in the next years

Cellphones have long caught up with the historical driver of the semi‐conductor industry, computers; they are now the biggest market for electronic components. Nevertheless, highest growth rates are to be found on markets related to mobility and connectivity (IoT, tablets…).

Integrated circuits revenues per end market ($Bn) and 2013‐18 CAGR (%)10

Mid‐single digit growth expected in the long‐term

According to WSTS, the market should rise by 3,4% in 2015 (then representing 345$Bns) and 3,1% in 2016 (355$Bns). Automotive and Communications would be the most dynamic segments, while Consumer electronics and Computer would keep steady.

With a longer perspective, the industry revenues should enjoy an average growth of more or less 4% per year until 201911, explained by:

Lower capital expenditures and consolidation of the market (through M&As);

Slower demand for computers, but flourishing revenues stemming from

smartphones and tablets;

Ever increasing quantity of data on the wireless networks and devices. 4G and

then 5G technologies will spread in all regions.

Very promising prospects for Internet of Things…

Underlying societal changes, with more demand for security, energy‐efficient

transport (automotive market) or housing (home appliances market), e‐health

devices.

10 IC Insights, March 2015. 11 IC Insights



1.2. However, the clout of Europe in global semi‐conductor industry has shrunk

Europe was historically a stronghold of the sector, but has been withering over the years. Europe was faced with the rise of Asian players: first from Japan, then from South Korea and Taiwan. Europe now ranks 6th in terms of total production.

Several elements account for this phenomenon:

Mass consumer markets have risen in Asia and local players have ruled the game;

Outsourcing strategies have been dominant, moving headcount from Europe to

Asia;

General decay of European high‐tech industry, in comparison to the arrival of

American giants (Apple, Microsoft, Google…) on high‐end markets, and Korean

giants (Samsung, LG) on mid‐end markets.

Another key element to have in mind when trying to explain this shift from Europe to Asia is public incentive. In some Asian countries, as well as in the USA, governments have carried out aggressive policies to attract, and maintain, electronic plants on their territories. The incentives generally rely on :

Tax reliefs for companies (through R&D tax credits, or corporate tax reliefs);

Low‐rent locations, or low‐cost energy offered thanks to public sponsoring;

Competitive financing conditions offered to companies that invest.

Public incentive turns out to be one of the key factors when deciding on the future location of manufacturing facilities. It is thought that a major part of each new semi‐conductor plant is publicly financed. That is how Taiwan became one of the hot places for the semi‐conductor sector.

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Share of semi‐conductor sales by region (Source : World Semiconductor Trade Statistics)

Americas Europe Japan Asia‐Pacific



Like in other IT sectors, Europe has turned away from consumer and mass‐market electronic components, to focus on industrial end markets. Consumer markets are more cost‐ and fashion‐oriented, which obviously does not play for Europe in comparison to Asia, while professional markets still value proximity and objective criteria of quality. In this regard, Europe can still boast about industrial champions (automotive, aerospace and rail industries).

1.3. Employment in Europe

From a statistical viewpoint, the semiconductor industry is mixed among NACE code 261, along with smart cards, EMS and connectors. As a result, a statistical approach to assess the number of employees does not seem relevant.

We then tried to evaluate the semiconductors employees crossing our view on the firms’ employment split within Europe and the information gathered on semiconductor employment by regions. Given that several firms concentrate a main part of the total employment we have adopted a bottom‐up approach, relying mainly on the main competitors (STM, Infineon, ARM, Global Foundries, NXP, Intel and the main clusters).

Those estimates lead to a 95K European headcount for the semiconductor industry.

The number of jobs in Europe within the semiconductor industry has been strongly decreasing for the last ten years because of the shift of production volumes towards Asia but also competitors’ strategies as financialized bias (NXP), choice to focus on specific segments (Infineon) or the broad choice to externalize growing volumes towards foundries (cf. fablite model).

We give some more details about the employment situation of each of these competitors in the 3.1 part of the semiconductor report.


2.1. Game changer technologies

The semiconductors industry is highly connected to disruptive electronic technologies as IoT, mobility or big data modifying the global demand.

The growth of the sector is mainly driven by three trends which are mobility, energy efficiency, big data or Internet of Things:

The mobility demand concerns the expansion of tablets, smartphones but also

devices as smart watches and smart glasses,

The rise of Big Data is creating new needs going with the massive growth in

demand for storage means implying for example the replacement of hard disk

drives by solid state drives,

The energy efficiency trend explains a growing demand of renewables, the

integration of which in electricity grids require fast adaptation, and thus

distributed computing power ("smart" grids) and power electronics,



The Internet of Things also constitutes a main trend fostering the sensors

products.

As stressed in the following chart the main perspectives of growth concern the IC Logic Products and the sensors and optoelectronics segment.

Source : Rolland Berger 2014


More than Moore, beyond Moore…

An accelerated technologies renewal, with increasing investments

Various changes have impacted the electronic industry through the last decades thanks to a unit cost of production decrease (and a strong rise in volumes). This “innovation race” has mainly concerned the transistor’s miniaturization, whose size is closer and closer to atoms but also the growth of the silicon wafer size (the wafer is the physical support for the integrated circuit: 300 mm today, 450 mm in the mid‐run? These evolutions allow the integration on one circuit of a growing number of transistors or even functions.

Those evolutions (increase of the wafer size and decrease of the transistor size) are summed up by the Moore’s law, famous in the microelectronics’ world. The Moore law anticipates that the number of transistors on an integrated circuit doubles every 18 months. It was first stated by Gordon Moore in 1975 and was based on empirical extrapolation; it has proved quite accurate since then.

Moore’s law emphasizes one aspect of innovation in microelectronics. When companies are said to follow a “more Moore strategy”, it means that they mainly invest in miniaturization.

The counterpart of such technological innovations is the rise in research and fabrication costs. Indeed, the processes are more and more constrained by technical requirements

70 57 62 64

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1920298 292

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Demand perpsective for semiconductor chip sales (USD bn)

Discrete semicond

Sensors &OptoelectronicsIC Analog

IC Micro

IC Logic

IC Memory

Total

0%

+33%

+5%

+2%

+22%

‐9%

growth between 2010 and 2015

More han

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oore

More M

oore



such as nanometer scale, growing robotization, the need to produce in cleanrooms and shorter life cycles of products (quick obsolescence).

Evolution of investments according to technological generation

Circuit size 100 mm 150 mm 200 mm 300 mm

Transistor minimum size 20 to 5 μm 5 to 0,8 μm 0,5 to 0,13 μm 0,1 to 0,032 μm

Plant cost 70 M€ 100‐200 M€ 1‐2 B€ 2‐4 B€ Source : STMicroelectronics – 2008 (Decision)

Beyond initial investments, production factories result in very high fixed costs: depreciations, energy …The industry is becoming increasingly capital‐intensive, and many firms do not have the financial resources to invest in fabs, as shown by the graph above : only a few leaders (Intel, Samsung, and the Taiwanese foundries) can keep up the pace.

The development costs are following the same exponential trend, which has a significant impact on firms’ strategies: concentration, alliances, externalization or differentiation.



Differentiation strategies are less capital intensive

The « more Moore » strategy has been the main track of development in the semi‐conductors history. Nevertheless, this strategy is reaching its financial (the necessary investments can only be realized by a few giants of the sector) and physical limits (the transistor size may not be endlessly reduced).

That is why more and more firms are turning to “more than Moore” or “beyond Moore” strategies, which rely on new functions with a certain level of miniaturization which leads:

To extend the semi‐conductors pervasion to new sectors, services ;

To retrieve non cost competitiveness on products with rather low volumes but

high margins, produced on already depreciated assets.

“More than Moore” or “beyond Moore” strategies do not rely only on ever‐greater miniaturization as an innovation policy. They rely on new functions and components, which are added to the integrated circuit: sensors, radiofrequency identification, biochips, batteries, power management components and microelectromechanical systems (MEMS)… and resort to related fields such as optical sciences.

Fabless / fablite / IDM players

Deverticalization trend

The semiconductors sector is highly intensive in capital but also in R&D which requires a very high level of investment.

Traditionally, semiconductors firms were performing all steps of the value chain: R&D, design, production of the integrated circuits, marketing, and sales. But given the growing need to invest, only a few actors can follow the pace without losing money.

Thus, new operating models have emerged with a growing deverticalization of the value chain:

Some actors have divested the production focusing on higher margins steps

(research and design),

Other actors have specialized themselves on the production step.

We can distinguish nowadays four main business models:

The historical model of « Integrated Device manufacturer », or IDM, in which all

the value chain steps are being overtaken by the same actor.

This model has been followed by main industrial groups (Motorola, Philips, Siemens), which have divested from the semiconductors sector since then. It still represents the main part of the market.

The fabless model, appeared a few years ago, in which firms are focusing on

research, design and commercialization. Divesting from production, these firms

can mobilize more resources on innovation.



From 7 % of the global market in 1999, the fabless turnover has been growing to almost 15 % in 2012 according to IC Insight and the trend is still growing (especially Qualcomm).

The « fablight model »: while maintaining internal capacities, some actors as Texas

Instruments or European actors (NXP or even ST Microelectronics) are

outsourcing a growing part of production, especially on the last generations of

integrated circuits, but maintain production capacities on mature technologies or

specializing on some specific process of production. This model is mainly driven by

financial considerations with a return on investment maximization and a reduction

in investments budgets.

The Foundries, which are focusing on the semi‐conductors production and are

especially supplying fabless and fablight actors, but they are also used as a

flexibility factor by IDM. They are mainly located in Asia (Taiwan especially) and

focused on high volumes productions and on the latest technologies

With a 50 % market share, the Taiwanese TSMC has multiplied its turnover by 3 on this segment with a net result rate reaching 33 % in 2012. The four main foundries concentrated in 2012 more than 80 % of the market.

Model evolutions: growing weight of foundries and alliances

The foundries are gaining power and weight in the semi‐conductors market thanks to better financial performances than the other actors. Nevertheless, they are overexposed to a slowing demand while their level of investments demands a very high utilization rate of factories. This could explain that these actors are increasingly interested to work up the value chain (towards conception or “more than moore” segments?)

Indeed, fabless or even fablight actors could have to face in the mid‐run the foundries’ competition on their niche competencies or markets.

Finally the IDM/fablight actors are managed with a more and more financial focus which lead them to divest form the markets in which they are the first or the second player allowing economies of scale and high returns on investments. Productivity and cost saving targets are becoming the main indicators along with the headcount flexibility/reactivity at growing risks for the ability to innovate.

European actors positioning

Most of the European actors have been trying to avoid the More Moore competition in front of Asian or US giants by diversifying their activity through More than Moore strategies.

Most European factories are concentrated on a 150 to 200 mm wafer production with only three 300 mm wafer factories: ST Microelectronics, Infineon Technologies and Globalfoundries.

The shift to the next generation, 450 mm wafers factories, is a key turn to keep pace with the most advanced firms. If some Asian and US firms are already making the move (Intel,



Samsung, TSMC, Globalfoundries), the European involvement was not guaranteed. Nevertheless, a change in the EU policy funding secured the funding of 5 pilot lines of 450mm.

Indeed, most of European actors have concentrated their efforts on More than Moore strategies trying to benefit from the growing demand in industrial and automotive electronics. But the increasing will of Asian players to enter the More than Moore markets niches represents a growing threat for European actors all the more when taking into account their financial and technological power.

Moreover, "More than Moore" strategies may prove to be strategies by default, adopted by the Europeans because they have no other viable option (financially viable). It could be harder for European actors to seize the full opportunities of Industrial Internet / smart industry issues only with niche products low‐volume manufacturing capacities… while tens of billions of objects will be connected in the future.

Source Roland Berger, 2014

Alliances and M&A: a lever to face increasing technological costs

Given the growing levels of necessary investments, most actors are adapting their strategies through alliances or M&A operations in order to keep means in the technological competition.

The most known alliance gathers around IBM the biggest players of the semiconductors industry (excepted Intel and TSMC) and offers to its members a technological parity with Intel by pooling the R&D efforts. As developed thereafter, ST Microelectronics has recently



decided to exit this alliance which could have impact on the company’s ability to keep the technological pace of the main players.

Another way to counter increasing development and production costs may be to launch M&A operations with among the biggest operations:

the recent acquisition of NXP by Freescale in march 2015 for 11,8 bn $ which has

created the 8th actor of the semiconductor industry and a main competitor in the

Microcontrollers and the Digital Signal Processing segments,

or the acquisition of Broadcom by Avago Technologies for 37 bn $ in May 2015

Intel has recently bought the US company Altera for 16,7 bn $ which will offer a

diversified portfolio and broader perspectives of growth towards the Automotive

market

The objectives of these huge M&A operations are also to gain bargaining power in front of huge clients as Apple or Samsung and to benefit from economies of scale while increasing R&D expenses.

Public support is an essential factor to lower growing costs and Europe seems still lagging behind Asian countries or the US

Public support is an essential lever to lower fixed costs burden and may take different forms as the provision of land, of favorable financing means or even direct subsidies.

Indeed, public financing schemes represent an important factor of firms’ implantation or investments. Most of new factories benefiting in most part of the world from a significant public provision. This fact could explain for example the Taiwanese success in micro/nano‐electronics, or the resilience of American semi‐conductors companies, heavily subsidized through defense contracts. China is now stepping up its investments in the field, and launched a year ago a massive public support program: it could involve funding of $170Bn for the next 10 years, including subsidies or tax credits12 It also the case in South Korea, with Samsung as the national champion : the high‐tech company announced a few months ago it intended to build a $14Bn plant (without any detail on the products that will be manufactured) in the country.

12 http://www.mckinsey.com/insights/high_tech_telecoms_internet/semiconductors_in_china_brave_new_world_or_same_old_story



Nevertheless, public support remains lower in Europe in comparison with the practices in other production zones. The risk for Europe, which has only one actor among the worldwide top ten firms (ST Microelectronics), is to be left marginalized in the mid‐run on a main technological sector including on fast growing sectors as the Internet of Things.

The European Union seems to be increasingly aware of this trend, as shown by the launch, by the European Commission vice‐president, of the 10/100/20 initiative in May 2013 (also called “Airbus of Chips”) whose goals focus on:

Securing €10Bn of public funding in order to unlock 100 bn € of investment in the

sector between 2014 and 2020,

But also raising the European part in the worldwide semiconductors production to

20 % in 2020/2025 (from less than 10 % nowadays).

A working group has been settled in this framework, gathering groups’ representatives (European Leaders Group) to draw a road map to reenergize the industry towards 2020 in oder to meet the initiative 10/100/20 goals.

If the EU intentions represent a positive track, the achievement will mostly depend on the main firms will to invest and Europe still seems far below form the public support level of some Asian countries or even the United States. Indeed, when the 10/100/20 initiative relies on a 10 % public investment goal, Taiwanese actors as TSMC or UBC benefit from massive economies of scale and a huge public support.

Further to financial support, Europe needs a comprehensive industrial policy regarding semi‐conductors, with :

Focus on low‐energy integrated circuits;

Country Company

Type of

investment Grant Tax relief Total

Israël ‐ 2014 Intel USD 6Bn

plant upgrade USD 300M

Corporate tax rate of 5% for 10yrs, instead of

26,5%

Estimation of

around USD 700M

USA ‐ NY State,

Malta

2010/2012

GlobalFoundries USD 4,2Bn plant

(300mm) USD 665M cash grant

Around USD 700M tax breaks (local and

federal)

Around USD

1,2Bn

USA ‐ NY State,

East Fishkill

2002

IBM

(now

GlobalFoundries)

USD 2,5Bn plant

(300mm)

Around USD

660M

Taïwan * Innovative firms Low‐rate loans for

equipment purchases

Asia * Electronics firms

Free access to land

Bank loans guarantee

Fixed price for util ities

during 5 to 10 years

Up to 150% tax relief for R&D expenses

Tax credits on corporate tax (decreasing

gradually)

* Source : French Parliamentary reports Saunier et Malier

Tax exemptions :

‐ 30% relief for R&D expenses ‐ accelerated amortization

‐ 30% relief for training

‐ 5% to 20% relief for automated equipment purchases

‐ possible complete tax exemption for 5 years for some

emerging/strategic industries

Exemples of public incentives provided to micro‐electronics industry outside Europe

Type of project Public support packages

USD 156M : State sales tax exemptions, local tax breaks

USD 28,75M : State grants and loans

USD 475M in tax breaks and incentives (no details, from Federal State)



State‐of‐the‐art manufacturing facilities, with capacity to develop low‐cost and mass production;

Coordination with industrial players, to build a global Industrial internet strategy, from integrated circuits, through software, to end‐products.

The exact nature of the European industrial policy which trade unions would recommend will be the purpose of the Phase 3 of the project.



STM is still the European leader, but this should change in S2 2015, once the NXP/Freescale is official. Infineon is the third European top 20 player.

Top 20 of semi‐conductor competitors, excluding foundries

ST Microelectronics

Though on the rise in 2014, STM has delivered poor performances over the last years

ST Microelectronics is a French‐Italian company, with significant public shareholders (27,5% for French and Italian governments). It is still an “IDM” company, though it resorts more and more to manufacturing outsourcing, and should be qualified today as “fablite”.

STM revenues have been following a downward trend over the last years (‐28,5% between 2010 and 2014), and it was the case again in 2014, even though the market globally experienced a strong rebound. A good part of the decrease is explained by the closure of



the ST‐Ericsson JV, but not all of it. Then, STM still has its rank in the semi‐conductors world top 10, but it should go down in 2015, and be replaced by the taiwanese MediaTrek but also the new NXP/Freescale group.

Even though revenues were up in some divisions (Automotive, Discrete power

components, industrial, microcontrolers);

Those increases can not make up for the fall of revenues in the Wireless division

(because of the ST‐Ericsson JV end, but also because of far lower sales to the

former main client, Nokia), and in the AMS division (analogic products and

MEMS). In the latter division, major contracts with Galaxy5 Samsung and Iphone 6

were lost.

2012 and 2013 results were poor, because of lower revenues and significant restructuration and impairment charges. Results have slightly improved in 2014, with operational profit positive again, thanks to the JV closure (which generated important losses) and reduction of costs. The improvement is still modest, but STM can still rely on a solid financial position.

The company is bending towards a fablite model, and its future is uncertain, especially since STM can no longer lean on the IBM Alliance

If cost‐cutting measures have proved efficient in 2014 with regards to financial performance, they have been linked to cutbacks in industrial investments and R&D expenses… Whereas the ability to invest huge amounts in fabs is key to success in the semi‐conductors industry. What’s more, STM has been more aggressive in financial operations

(dividends while net profit was negative, in 2012 and 2013, and purchase of shares in 2014) than in next‐generation manufacturing investments… STM is more and more opting for a “fablite” model, questioning the mid and long term future of its plants, especially in France and Italy.

On the plus side, the Nano 2017 program has been signed in 2013: it provides a budget of €3,5Bn (shared between STM, French government and Europe) for :

Investments in the state‐of‐the‐art plant of Crolles 2 (next to Grenoble), which

could double its wafer production capacity;

M$ 2010 2011 2012 2013 2014Revenues 10 350 9 730 8 490 8 082 7 404

R&D 2 350 - 2 352 - 2 413 - 1 816 - 1 520 - % of revenues -22,7% -24,2% -28,4% -22,5% -20,5%

Operational profit 476 46 730 - 465 - 168 % of revenues 4,6% 0,5% -8,6% -5,8% 2,3%

Net profit 830 650 1 158 - 500 - 128 % of revenues 8,0% 6,7% -13,6% -6,2% 1,7%

Net cash 1 152 1 167 1 192 741 546

Main results of STMicroelectronics



R&D expenses in next‐gen technologies (FD‐SOI, processors and sensors for

images, embedded memories);

Giving the ability to carry along the minor semi‐conductors players of the whole

Grenoble region.

This good piece of news has been somehow darkened by another strategic announcement: STM leaves the IBM alliance. If this decision breeds significant savings for the company… It first and foremost reduces the R&D capacities for STM, especially for next‐gen circuits.

ST‐Microelectronics still maintains significant headcount in Europe, but the trend looks downward

Globally, STM has been sharply focusing on cost‐cutting programs over the last years, and this includes growing quantities of outsourced production to the foundries. Probably supported by their public shareholders (27,5% of capital for both governments), France and Italy have managed to maintain both manufacturing and R&D strong places… Until when?

STM has been more and more focused on financial targets since 2007 resulting in decreasing investments in new technolgies and a growing amount of volumes externalized to foundries. As a consequence, STM has been gradually turning itself into a fablite semiconductor company.

In France, beyond Crolles 2, other plants are ageing. New and significant sources of workload for Crolles 1 and Rousset are still to be found. The situation is better for the plant in Tours, which should specialize in micro‐batteries through new manufacturing capabilities.

A restructuring plan is likely to be have been analyzed by the company in 2015 concerning the Digital segment planning to reduce significantly employment especially in France (1100 of the 1800 employees of the Digital segment are located in France).

24.2 21.7 21.3 19.1

4.84.4 4.4

4.5

8.68.8 8.8

9.5

11.110.6 10.4

10.4

0

10

20

30

40

50

60

2010 2011 2012 2013

STM Employees per region (thousands)

Asia Mediterranean region USA Other Europe Italy France



Finally, the group has announced in January 2016 that it would cut 1400 jobs worldwide affecting its set‐top box activity (430 positions in France, 670 in Asia and 120 in the US). This decision raises huge concerns concerning the future of Crolles 2 in France.

The situation seems slightly better in Italy with a focus on well orientated segments as automotive, industry or sensors. Nevertheless, the italian facilities of STM do not benefit from significant public support (as opposed to Crolles) and the supposed will of the Italian State to sell its STM shares would not be a good indicator for the local employment in the long‐run.

Global foundries

GlobalFoundries (GF) was the foundry of the semi‐conductor player AMD, which carved out its activities in 2009. GF then became an independent foundry; it is owned by Advanced Technology Investment Company, an industrial investment fund from Abu Dhabi13.

GF bought another foundry, Chartered semiconductor manufacturing, in 2009, and acquired the chip manufacturing facilities of IBM in late 201414. In 2013, GF was ranked as the second foundry in the world (behind TSMC but before UMC), and revenues amounted to 4,4Bn$ in 201415.

GF manufactures integrated circuits for companies such as Qualcomm, AMD or STM. It holds several 200mm manufacturing plants in Singapore, and three 300mm plants (Singapore, Dresden in Germany, USA). The construction of the 300mm American plant started in 2009, and was thought to be the world most advanced manufacturing facility. Close to 10Bn$ were invested in the construction. Moreover, GF industrial portfolio now includes two plants formerly owned by IBM (one in 200mm and one in 300mm). Indeed, through the IBM Microelectronics Business acquisition, GF will benefit from thousands of licenses to improve its manufacturing processes but also accelerate its transition towards the 10 nm technology. This acquisition involves the transfer of around 5 000 former IBM workers in the US.

GF employs about 13 000 employees worldwide, among which 3700 people in Germany at the leading edge fab of Dresde.

ARM

ARM is a British specific kind of player in the semi‐conductor industry: revenues only come from licensing revenues of Intellectual property. ARM does not manufacture any circuit on its own, but licenses its IP (result of its R&D efforts) to its “partners”, generally semi‐conductors producers. ARM communicates on more than 300 clients using ARM chips. It sells chips for a wide range of semi‐conductor markets: Internet of Things, embedded products, mobile phones, wearables (watches, headbands…), home appliances…ARM

13 For this reason, GF does not report any detail about revenues or financial situation. 14 IBM wanted to concentrate on core business, and will actually pay GF for taking over its manufacturing activities (1,5Bn$ over the next 3 years). 15Source : IC Insights http://www.icinsights.com/news/bulletins/Six‐Top‐20‐1Q15‐Semiconductor‐Suppliers‐Show‐20‐Growth‐/



estimates that it holds a market share of 37%, which means that 37% of chip processors produced in 2014 used ARM design.

ARM has numerous locations all around the world, in the US and in Asia. Total headcount is about 3300 people, and numbers are growing. Its headquarters and are located in the UK (Cambridge), which also holds smaller several design and sales centers. Other minor locations include Norway, Finland, France, Germany, and Sweden. European headcount is around 160016.

2010 2011 2012 2013 20140

500

1000

1500

2000

2500

3000

3500

1191 1382 16521987

2370698

734740

846

924

ARM Employees by fonction

Engineers Others

16 Source : ARM website. This number should be a minimum, as headcount was not indicated for some locations. The date is unknown.

M£ 2011 2012 2013 2014Revenues 492 577 715 795

R&D 165 - 166 - 203 - 224 - % of revenues -33,6% -28,8% -28,4% -28,2%

Operational profit 149 208 154 309 % of revenues 30,3% 36,1% 21,5% 38,9%

Net profit 113 161 105 255 % of revenues 22,9% 27,9% 14,7% 32,1%

Net cash 424 520 706 862

Main results of ARM



ARM results are very good. Revenues have been up for several years, with both new licensing clients and existing clients increasing their use of ARM portfolio. In 2014, sales rose by 11%, outperforming the industry. ARM relies heavily on IT megatrends, such as the penetration of smartphones (half of ARM chips goes to mobile devices) and the emergence of IoT (with developing market shares for embedded chips). Both operational and net margins are record high, and the financial situation is very robust.

NXP

NXP is a Dutch company, spin off of Philips. Previously entirely held by equity funds, it was publicly introduced in 2010; equity funds keep a part of shares. Bought under LBO, NXP has been heavily restructured since 2006, with mass job cuts and carve‐outs (sale of its mobile phone division), with a clear focus on short‐term cash generation.

NXP revenues have been very dynamic in 2014, clearly out‐performing the sector. More globally, NXP has enjoyed robust growth over the last years, thanks to strong positions on smartphones and tablets, NFC technologies, identification or automotive. Operational profit is also on a very positive trend, close to 19% of sales. This is explained by higher revenues, decrease of operational expenses (in the wake of years of restructuring programs) and cost‐control policies. Net profit is also positive, and cash flow important.

Moreover, financial debt has deflated, and financial situation, which was worrisome a few years ago, is getting healthier.

Those improved financial metrics have enabled to focus on value creation for shareholders (with purchase or shares)… and have opened the way for external growth, with the major acquisition of Freescale earlier in March 2015. Among the most important M&A of the industry (11,8 bn $), this operation creates the 8th actor of the semiconductor industry with a competitive advantage on Microcontrollers and the Digital Signal Processing segments

NXP total headcount is approximately 29 000 employees worldwide. Wafer fabs are located in the Netherlands, Germany, the UK, China and Singapore. The M&A with Freescale will probably have impacts on R&D and central headcounts of each firm, including in Europe, in the mid‐run.

M$ 2011 2012 2013 2014Revenues 4 194 4 358 4 815 5 647

R&D 635 - 628 - 639 - 763 - % of revenues -15,1% -14,4% -13,3% -13,5%

Operational profit 357 412 651 1 049 % of revenues 8,5% 9,5% 13,5% 18,6%

Net profit 390 115 - 348 539 % of revenues 9,3% -2,6% 7,2% 9,5%

Main results of NXP



Infineon

Infineon is a German semi‐conductor manufacturer, and a spin‐off of Siemens. The company has undergone several restructurings in the past years, and sold parts of its activity to concentrate on mostly industrial markets (memory chip division in 2009, wireless solutions in 2011 to Intel, wireline communications).

Infineon bought American company International Rectifier (specialized in power management integrated circuits) in early 2014, for 2,4Bn$ net of cash.

Today, its top end market is Automotive (45% of 2014 sales), which seems logical given that Infineon is German, as well as leading car manufacturers (Bosch…). On this segment, Infineon is number 2. Other main markets include power management (power supplies for consumer electronics or lighting systems, 25% of 2014 sales), industrial power control (home appliances, energy transmission, industrial drives…, 18% of 2014 sales) and security (authentication and identification for smart cards, 11% of 2014 sales). Infineon communicates on 3 megatrends that deeply influence its business: energy efficiency, mobility and security.

Infineon holds 33 R&D facilities in the US, all over Asia and in Europe (Germany, UK, Italy, Austria and Romania). It holds 20 manufacturing sites mostly in Asia (with a major site in Malaysia), but also in the USA and Europe (Germany, Austria17 and a smaller plant in Hungary). Total Infineon headcount was 29 800 people, among which 556 in America, 13 179 in EMEA and 16 072 in Asia. International rectifier employees (around 4000 people) have now to be added.

In 2014, Infineon outperformed the market with a sales growth of 12%. All divisions reported a growth, especially automotive and industrial power control. The sales towards APAC are gaining traction, because of the presence of numerous EMS in this region, including EMS working for Europe and the US. Moreover, Infineon improved its financial performance; this is mainly explained by a greater rate of capacity utilization (since Infineon still resorts mostly to in‐house manufacturing, the absorption of heavy fixed costs is essential). The financial position is very good.

17 It started producing 300mm wafers in its Austrian plant in 2015, for automotive power components. This is the second player to ramp up to 300mm for analog and discrete components.

M€ 2011 2012 2013 2014Revenues 3 997 3 904 3 843 4 320

R&D 439 - 455 - 525 - 550 - % of revenues -11,0% -11,7% -13,7% -12,7%

Operational profit 736 455 325 525 % of revenues 18,4% 11,7% 8,5% 12,2%

Net profit 1 119 427 272 535 % of revenues 28,0% 10,9% 7,1% 12,4%

Net cash 2 387 1 940 1 983 2 232

Main results of Infineon



2010 2011 2012 2013 20140

5000

10000

15000

20000

25000

30000

35000

8 826 7 926 8 408 8 520 8 888

3 449 3 755 4 019 4 067 4 291

12 106 12 285 12 317 12 024 14 324

Infineon employees by region

Germany Other Europe Americas China Other Asia

Europe lags behind and tries to catch up Asia and North America

It is clear that Asia and the USA now lead the semi‐conductor world. Europe is finally trying to catch up with those regions. In 2014, the EU launched a public‐private initiative, the “Ecsel partnership”. This program aims at doubling the value of European semi‐conductor production from now to 2020, with a dedicated budget of 5Bn€ (1,2Bn coming from the EU, 1,2Bn coming from member states and the rest from private investments).

The plan will rely on European strengths (current European skills with automotive, energy, smart cards, security, home automation, leading edge clusters such as CEA‐Leti, IMEC, Franhofer) and bet on future trends such as IoT.



European industrial footprint in semi‐conductor industry in 2013, and evolution of European production in 200mm (Source : Garnter, Yole, SEMI)


As a reminder (cf. 1.3), we consider 95K employees as our estimate for the semiconductor industry in Europe.


Slowing mid‐term growth of the semiconductor market,

The More Moore strategy is getting increasingly difficult and costly…

… as minimum investments to keep pace on new generations facilities reach new

heights,

The market is concentrating by the mean of huge M&A and is likely to continue on

this track,

The shift of volumes towards foundries goes on since most semiconductor

competitors are turning increasingly towards a fablite model,






Acceleration of volumes shifting towards foundries that would cost production jobs but also R&D capacities in Europe,

Further M&A impacts on jobs,

European competitors have made a choice towards the More than Moore strategy that shows better growth perspective …

… but the threat of foundries is growing as these actors show more and more interest to these segments but also competencies and means to execute,

Some European actors seem more and more focused on financial targets turning them into a fablite strategy that could cost jobs in Europe in the mid‐run,

The public support gap between Europe and other geographical zones could have a main impact on the location of next generation facilities investments,

Given those hypotheses, our “business as usual” scenario forecasts a 15% reduction of

the number of European employees up to 2020.

Chapter 4 ______________________

Connectors


56 Chapter 4 ‐ Connectors


Chapter 4 ‐ Connectors 57


1.1. A significant growth for the Connector industry since the 2009 crisis and good perspectives towards 2020

The Connector industry has retrieved growth after the 2009 drop

According to Bishop & Associates, the world Connectors market represented in 2014 almost 53 billions dollars (+ 7,8% vs 2013).

2010 2011 2012 2013 2014 2015

45 34148 355 47 049

49 04752 855

55 569

Connectors global sales (M$)

After a sharp decrease in 2009 (loss of 10 B$ sales in one year), the sector turnover has been recovering with an average annual growth of 4% between 2010 and 2014.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

11,4%

18,0%

7,5%13,1%

7,6%2,7%

-21,9%

28,5%

6,6%

-2,7%4,2%

7,8%5,1%

Connectors market - worlwide growth



Connector sales by regions (% of worldwide turnover)

2002 2014

33,0%

24,1%

14,6%

10,8%

11,8%

5,7%

North America

Europe

Japan

China

Asia‐Pacific

ROW

20,5%

21,4%

10,6%

25,8%

16,2%

5,4%

North America

Europe

Japan

China

Asia‐Pacific

ROW

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

2010 2011 2012 2013 2014 2015

Connectors sales by regions (en M$)

North America

Europe

Japan

China

Asia‐Pacific

ROW



Connectors sales are likely to go on growing in the mid‐run

The Connectors industry projections in the mid‐run are good with 6% CAGR between 2015 and 2020 according to Bishop & Associates.

Surge of China, while the historical end‐user markets have shrunk

The analysis by geographical zones stresses the following tendencies:

Continued growth in North America (+ 26% between 2010 and 2014);

Significant recovery for Europe in 2014 after two years of stagnation ;

Slight growth in China until 2014 which has seen a significant recovery with + 15% in one year.

2014 2015 2016 2017 2018 2019 2020

52 85555 569

58 79362 948

66 00270 875

74 705

Connectors sales forecast (M$)

The worldwide Connectors industry was characterized by a main shift concerning regions importance in the global turnover mainly explained by actors choices (especially US or European groups) to relocate their production to Asia.

In the 1980’s, the United‐States represented almost the half of the world turnover, Europe one third, the balance coming from Asia and mainly Japan.

Their weight has sharply decreased since then with an acceleration of relocation strategies. In the beginning of the 2000’s, the US still represented more than one third of the total market, Europe almost 25% and China slightly more than 10%. At the end of 2014, the chart has clearly changed with 20% for the US, 21% for Europe and 26% for China.



Main actors: US and Japanese groups dominate the ranking

The domination of the US and Japan is obvious when analyzing the firms top 10 according to turnover with 4 American firms within the top 5 and 5 Japanese firms within the top 10.

The only European actor has disappeared from the top 10 a few years ago: FCI, a former affiliate of Areva, has been bought by the investment fund Bain Capital, which has sold a significant part of its activities (see thereafter).

Top 10 Manufacturer by 2014 Annual sales

M$ 2011 2012 2013 Var 2011/2013 Market

share 2013

1 TE Connectivity 8 476 8 432 8 719 2,9% 18%

2 Amphenol 3 676 4 015 4 290 16,7% 9%

3 Molex 3 582 3 580 3 617 1,0% 7%

4 Delphi 2 522 2 589 2 953 17,1% 6%

5 Foxconn 2 718 2 683 2 704 ‐0,5% 6%

6 Yazaki 2 176 2 278 2 382 9,5% 5%

7 JST 1 509 1 357 1 508 ‐0,1% 3%

8 JAE 1 083 1 311 1 335 23,3% 3%

9 Sumitomo 859 1 006 1 038 20,8% 2%

10 Hirose 1 160 948 959 ‐17,3% 2%

Top ten 26 601 28 199 29 506 10,9% 60%

All others 21 162 19 411 19 372 ‐8,5% 40%

Total world 47 763 47 610 48 877 2,3% 100% Source: Bishop & Associates

A profitability even better than before the 2009 crisis

During the year 2009, the Connectors sector has experienced a sharp decrease of volumes with a huge impact on profitability:

Volumes drop (‐ 21,9%) ;

Rise of raw materials price;

Conectors price decrease.

And yet in 2010, the profitability of Connectors companies has recovered and has been above its pre‐crisis level from this date.



1.2. Employment in Europe

From a statistical viewpoint, the connectors industry is mixed among NACE code 261, along with semiconductors, smart cards and EMS. As a result, a statistical approach to assess the number of employees does not seem relevant.

Assessing the connectors industry employment within Europe gathers two difficulties:

Firstly, unlike other electronic components industries, the Connector industry relies on an important number of firms active in Europe.

Moreover, a significant level of employment concerns family owned firms which often do not communicate precisely on their headcount split between locations.

In this context, we have gathered the maximum information on the basis of main groups’ public published data or interviews and we have tried to build the most accurate evaluation of employment we could.

Those estimates lead to a 36K European headcount for the connectors industry.

If the industry has experienced massive relocations of standard connectors towards Asia especially in the Telecom & Computers sectors or even Automotive, the trend is positive on the remaining activities especially in aerospace and industries with long‐term growth perspectives and recognized competencies in Europe

9.3%

‐16.8%

13.4% 12.7% 12.0% 11.3%

5.8%

‐17.0%

9.5% 9.0% 8.8% 8.6%

‐20.0%

‐15.0%

‐10.0%

‐5.0%

0.0%

5.0%

10.0%

15.0%

2008 2009 2010 2011 2012 2013

Connector industry profitability

Operating income (as a % of sales)

Net margin (as a % of sales)



2. Disruptive technologies and strategies of the actors:


The main technological trends going through the Electronic industry but also client

markets will have impacts on the Connector industry

The Connectors industry is also impacted by most of disruptive technologies crossing the electronic industry but also client markets:

as technology becomes more mobile, the need for connectors made for computer peripherals will decline,

the deceleration of the Moore’s Law strategies may implies a growth of some applications connectors in the semiconductor and IC packaging industries,…

…but technologies as SoC (system on chip) or SIP (Session Initiation Protocol) will reduce the Connectors needs due to circuit integration,

the Internet of Things impacting some client markets will bring new needs from Connectors suppliers and will represent a huge opportunity while requiring connectors on an exponential number of objects,

the industry 4.0 will also bring some growth opportunities for actors specialized in industrial markets (some German actors seem well positioned)

If some main technological trends may change the Connectors industry landscape, the Connectors suppliers will be very differently impacted according to their final market/specialization:

Indeed, the divide between Datacom/high‐tech segment and industrial specific applications (electro‐mechanical, high‐voltage, ergonomic, applications with very specific parameters) will be surely widening.

For example, the connectors dedicated to the automotive industry may move from electro‐mechanical to Datacom applications which could change significantly the competitive situation.

The Connector industry is involved in a continued concentration process

The connectors sector is pursuing a continued concentration process concerning both main groups and the SMEs trying to find way to accelerate their growth and to buy niche competencies. We can quote the most recent and significant examples of M&A in the sector:

The acquisition of Deutsch by TE Connectivity in 2012 for 1,6 B€ in order to expand the portfolio and sector offer of the US group (especially Aerospace, Railway, Transports),

The buyout of the Motorized division of FCI by Delphi Interconnect in 2012 for around 0,8 B€,



The FCT Connectors takeover by Molex in 2013 (acquisition of competencies in the industrial, telecom and aerospace industries).

Or the acquisition by Amphenol of FEP (a German based company; mainly automotive) and more recently the proposal to buy FCI Asia for 1,2 B$ (telecom, Datacom, wireless communications and industrial markets).

The last potential acquisition of FCI Asia by Amphenol raises an issue about what will happen to the remaining part of FCI Europe.


The Connectors industry goes on concentrating

The market shares of the first ten connectors producers have been increasing continuously since the 1980’s to reach 60% in 2013.

This trend is especially linked to the acquisitions which have particularly concerned TE Connectivity (Deutsch acquisition), Delphi Interconnect (Motorized division of FCI) or Amphenol (FEP).

1980 1990 1995 2000 2005 2010 2011 2012 20130

10 000

20 000

30 000

40 000

50 000

60 000

40% 43% 43%51% 52% 54% 57% 59% 60%

Worldwide turnover (M$)

Worldwide turnover (M$) top ten share

But there is still place for big SMEs on specific markets

The global Connectors market gathers more than 1000 actors with a huge number of SME concentrated on niche markets.

As stressed in the following chart, the Computer, the Automotive and Telecom/Datacom sectors concentrated almost 60% of the world sales in 2014. Nevertheless, the balance is distributed on a lot of end markets.



Sub‐sectors analysis (Bishop & Associates 2013)

16.3%

1.5% 2.3%3.3%

11.9%

22.2%

6.0% 6.1%

20.4%

5.2% 4.9%

Connectors markets (in % of 2014 world sales)



The analysis by sub‐sector offers a rather good picture of the European actors’ specializations:

A good position of French firms (Souriau and Radiall) in Aerospace, Transports and Medical or even FCI in Computers or Telecom,

Some important German actors in Instrumentation, Industrial Equipment, Automotive but also Telecom (Harting, Rosenberger, Weidmüller),

As stressed by this table, the main connectors firms in Europe are French or

German. Another European significant actor is Lemo, a firm headquartered in

Switzerland which is well positioned in the Medical sub sector.


3.1. European market

2010 2011 2012 2013 2014 2015

10 25111 276

9 91910 643

11 31011 816

Connectors sales in Europe (M$)

The Connector sector in Europe has experienced a huge drop of sales in 2012 (‐12%) but has been since keeping growing with +7% in 2013 and +6% in 2014.

The market is highly concentrated in Western European countries (82% of the total European turnover in 2014 according to Bishop & Associates) with almost the half in France and Germany.

Most of the production of Telecom or Computer Connectors (or generally speaking standard connectors) has already been relocated to low costs zones. Some Telecom production remains thanks to companies as Ericsson or SMEs which keep on buying European connectors or concerning specific connectors with technological components.

The production of connectors for automotive has also strongly decreased in Europe, the only country keeping a good balance being Germany.



The main part of the European Connectors production concerns:

Automotive for the production remaining in Europe is still the first sector in terms of turnover,

Industries with a huge number of end market and technologies (industry equipment, industrial applications, transports, medical,…),

Military/Aerospace.

These three segments have been growing in 2014:

The Aerospace segment is fast increasing with a strong European base even for US groups (as Amphenol for example) and especially in France (but also in the UK, in Italy or in Spain),

The Industrial segment is also on a rising trend, particularly for segments as robotization and mechanization (in Germany) or railways (Germany but also France, Italy and Scandinavian countries),

The Automotive segment with manufacturers regaining growth in Europe.

In these three segments the proximity to the clients production site is essential in order to be close to the design center and to have logistic facilities next to the client factories.

The situation of European actors and, on a wider scale, of the production in Europe is rather good with positive mid‐term perspectives (especially for Aerospace) and a clear recognition of the competencies located in Europe.

Nevertheless, some threats could darken this bright picture since:

The relocation strategy of specific client could have huge impacts especially on SME dedicated to a few number of clients (cf. Automotive, some Industrial segments),

Some Chinese actors are yet trying to capture European volumes for example in Automotive,

The regulation at the European level as the REACH initiative which could ban some products used in the industrialization (derivative of chrome 6 banned in 2017) and then incites some producers to relocate their activities.



European top ten 2013

Headquarters World Sales 2013 (M$)

World ranking European sales

2013(M$) Weght of Europe

Rosenberg Germany 720 11 335 47%

Harting Germany 642,7 12 462 72%

Phoenix Contact Germany 412,4 18 182,9 44%

Souriau France 363,5 21 215,1 59%

Radiall France 312,2 23 112,6 36%

Huber+Suhner Germany 310,6 24 144 46%

Multi‐contact Switz. 290,3 27 203,5 70%

Kostal Contact Germany 275,6 31 144,1 52%

Smiths Interconnect UK 252,2 34 89,3 35%

Lemo Switz. 240,3 36 129 54%

Total European top 10 3 820 2 018 53%

Market share of top 10 8% 19%

Total market 48 877 10 643

Bishop & Associates, 2014

The European top ten groups have sold 3.8 billion $ in 2013 which represented only 8% of the total market (less than TE Connectivity or Amphenol alone). But even when focusing on European sales, they represented less than 20% of the European Connectors market. This fact stresses the importance even in Europe of US and Japan based groups in the Connectors industry (TE Connectivity, Amphenol, Molex or Delphi).

Within this European top ten, half of firms are headquartered in Germany (5), 2 in France, 2 in Switzerland and 1 in the UK.

Most of them are family owned, realize a main part of their sales in Europe and are specialized on specific markets as for example:

high‐frequency and fiber optic technology (telecom, medical, instrumentation,…) for Rosenberger,

industrial applications for Harting,

military/aerospace and industry for Souriau or Radiall.

Their internationalization is quite recent with the construction of production sites in most regions.

In the detailed analysis of actors, we will focus our attention on these four actors which may constitute good examples of the European Connectors sector.



3.2. Overview of the main European competitors

The main actors in Europe are generally family owned firms from Germany, France or Switzerland with renowned competencies on a few niche markets.

The main difference between France and Germany (or even Switzerland) may rely on the ownership structure:

Germany gathers around 15 fast growing SME that have always been family owned,

France has a few main actors which had a capital link with French multinationals that have decided to get rid of them (Souriau, FCI) and a lot of smaller companies often mono‐client.

We are going to present 4 actors representative according to us of the European competitors’ landscape: Souriau and Radiall for France, Harting and Roseberger for Germany.

Harting: the company is keeping growing in industrial applications by organic growth

2012 2013 2014

347 348 369

132 136178

479 484547

Turnover (m€)

Sales Europe Sales outside EuropeTotal

Harting is a German family owned company created in 1945 which has keeping growing thanks to a strong position in industrial applications (robotics, machine tools but also railway) and has sold its Automotive business in the 1990’s

The Harting total turnover has grown by 13% in 2014 thanks to:

a good dynamism of sales in Germany (+ 11,5%)

A main contribution of Asia with a 40% sales increase .

This evolution stresses the on‐going internationalization of Harting with new production sites located in China, Brazil and Romania.



Germany EMEA wo Germany Asia Americas

174 175

90

46

194174

126

52

Turnover (m €)

20132014

Although the share of Asia in the company turnover is increasing, Germany remains the base of Harting with production sites, R&D teams but also the decision centers.

The evolution of headcount is quite similar with constant growth (+ 6%) towards 4 048 employees in 2014 on which more than the half are located in Germany (56% in 2014; + 7% in 2014 vs 2013).

Rosenberger: a very dynamic trend fueled by acquisitions and organic growth

As for Harting, it is quite difficult to find financial information about Rosenberger given its family owned status.

Created in 1958, Rosenberger is also a family owned company and a leading manufacturer of connector solutions in the high‐frequency and fiber optic technology fields.

The clients are mainly high‐tech companies in cellular technology and telecommunications, data systems, medical electronics, industrial measurement technology, automotive electronics and electro‐mobility fields.

Rosenberger has strongly expanded both by organic and external growth:

Opening of production facilities in (China in 2001, expansion of Hungary in 2003, India in 2006, Brazil in 2010, new facilities opened in Germany and in China in 2014, new facility opened in India in 2015)

Acquisitions of companies (CDS DataComm, Plano‐Texas in the US, a leading contractor for fiber optic products, Hörl Kunststofftechnik and H&S Automotive in 2007; Toth Inc. in the US in 2012).

As a consequence of its aggressive growth strategy, Rosenberger has multiplied its headcount by 6 between 2000 and 2014 to reach around 6 200 employees in the world



(Germany representing less than a third of total headcount with 1 770 employees at the end of 2014).

2000 2007 2008 2009 2010 2011 2012 2013 2014

1040

2600 2720 2700

35004015

4900 5100

6200

Headcount - Rosenberger

Its industrial footprint is yet internationalized with 19 production sites worldwide in 11 countries (Brazil, Chile, China, Denmark, Germany, Hungary, India, Spain, Sweden, UK, USA).

If Germany still concentrates 4 production sites of most of the decision centers (Augsburg, Augsburg, Ottobrunn, Laufen), the Rosenberger production and commercial presence has also expanded especially in Asia and in the US (2 production sites in India, 3 China and 3 in the US), but also within Europe with the Assembly and logistic center located in Hungary.

If Europe still represents almost half of its turnover, Rosenberger is quickly growing in the US (thanks especially to external growth) and in Asia with new production sites.



2008 2009 2010 2011 2012 2013

265 247

336

453483

542

Turnover (m€)- Rosenberger

Souriau: an eventlful history but the business seems flourishing especially on the aerospace and industrial segments

Only few information on Souriau is available since the company remains unlisted. Nevertheless, some information has been reflected since 2011 in the Esterline annual report but they are still quite limited.

Created in 1917 and specialized in Coonectors solutions for severe/extreme environments, Souriau has experienced several holding changes:

buyout of Souriau in 1989 by Framatome which created FCI ;

creation of the MAI division within the FCI group (military, aerospace and industry) ;

sale in 2003 to Axa Private Equity et rebirth of Souriau ;

sale in 2006 to the Investment fund Sagard ;

finally, Esterline bought in 2011 the company (for 726,7 M$ in cash). Esterline is a US industrial company that has realized sales of 2 bn € in 2014 and was not active in the Connectors industry before the buyout but in related sectors as sensors, man‐machine interface or advanced materials with potential synergies with Souriau.

The decentralized organization allows to Souriau a quite important autonomy and a decision center located in France.

The society is particularly active in sectors as aerospace, military and industries (transport, instrumentation…). If the link with the aerospace industry is historical, the company has also developed links and competencies in the nuclear industry, marine or the offshore segment.

Souriau has 11 production sites in the world, among which 4 in France:

Less than 50% from Europe



Champagné: high volume production for aerospace/industry and center of development and industrialization ;

La‐Ferté‐Bernard: linked to the Champagné site, moulding operations for all the French industrial sites ;

Marolles: specialized in specific products with low volumes but high value‐added ;

Cluses: contacts machining for all the French industrial sites ;

One site in Morocco: this site has been fast growing for the last years and yet centralizes the production of standard products (high volumes) ;

Two sites in Asia (India and Japan) ;

Two sites in the US ;

One site in South America (Porto Rico) ;

The Asian and American sites have been settled to facilitate the local markets penetration.

Despite these numerous ownership changes, Souriau has been keeping growing with a turnover around 250 M$ in 2012 (Sensors & Sytems division within Esterline) and a net result of 40 M$ (net margin of around 16%). Separate data concerning Souriau within the Esterline annual report have not been communicated any more since 2013.

The trend seems also positive for the years to come with a good positionning in the aerospace segment (especially with Airbus).

The French headcount should pursue its growth: indeed, in spite of the the reallocation of standard volumes toward Tangiers, the headcount of French sites has been growing for the last years tanks to the development of new activities (offshore, nuclear…) and the dynamism of aerospace sales.

The company has announced in june 2015 the recruitment of 100 employees for Champagné and La‐Ferté‐Bernard to follow the backlog growth which represents a 15% increase in the total headcounts of both sites (from 700 to 800).

Radiall: a strong growth for the family owned company thanks to internationalization and aerospace

Family owned SME funded by the Gattaz family, Radiall has strongly grown since its creation and now operates production sites on four continents.

Following concerns regarding its model to finance its growth, Radiall went into the stock market more than twenty years ago for a limited part of its capital but has announced in 2010 its will of withdrawal, with a share buyback representing around 25% of the total shares. The company direction explained then this decision by its will to keep a long‐term prism in its development and to limit the financial market pressure.

The company fits into a strong growth trend with a 55% growth of sales in only five years and + 21% for the sole year 2014. The operating margin is following the same track, reaching 16% of sales in 2014 (vs 10% in 2013).



Indeed, the company has benefited from a good growth of the Telecom segment and the continuation of the aerospace growth.

The main part of growth is obviously coming from the Aeronautics segment with very dynamic sales to Airbus. This segment represented more than two thirds of the company turnover in 2014.

The Wireless division was also fast growing in 2014 with an increase of 41% in sales mainly coming from the recovery in China.

If sales and headcounts have been fast growing in Americas and Asia, the French headcount has remained rather steady since 2010 with + 4% between 2009

18,5%

68,7%

12,8%

Turnover 2014 Radiall per division

Wireless

Military, Aeornautics,Space

Automotive

Industrial

19,5%

19,2%

37,2%

24,1%

Turnover 2014 Radiall per zone

France

Europe (hros France)

Amériques

Asie et ROW




As a reminder (cf. 1.2), we consider 36 K employees as our estimate for the connectors industry in Europe.


Strong growth perspectives for the global Connectors market including in Europe,

Standard connectors volumes may decrease in Europe …

… and globally the rise of Wireless may impact the Computers peripherals segment…

…but specific connectors seem globally well orientated in the mid‐run,

Growing internalization of European main competitors,

As specific connectors suppliers are dependent on clients’ localizations, any relocation strategy on the client side may have impacts on employment,

Potentially huge opportunities from the IoT and the Industry 4.0.




Main European actors are well positioned on specific markets,

The relocation towards Asia is likely to continue concerning standard products,

The relocation of some final clients could impose a shift of the Connectors production. This threat is especially strong for Automotive suppliers but not only,

Major groups (US MNE for example) decide to relocate some production sites to low‐cost zones,

The European competencies are recognized even by US based groups in sectors as aerospace or instrumentation,

The European regulation may become stricter than in the other zones (cf. REACH) which could harm European actors competitiveness,

Given those hypotheses, our “business as usual” scenario forecasts a 5% rise of the

number of European employees up to 2020.

Chapter 5 ______________________

Consumer electronics and domestic appliances


76 Chapter 5 ‐ Consumer electronics and domestic appliances


Chapter 5 ‐ Consumer electronics and domestic appliances 77


1.1. A complex market with a wide range of products

Domestic appliances are divided between:

Major domestic appliances: refrigerators, freezers, dishwashers, washing

machines, tumble dryers, free standing cookers, built‐in ovens, hobs, hoods, and

microwaves;

Small domestic appliances: ovens, cookers, irons, fans etc.

The wide range of products enumerated above, as well as their different features and classification creates a highly fragmented market, making the analysis of the consumer electronics and domestic appliances sector a difficult task. Moreover, the sector is characterized by the existence of a high number of big companies manufacturing a large palette of products. These companies are market leaders/top manufacturers for certain products, sometimes having as competition smaller companies specialized on certain products. This situation makes the analysis even more complex as for some products there is the possibility to identify leaders that compared to the whole sector are not significant.

The sector experienced a sharp decline during the crisis

The domestic appliances market in Europe experienced a sharp decrease during the crisis; the contraction was around 14% in 2009, the sales decreasing to 45 bn. EUR from 52 bn. EUR. The market fluctuated in the following period and in 2012 a new minimum was reached – 43.7 bn. EUR, when the debt crisis hit Europe. Since then, the domestic appliances market has started to recover, but at a slow pace. On the other hand, the Consumer electronics market is declining despite a small recovery in 2010. In 2012, the total European market accounted for 24.4 bn. EUR showing a 28% decrease compared to 2008.



According to CECED18, the total appliances stock is around 1.7 billion appliances across Europe. The same institution estimates that the total production of appliances in EU28 and Turkey is around 121 million divided as follows:

72 million large appliances

47 million small appliances

1.8 million heating, ventilation and air conditioning

Recovery and growth indicators for domestic appliances in 2015

According to GfK and EUROSTAT data, Western European19 countries are main markets for IT&C products, including consumer electronics and domestic appliances. The evolution of sales in this region is defining general EU trends. According to GfK reports20, for the first quarter of 2015, Major Domestic Appliances sales show a solid increase compared to the same period of 2014. Tumble dryers outperformed expectations, having the biggest increase among the Major Domestic Appliances. The positive evolution is also due to the increase in sales of appliances with the energy efficiency class of A+++ on the back of a decrease in prices.

18 European Committee of Domestic Equipment Manufacturers 19 Western Europe: AT, BE, CH, DE, DK, ES, FI, FR, GR, IT, NL, NO, PT, SE, UK 20 http://www.gfk.com/



The sub‐sector of Small Domestic Appliances registered a growth of nearly 10% in the first quarter of 2015, many products such as vacuum cleaners, shavers, dental care products and food preparation equipment posting double‐digit robust growth.

Main trends observed in the sector include a better energy efficiency (e.g. 2013 refrigerators are 40% more efficient than those produced in 2003) and lower sale prices (on average, by 4%/year?? since 2005).

Consumer electronics lag behind, but potential exists on the TV segment

Overall, Consumer Electronics sales declined in Q1 2015 and are expected to fall for the whole year, as there is no major sporting event to fuel demand.

However, the market for TVs is expected to grow in the middle term, especially for large screen sizes and high quality (4k/UHD) sets. Smart TVs will become the most sold TV product worldwide. The market research company Gartner21 estimates that until 2018, 87% of the TV shipped annually will be smart TVs. In European countries the smart TV penetration rate is rather low and the market is not yet mature: UK – 29% (Jan. 201522), Germany – 38% (201323), Austria – 33%, France – 42% (201224), Poland – 36%, Netherland – 26%, Spain – 26%, Italy – 28%.

According to European TV market 2007‐2013 report25, sales of televisions in Europe reached their peak in 2010, when 56 million units were sold and the market was dominated by CCFL26‐LCD TVs. High volumes were stimulated by a 30% decrease in prices registered in 2007‐2010. After 2010, the disruptive technology such as LCD monitors changed consumer preferences and eventually led to the disappearance of CRT TVs from the market. Given the higher average sale price for the new televisions and the average replacement cycle of 7 years, the number of units sold decreased by 7% from 2010 to 2013. In less than 10 years, the television market changed completely, evolving from CRT TVs to Smart TVs with lower energy consumption, higher image quality and full connectivity.

21 http://www.gartner.com 22 http://www.emarketer.com/Smart‐TVs‐Make‐Slow‐Progress‐UK 23 http://www.gfu.de 24 http://www.digitaltveurope.net 25 European TV market study (2007‐2013) 26 Cold Cathode Fluorescent Lamps



A similar trend is observed at the global level, as the market declined in the last years and the brands are exploring many avenues to revitalize the market, including OLED displays, curved screens, and increased resolution (4K or Ultra‐HD).

1.2. Employment in the sector

According to the most recent data27, Domestic Appliances Industry direct contribution to employment in Europe is around 219k workers, while the indirect contribution accounted for 465k, most of the indirect workforce being located in Italy and Poland.

The TV production in Europe represents a particular case having in view that, with few small exceptions we could not identify any manufacturers in Europe. The biggest TV producers – Samsung, Sony, LG – are not present in Europe, as their products are manufactured in their home countries or other Asian countries. The number of people employed in the consumer electronic sector is estimated to be at around 67k as of 2012. Based on our estimation, the existing workforce employed in TV production is at around 2,500:

The Slovak company Universal Media Corporation employs around 600 workers,

The Chinese manufacturer TPV, after shutting down the production in Hungary,

remained with around 700 workers at the site in Gorzow, Poland.

When acquired by Skyworth, the German producer Metz employed a total of 650

workers and

TCL reported more than 400 employees for its operations in Europe.

27 2011, The Economic Impact of the Domestic Appliances Industry in Europe (April 2015)



Source: EUROSTAT

Some producers chose to leave the European market because of high costs (Sharp), while local companies have divested their TV divisions (Philips) or have become victims of the fast moving technology. In the last years the European TV market has been penetrated by Chinese producers such as TPVision or Skyworth that acquired local companies. Even so, from employee’s perspective, the news are bleak: Chinese companies are planning to move nearly all production to Asia or to concentrate local production in Eastern Europe, while TPVision will close its factory in Hungary. Still, Europe is attractive for highly skilled R&D staff, most of the biggest global companies having innovating centers in E.U.:

Samsung: Samsung Electronics Research Institute (UK, area of R&D: Mobile

phones and digital TV software); Samsung Poland R&D Centre (Poland, area of

R&D: STB SW Platform Development);

Sony: Sony Computer Entertainment Europe R&D (UK);

LG: R&D center located in Poland that will adapt LG's products including

televisions, refrigerators and washing machines to the European market;

As regards domestic appliances, Europe is very well represented at global level. Many production sites are located in Europe, but the pressure for cheaper and energy efficient products and higher competition on the market led to important changes in the organizational structure of the companies. The share of Europe in worldwide employment has constantly decreased in the last years, partially because of a wider global footprint (mainly in Asia), partially because of offshoring to Asia:

BSH has maintained its workforce in Europe since 2009, while its global effectives

have increased by 1/3. Most of the company recent investments were in

production sites located in Turkey and China.

70% of Electrolux total production is located in low costs countries.

Inside Europe, many companies chose to open/acquire new facilities in Eastern Europe in order to reduce costs: BSH bought a bankrupt domestic household appliances factory in Poland and plans to double its production by 2025; Miele’s last two investments in production sites were in Romania and Czech Republic.



Most R&D centers in the domestic appliances sector are located in Europe, but some new investments were also made outside E.U. For example, BSH built a R&D center in Turkey in 2013 and another one in India in 2015, while Miele invested in South Korea. The BSH’s Indian center will be located in Puna and will hire around 30 people. According to our estimates of the companies, R&D staff do no count for more than 3‐4%.


2.1. Increased digitalization of home appliances

Communication between CE components and household appliances opens up a wealth of possibilities for future applications. Thus home networks can help to save energy and also make the home a safer place. The trend of digitalization will remove the barrier between the producers and it will determine the manufacturers to collaborate in order to create more competitive and innovative products that will respond to a more complex demand. More important is that in the case of Home Appliances, this trend can be led by European manufacturers, given their know‐how and highly skilled personnel.

Table 1. Trends in consumer electronics, by products28 TVs Ultra High Definition TVs (UHD) are ready for the mass market;

TVs that support HEVC standard (highly efficient video compression); New nanocrystals technology in the red and green color filters; New OLED (Organic Light‐Emitting Diode) TVs; High Dynamic Range (HDR) technology for obtaining better contrast; A competition is developing for Smart TV's operating system; Higher connectivity between TVs, mobile phones, tablets and other appliances;

Watches Smart watches connected to Internet, with sensors to monitor body activity Sound systems 3D sound technology Loudspeakers/ Headphones

Wireless technology Recalibration functions that individually adapt the sound to the hearer’s ears; Sophisticated control concepts (e.g. going to the next piece of music in response to a wave of the hand); Headphones that no longer obtain the sound via the traditional way, but have their own digital‐analogue converter and amplifier in the earphones; High definition sound format.

28 GFU Consumer Electronics trends 2015



Table 2. Trends in domestic appliances, by products29 Major Domestic Appliances

Higher energy, water and detergents efficiency; Interconnecting the appliances using smartphones

Washing machines

Effective washing even at 20°C, use of foam system, reduction in noise level

Tumble driers Economical use of energy, noise reduction, higher load capacity Dishwashers Faster and more efficient, reducing operating times up to 60%

Reducing the amounts of water and energy used Tumble driers Economical use of energy, noise reduction, higher load capacity Fridges Improved energy efficiency Ovens Higher flexibility and speed: new generation ovens combine a number of

functions in a single unit, such as such as conventional heating, hot air, a grill and steam cooking, as well as a microwave and induction Higher use of sensors to insure maximum efficiency

Small Domestic Appliances

Developing new products with multiple functions; Interconnectivity between the appliances and smart phones; The global market is driven by large European groups such as Groupe SEB, Philips, Bosch Siemens or De Longhi, which develop new products and concepts, open up new categories and set up in new territories;

Food processors Multiple tasks and new functions

New sub‐sectors Food preparation (mixers, stick blenders etc.) and Fun cooking (e.g. waffle irons)

Vacuum cleaners Improved performance and reduced energy consumption Units tend to be more compact, lighter and more silent New vacuum robots are growing in popularity and they can be controlled via smartphones.

“Connected home”

More and more devices are connected. The trend is obvious and by the end of 2023, around 22 bn. devices will be connected30 into M2M31 and Internet of Things, an astonishing 6 time increase since 2014 (3.5 bn. devices connected).

29 GFU Electric Home Appliances 2015 30 Machina Research forecast database 2014 31 Machine‐to‐Machine

Source: Machina Research



The “connected home” is part of a wider concept called Internet of Things and is referring to the idea that all the devices in a house can communicate with each other. Although there is no clear definition of the connected home, it is well accepted that the connected home market consists of 5 domains or “submarkets”:

Home security & safety

Home energy management (HEM)

Home automation

Home entertainment

Home health monitoring

This is the next big market for the coming years and most of the Consumer Electronics and Home Appliances companies are developing products that can be integrated in this new concept. Some of the companies even created special departments inside their organizations that are focused to develop products in this direction.

The race has begun and the competition will be fierce as the demand for smart appliances will boost in the next 5 years: IHS analysts estimate that the “smart connected home appliances” market will boom from 1 million unit sales in 2014 to 220 million by 2020, resulting into a CAGR of 134% for the period. The total number of connected appliances will be more than 470 million:

186 M smart air‐conditioning and heater units;

131 M smart washing and drying machines;

120 M smart fridges;

11 M smart large cookers;

17 M smart dishwashers;

If small appliances are included – coffee machines, robotic vacuums, microwave ovens etc. – the total number of connected devices will jump to 700 M. To give a clearer picture of the potential of smart‐homes, it is estimated that revenues generated by this market will reach $71 bn. by 201832.

Samsung, LG Electronics and other consumer electronics giants vying for first‐mover advantage have shifted their focus from mobile devices, television and other saturated businesses, to smart home technology devices. In the next years this will sharpen the competition on the European market and the newcomers will try to take advantage of the convergence between mobile devices and smart appliances.

At the same time, smart home is a great opportunity for European companies like BSH, Electrolux, Miele, Philips or Groupe SEB, that are market leaders: their know‐how can be determinant in conquering new markets. Moreover, their business is protected by high entering barriers, which hinder small start‐ups to menace their leader positions as it has happened in the case of mobile devices. However, the question remains if the production

32 3 Reasons Why The Connected Home Will Be Defined By Big Brands



of the new devices will be kept in Europe or it will be relocated to low‐cost countries in order to increase profits.

It is certain however that the development centers will be kept in Europe and most probably will increase their workforce. R&D represents an important piece in a manufacturer’s internal structure and its importance will increase in the actual dynamic environment. In 2012, the total amount invested by the consumer electronic and home appliances sector in R&D in Europe accounted for 1.4 bn. EUR.

Two of the most important factors that will impact the evolution of smart home appliances are: energy management initiatives, such as dynamic pricing, government initiatives and structure of utilities and standards for interoperability.

Interoperability between devices is one of the main challenges that producers must face at present. According to a research made by BSH, 90% of customers own different home appliances brands in their home and 66% want one app to connect them all. Such platforms have already been developed for TVs and other multimedia devices, and are currently developed for home appliances.

Some of the producers developed their own platforms that facilitate communication among appliances (for example BSH with its Home Connect app, an open platform that can evolve to accommodate a growing selection of services), but the IHS report suggests that there will be just a couple of connectivity platforms. Today, the most important platforms/ecosystems are developed by a consortium of several companies or IT giants:

ZigBee Alliance: its product, ZigBee, is the language for a wide variety of smart

home devices so companies can deliver an integrated ecosystem of home

monitoring, energy management, heating and cooling, security and convenience

devices;

HomePlug Alliance: its goal is to develop standards and technology for enabling

devices to communicate with each other, and the Internet, over existing home

electrical wiring;

Nest – developed by Google and already used by Whirlpool and LG;

HomeKit – developed by Apple;

AllSeen Alliance – non‐profit consortium dedicated to enabling and driving the

adoption of the internet of things. The protocol is used by big names such as

Electrolux, LG, Sony, Panasonic and Microsoft;

Thread – is an IPv6 based protocol for "smart" household devices to communicate

on a network.

Still, there are companies that are not launching products with connectivity capability. The German manufacturer Miele, for example, is still on standby considering that simple functions like turning on/off a dishwasher or washing machine are not features from which the customer will benefit, but only basic functions. On the other hand, reducing energy



consumption is more important for a customer and according to Miele, the company concentrates its efforts to develop this kind of useful features.

The development of solutions for connected appliances in the “connected home” environment is still at its beginning. The compatibility between smart appliances produced by different companies and phone apps is under construction. First steps have already been made in that direction but unfortunately, European developers lag behind.

One should consider that standards and devices born in the world of mobile telephony terminals, of which the EU is now completely absent, could gain a hegemonic position in this market segment. In order to counteract this prospect, developing a common EU‐based standard around a domestic gateway, with fair legal and economic conditions of access, could prove to be a viable solution. The existence of significant EU players in the gateway manufacturing sector, and in the home appliance sector, would be an opportunity for developing such a common EU‐based standard.

In the document Home appliances 2025: A vision for the home appliance industry in Europe of the European Committee of Domestic Equipment Manufacturers (CECED), the connected home is one of the 4 pillars that the companies consider to be essential for the future development of the sector. In that respect, the CECED asks the European Commission to establish a “Connected Appliances” platform with policymakers, consumers and industry to discuss trends and market uptake as part of the EU Digital Single Market and also to coordinate with industry to align investments in technology innovation with supporting infrastructure.

Profound changes in television technologies towards smart and connected TVs

The European market is adopting the display resolution 1920 × 1080 pixels of Full‐HD (1080p). The increasing market penetration of LED technology with 3D capability (about 30% of total TV unit shipments are already 3D) is pushing enhanced resolutions such as 3840x2160 pixels or Quad Full‐HD (2130p) into the market. The trend goes to even higher resolution of 4096×2304 pixels or 4kx2k.

Independently from the core technologies and display specifications, the global TV market is shifting towards the next generation of “smart or connected TVs”. Most manufacturers are launching smart TVs that allow access to the internet and interactive service platforms. According to 6Wresearch, the global smart TV market is expected to ship 198.2 million smart TVs by 2017, growing at a CAGR of 20.8% from 2012‐2017.



2.2. A competitive landscape marked by multiple mergers and acquisitions

In the last years, some important acquisitions, mergers and even bankruptcies changed the European market in what concerns the Consumer Electronics and Domestic Appliances.

The acquisition of Indesit by Whirlpool (world’s largest Major Domestic Appliance

manufacturer) in July 2014. The transaction accounted for some 758 million EUR.

With this acquisition, the American Group consolidated its European market

position t, Indesit being the market leader in Italy. Recently, the American

company announced a restructuring plan that will cut nearly 2,000 jobs out of

6,700 in Italy. The redundancies are 480 higher than the initial numbers declared

(1,350 jobs out of which 1,200 factory jobs and 150 jobs in research). The

restructuring plan is targeting 2 factories. All jobs cuts are due to be carried out by

2018.

European home appliances manufacturer Electrolux came to an agreement in

September 2014 to acquire its competitor, the American company GE Appliances.

The transaction is still subject to antitrust regulations. By this transaction,

Electrolux will strengthen its position in North America and will become a much

stronger competitor of Whirlpool.

Panasonic’s CEO publicly declared in November 2014 that the Group was

considering future M&A deals in order to increase its presence on the European

home appliance market. The company has not announcedany target yet, but is

present in Europe through the Slovenian company Gorenje, in which Panasonic is a

minority shareholder.

In 2013, Spain’s largest appliances manufacturer, Fagor, declared its bankruptcy.

The company was acquired by CAN Group, another Spanish appliances

manufacturer. The new shareholder plans to restart Fagor's activities as soon as

possible and to bring back 840 jobs in the next four years.



Groupe SEB announced in mid‐2015 the acquisition of OBH Nordica group, a

leading appliances manufacturer in Scandinavia. The closing is expected to take

place at the end of August.

At a smaller scale, the Italian company Hoover‐Candy acquired the British

appliances manufacturer Baumatic at the end of 2013. After the transaction

closed, around 100 jobs were cut.

By mid‐April 2015, the Chinese company Skyworth acquired the Metz’s LCD, LED

production and distribution units. The German manufacturer declared its

bankruptcy in 2014. With this acquisition, the Chinese company is entering the

European market. The next step will be to control costs, with plans to gradually

transfer Metz's research and development as well as manufacturing systems to

China, although the sales infrastructure will remain in Germany33.

The fierce competition on the European market and also the weak demand in the

region forced manufacturers like Sharp to exit Europe in July 2014. According to

public data, around 300 jobs were cut while the factory situated in Poland was sold

to the Slovakian company Universal Media Corporation.

2.3. Sustainability

Energy efficiency policy represents an important chapter in the 2020 EU strategy. Most products should consume less energy by 2020 and by then tighter regulations will be adopted. All appliance manufacturers are paying a special attention to this subject and they invest important massively to develop new products that will meet or even exceed EU requirements.

According to the IEA (International Energy Agency), electricity consumption would have increased by 23% higher compared to 1990 without energy efficiency improvements. Energy efficiency benefits are above average in the case of large appliances: the electricity consumption would have been 39% higher compared to 1990 without energy efficiency improvements. The largest savings are for refrigerators, where total energy consumption has increased by 48% whilst the stock has increased by 131% since 1990.

33 http://www.wantchinatimes.com



In spite of the mentioned results, energy efficiency improvement hasn’t reached its maximum potential. Government policies such as energy labeling and Ecodesign MEPS (Minimum energy performance standards) are very important in reaching further energy savings and should be maintained. On the other hand, the EU directive on the issue seems to be obsolete, as most of the appliances are already in the energy label’s highest energy efficiency class. For example, 90% of household dishwashers are energy efficient.

However, not all products are becoming more efficient. Televisions are a negative example: a study conducted by Natural Resources Defense Council (NRDC) revealed that 2015 UHD TVs consume in average 41% more energy than HD TVs. Even if UHD TVs reduced their energy consumption by 4% compared to 2014, HD TVs improved their efficiency by 7%. The study focused on 55 inches TVs and important differences were observed among different brands. Therefore, the difference in energy consumption between the most efficient TV (LG model – standard consumption of 88.5 Watts) and the least efficient one (Vizio – American producer – standard consumption of 166.3 Watts) is 77.8 Watts.

Source: International Energy Agency, 2015



Companies continue to invest in developing new products that have lower energy consumption. Recently, European Investment Bank granted Electrolux a 150 MEUR loan for the development of more energy efficient large and small home appliances. Electrolux goal is to reduce the CO2 emission of its products by 50% by 2020. Moreover, according to the company, one third of its R&D expenses are related to sustainability and energy efficiency. In July 2015, Electrolux unveiled its latest washing machine that is 50% more efficient than the EU’s top energy rating A+++ and emphasized the fact that, even if the energy labeling stimulated the manufacturers to improve energy efficiency, the current classification can’t keep the pace with technological development.

The table below integrates the actual EU regulations for the most energy efficient appliances.

Home appliance Start date EEI for A+++

ovens 1 January 2015 < 45% range hoods 1 January 2015 < 55% household tumble driers 1 March 2012 < 24% television 28 September 2010 < 10% household washing machine 28 September 2010 < 46% household dishwasher 28 September 2010 < 50% household refrigerating appliances 1 July 2014 < 22% vacuum cleaner ‐ annual energy consumption 1 September 2014 ≤ 28 kWh

EEI stands for Energy Efficiency Index and represents the percentage of power consumption relative to benchmark power consumption. For example, for washing machines, the EEI is a measure of the annual electricity consumption, and includes energy consumed during power‐off and standby modes, and the energy consumed in 220 washing cycles. For the washing cycles, a weighted mix consisting of 42% full‐load cycles at 60 °C, 29%



partial‐load cycles at 60 °C, and 29% partial‐load cycles at 40 °C. The washing performance is not mentioned anymore, since all washing machines must reach class A anyway. For a 6‐kg machine, an EEI of 100 is equivalent to 334 kWh per year, or 1.52 kWh per cycle34.

In order to demonstrate the energy efficiency of new products and the benefits of connected appliances, several Swedish companies created a cross‐industry consortium that developed a testing bench composed of 150 apartments. Key contributors are Fortum, ABB, Ericsson, Electrolux and Swedish Energy Agency. This kind of projects shows that in Europe the interest for energy efficient technology remains high.


3.1. In the sub‐sector of consumer electronics, European TV producers lost the battle against Asian companies

The consumer electronics sector comprises a wide range of products, among which the television market is the most representative. The European TV market is dominated by Korean and Japanese brands such as Samsung, LG or Sony. Most of these corporations are manufacturing their products in their home countries and exporting to Europe.

Until 3 years ago, Philips was one of a few well‐known European consumer electronics manufacturers that produced TV sets. But even a big company such as Philips couldn’t face the fierce competition of the Asian products, and in 2012 the Television business was divested as part of a strategic partnership agreement with the Chinese company TPV Technology Ltd (TPV). In 2013, the production site situated in Hungary was shut down and 370 employees were laid off. The European production is now concentrated in Gorzow, Poland.

Besides TPV, another Chinese TV manufacturer is producing TV sets in Europe – TCL Multimedia, which has a plant in Żyrardów, Poland. The company produces TVs under Thomson brand.

The biggest European TV producer is the Turkish company Vestel, but no production sites are based in EU. The sole European based company that produces televisions is UMC Slovakia (Universal Media Corporation), which manufactures various TV sets including Technika TVs, Tesco’s brand.

It seems that the European manufacturers have lost the battle with foreign companies for the local TV market.

34 Wikipedia ‐ European Union energy label



3.2. The largest European producer of home appliances, Bosch moves towards digitalization

BSH indicators

Indicator 2009 2010 2011 2012 2013 2014 2014 vs.

2009

Revenue, in M EUR 8,410 9,073 9,654 9,800 10,508 11,389 35%

No. of employees worldwide 39,600 42,841 46,228 46,925 49,876 53,211 34%

No. of employees in Europe 30,136 31,274 33,284 33,317 28,085 29,552 ‐2%

% Europe in total employees 76% 73% 72% 71% 56% 56%

R&D rate (% of revenue) 3.1% 3.1% 3.1% 3.3% 3.2% 3.3%

BSH Hausgeräte GmbH is the largest manufacturer of home appliances in Europe and one of the leading companies in the sector worldwide. Within the brand portfolio the main brands are Bosch and Siemens¹. With its eight special brands (Gaggenau, Neff, Thermador, Constructa, Viva, Ufesa, Junker and Zelmer), BSH caters to the individual wishes of consumers. Four regional brands (Balay, Pitsos, Profilo and Coldex) ensure a broad presence in their respective home markets.

In Sept. 2014, Bosch Group came to an agreement for purchasing the 50% stake in BSH from Siemens. The total amount of the transaction is 3.25 bn. €. The transaction was completed in the first half of 2015.

Strategy

moving toward a more digitalized range of products;

innovation;

in 2014, BSH developed the first ovens and dishwashers to be network‐capable,

and can be controlled away from home using the Home Connect app;

the strategy for producing networked appliances will continue also in 2015;

the existence of a Digital Transition department;

consumers wish list for appliances is headed by performance and ease of use.

BSH R&D expenses had an increasing trend since 2008, revealing the company’s

strong interest for developing new products that will make the difference in the

market.



STRENGTHS WEAKNESSES

BSH was the fastest growing Western European major appliance manufacturer at world level in absolute volume terms in 2009‐2014.

High technology available

Low performance of major appliances

Low presence in Asia and North America

OPPORTUNITIES THREATS Increasing presence in China and

Eastern Europe

Developing small appliances business ‐ through the acquisition of Zelmer, which boosted sales in this category and its presence in Eastern Europe.

Digitalized appliances

Developing opportunities in emerging markets

Merger between Electrolux and GE Appliances

Lack of growth in Western Europe

Stringent safety and performance certifications

3.3. The global leader Samsung has a limited industrial presence in Europe

Samsung indicators

Indicator 2009 2010 2011 2012 2013 2014 2014 vs. 2010

Revenue, total, in bn EUR 78.6 103.1 107.3 139.3 158 147.8 43%

Consumer Electronics Division, in bn EUR

38.9 32.6 35.4 34.7 36 ‐7%

Consumer Electronics Division, % of total revenue

38% 30% 25% 22% 24%


No. of employees in Europe 8,985 10,609 13,850 15,318 18,362 18,602 75%

% Europe in total employees 5.7% 5.6% 6.2% 6.5% 6.4% 5.8%


The Korean giant is the world biggest manufacturer of mobiles phones, TVs, refrigerators and memories. The Group developed rapidly even during the crisis. The total sales increased by 70%35 between 2008 and 2014. The company has a various range of products that are sold all over the world. The most dynamic division is the Mobile Business that developed at a fast pace in the last years and is the main reason for the recent Group evolution.

The Consumer Electronics Division (CE Division) inside Samsung is quite large and comprises the following sub‐divisions: Visual Display Business, Digital Appliance Business, Printing

35 KRW figures



Solution and Business Health & Medical. TV represents the core product of the CE Division (64.6% of the division’s sales). The weight of CE Division in total sales decreased constantly, from 37.8% in 2010 down to 24.3% in 2014 given the boom registered by the Mobile Business. It seems that home appliances products do not have an important weight in Samsung’s total sales as the Group does not report sales figures for this sub‐division.

The number of employees at Samsung more than doubled since 2009, reaching 320k workers. Most of the employees are based in Korea, while only 5,8% of the total working force is based in Europe, most of them being blue collars workers in the plants situated in Hungary (Production of electronic goods), Slovakia (Display panel processing, Production of TVs and monitors) and Poland (Production of home appliances). The important role of the R&D is emphasized by the high number of employees dedicated. In 2014 their weight in total number of employees accounted to 22% (70k workers). In Europe, Samsung owns five R&D centers in Sweden, Greece, Denmark, France and UK.

From a trade union point of view, it may be noted that Samsung is notorious for its anti‐union policy, including in its home country Korea36.

Strategy

focusing on new premium products such as SUHD TVs, featuring Nano Crystal

technology

expand market leadership based on smart devices;

focus on emerging markets. As such, Samsung is hard at work on successfully

entering new and emerging markets. In particular, the company strengthens

emerging market strategies through its deep understanding of consumer needs,

localized product designs and local knowledge, developed by regional R&D

centers.

lead innovations in technology

high interest on connected home appliances

90% of all devices created by Samsung, including televisions and mobile devices,

will be Internet‐enabled by 2017. Samsung's platform will be entirely open to

developers and other software and hardware manufacturers.

36 http://goodelectronics.org/news‐en/samsung2019s‐no‐union‐policy‐claims‐another‐life




Worldwide market leader in TVs (9 years in a row) and refrigerators

High investments in R&D and developing new centers around the world

Global presence doubled by a strong brand name

Innovative products brought on the market

Developing three new product lines—including smart refrigerators, air conditioners, and washing machines—that should help Samsung gain a stronger foothold in the connected‐device market

Focusing on other business divisions (especially Mobile Business)

Moderate weight of home appliances revenues in total sales

OPPORTUNITIES THREATS The trend towards large‐size and high‐

resolution screens is accelerating

Increased demand for UHD TVs and refrigerators (US market)

Developing its own operating system for TVs (Tizen)

Higher competition

Average selling prices are dropping (TVs)

High costs for developing new products

3.4. LG Electronics aims at becoming market leader on the Home entertainment market

LG Electronics indicators

Indicator 2009 2010 2011 2012 2013 2014 2014 vs.

2009

Revenue, in bn EUR 31.4 37.2 35.3 35.3 40.2 42.3 35%


No. of employees in Europe 3,086 3,426 7,466 6,382 5,183 6,078 97%



The Korean company is a world market leader of TVs, Mobile Communications and Home Appliances. LG maintained the number of employees relatively stable between 2008 and 2014, with a peak in 2011. In the same year, LG opened an appliances plant in Poland with an annual capacity of 700,000 units and increased the refrigerator capacity by 21%.



Strategy

Aiming to become the leader of the Home entertainment market;

Focusing on technological innovation and implement business initiatives based on

accurate identification of market needs;

Delivering more differentiated products;

Improving cost competitiveness by lowering the raw material costs and delivering

higher energy efficient products;

The key areas are considered to be cell phones and digital TVs


Consumer electronics and Home appliances are the main business divisions of the company

Pioneer of the UHD TVs and OLED TV sets

The new Home Appliances Division that incorporates the Air Conditioning & Energy Solutions (AE) unit

Eco‐friendly product development and production process

Leading‐edge technology for OLED TVs

Increased market share for Home Appliances products

Despite important efforts, still in the shadow of its main competitor, Samsung

Low level of R&D expenses compared to the leader

Home appliances are not considered as being key areas for developing new products

OPPORTUNITIES THREATS Developing its own operating system

for smart devices (WebOS)

Leveraging on its broad product portfolio

Expected demand for UHD and OLED TVs to increase

Increasing its focus on Smart Technologies

Participating in pilot projects to develop new products

Strong competition on all the markets, but mostly on the mobile communications market

Unstable economic conditions in the emerging markets



3.5. Groupe SEB expands its presence in Europe

Groupe SEB indicators

Indicator 2009 2010 2011 2012 2013 2014 2014 vs.

2009

Revenue, in M EUR 3,176 3,652 3,963 4,060 4,161 4,253 34%


No. of employees in Europe (incl. Russia and CIS)

8,012 7,963 8,012 8,113 8,041 7,980 0%



According to Euromonitor, Groupe SEB is the second largest small domestic appliances manufacturer in the world. The company is very active on the Chinese market where it is developing its business, but also on the European market where the Group acquired the OBH Nordica in July 2015.

The number of employees involved in R&D activities is about 900 or 3.5% of total workforce.

Strategy

Aggressively implementing a strong product innovation and brand differentiation

policy;

Conquest of new markets;

Leveraging the strength and complementarity of its brands;

Expanding its sales operations by opening its own retail brand outlets;

In 2014, Groupe SEB’s cross‐disciplinary development initiatives focused on the

ageing of the population, wired households, digital applications,

health/beauty/well‐being assets, energy and environmental responsibility;

Focusing on China: new investments in local plants.




World 2nd largest manufacturer in small domestic appliances

Important investments in companies that activate in innovation sector such as hardware and software, robotic navigation, 3D printing etc.

Good financial situation that allows the Group to buy other companies

Diversified distribution channels that are adapted to markets

A wide, diversified product range

Higher prices relatively to emerging markets

Fragmented markets with different consumption habits

OPPORTUNITIES THREATS The acquisitions made in the last years

increased its presence in emerging markets

Strong anticipated growth in Chinese and Latin America markets

New consumer trends and a more attention given to nutrition and health

The necessity of developing new products in partnership with other mass consumer goods manufacturers

Few competitors have a global coverage

Small household equipment market growing around 7% per year.

Worldwide fierce competition; increased competition in China (Midea)

Strong pressure on prices

Low‐to‐moderate, yet steady, demand in the majority of mature markets (e.g. Europe)

Another form of competition comes from “white label” goods and retailer brands; both mainly consist of aggressively priced entry level products

New European regulation on hazardous waste and energy footprint



3.6. Whirlpool doubles its footprint in Europe through the acquisition of Indesit

Whirlpool indicators

Indicator 2009 2010 2011 2012 2013 2014 2014 vs. 2009

Revenue, in bn EUR 12.8 12.3 13.8 13.4 14.1 14.1 10%

No. of employees worldwide no information


66,884 70,758 68,000 68,000 69,000 100,000 50%


The global leader in home appliances manufacturing, Whirlpool has an important presence in Europe being leader in UK, France, Russia, Poland or Italy (after the recent acquisition of Indesit).

After the acquisition of Indesit in 2014, Whirlpool is already reducing?? its operations in Italy, despite the strong, low‐cost country footprint37 that Indesit has. Facing an over‐capacity of production, the company decided to cut 1,350 jobs, according to an announcement made in April 2015. In May, Whirlpool increased the number of employees to be laid off to 2,000, nearly one third of total employees in Italy. The situation is still on the table and discussions are still taken place between the company, trade unions and the minister of industry.

Strategy

Continuing to expand the regional footprint (+30% by 2018);

Expanding trade distribution channels;

Increased presence in emerging markets, especially in Asia and particularly in

China;

Increased revenue from emerging markets, including through acquisitions;

Creating an Internet of Things team, in order to develop more connected

appliances;

Reducing production costs.

37 Indesit Day Foundation for Growth – May 2015




The world’s leading global manufacturer and marketer of major home appliances

Long experience in manufacturing home appliances products (more than 100 years)

Strong financial situation allowing the Group to make important acquisitions

Strong chain of distribution around the world

Over production capacity in Europe

The need of reorganization and restructuring of the European operations after the acquisition of Indesit, which will imply important costs

Costs associated with new acquisitions in Asia in order to comply with legal demands (e.g. Foreign Corrupt Practices Act ‐ FCPA)

Low presence in Asia

OPPORTUNITIES THREATS Acquisition of Indesit that doubled the

size of the company in Europe and made Whirlpool the market leader in Europe by number of units

Extending its footprint in China by acquiring Hefei Sanyo home appliances

Moving the production to low cost economies

Growing demand in the US

The adoption of stricter governmental energy and environmental standards

The competitors are expanding beyond their existing manufacturing footprint

Acquisition of GE Appliances by Electrolux

Higher pressure on prices and competitive products

Small industrial demand on the European market (1‐3%)



3.7. Electrolux continues its restructuring plan and at the same time makes courageous acquisitions.

Groupe Electrolux indicators

Indicator 2009 2010 2011 2012 2013 2014 2014 vs.

2009

Revenue, in M EUR 10,279 11,142 11,256 12,638 12,619 12,329 20%



25,292 23,030 21,667 21,615 21,602 20,768 ‐18%



The Swedish company Electrolux is a global consumer appliances manufacturer with strong footholds in all regions, except China, where the company didn’t manage to build a distribution network.

In January 2014, Electrolux threatened to move the production of one of its four Italian plants to Poland, if the employees didn’t accept a salary cut. More than 1,200 jobs were at stake. After the government intervention and nine months of negotiations, Electrolux accepted to keep the production in Italy. The deal comprised tax breaks for all Italian plants of the company, while Electrolux committed to invest around 150M€ by 201738.

Discussions were initiated with employee representatives concerning the production at two plants – one in Sweden and one in Switzerland – and a decision was taken to cease production at the plant in Switzerland. The company laid off 80 people at its Schwanden operations, after announcing that it was reorienting the focus of the plant to the Swiss market.

In 2014, Electrolux sold the French plant situated in Revin to the electric motors and pumps manufacturer Selni. The new company will keep only 186 employees out of 420. The plant’s production was moved by Electrolux in Poland39.

Strategy

Investment in new technology;

Focus on the development of intuitive and user‐friendly control panels;

Solutions with less environmental impact;

Operational efficiency: Reducing energy, water and waste in manufacturing,

shifting sources to minimize negative impact, minimizing emissions from logistics;

38 http://www.industryweek.com/labor‐employment‐policy/italy‐strikes‐deal‐electrolux‐save‐1200‐jobs 39 http://www.force‐ouvriere.fr/la‐colere‐explose‐chez‐electrolux‐a‐revin?lang=fr



Western Europe: Increased focus on the strongest product categories and brands

(Electrolux, AEG and Zanussi);

Greater priority assigned to small domestic appliances;

North America: Increased focus on professional products and a strong offering for

global food chains;

Major efforts to market a broad range of appliances targeting the Chinese

premium segment, with functions adapted to this market;

Electrolux has a focused growth strategy targeting primarily Egypt, Saudi Arabia

and the Lower Gulf countries;

European strategy was based on its premium brands, primarily built‐in kitchen;

Consumer relevant innovation in the strongest product categories and brands.


Acquisition of GE Appliances in Q4 2014

Strong presence in Western Europe and North America

Professional expertise at Group level (more than 90 years)

High market shares mainly in Western Europe (particularly strong position in kitchen appliances), North and Latin America and Australia

First steps toward digitalization ‐ connected‐oven

Poor presence in Asia and Pacific, mainly in China

Europe is the Group's biggest market

Low presence in the small domestic appliances industry (excepting the vacuum cleaners)

OPPORTUNITIES THREATS

Development in North America

Building up its strength in emerging markets where Electrolux has strong volume shares, such as Brazil and Russia.

Electrolux Design Lab. The purpose is to stimulate and activate design students globally by inviting them to present breakthrough ideas for future household environments.

Energy‐efficient products are growing in popularity

Growing segments like built‐in appliances

High demand of major domestic appliances in China

An unsuccessful closure of the GE Appliances deal

Europe market is a fragmented market with a large number of manufacturers, brands and retailers

For some time, the market in Western Europe has been characterized by overcapacity and price pressure

Negative economic evolution estimated for the Western Europe



3.8. Trends for employment in Europe

The European employees in the domestic appliance sector are going through difficult times, for several reasons:

weak demand for household appliances in Europe can have as effect lower

capacity utilization rate, reduced working time or even to radical decisions

regarding the production sites;

higher costs associated with the workforce are making the employees susceptible

to redundancies;

the loss in competitiveness when it comes to prices can lead to relocation of

manufacturing sites;

the consolidation of the sector is inevitably followed by restructuring measures.

The loss of jobs in Europe will continue, but the pace is difficult to estimate. Reorganization measures taken in most of the companies are related to costs‐cutting. A representative example is Electrolux, which since 2004 moved 35% of its manufacturing sites located in high costs area to low costs regions. However, we do not expect production sites in Europe to be completely eliminated, as the need to be close to the end market for region‐specific products is essential.

The battle for a higher market share is sharpening at the global level. Asia is the new battlefield, but mature markets remain important from the business perspective. Recent acquisitions – as that of Indesit by Whirlpool and of GE Appliances by Electrolux – will surely change not only the global home appliances market, but will have a major social impact in Europe. To prove this, the restructuring announced in Indesit factories will cut around 2,100 jobs and will reduce the number of employees by nearly 30% until 2018.

Increased market share of less expensive products will become a serious threat for European jobs: Turkish producer Beko is the second best‐selling home appliance in Europe. Even if the Turkish company invested in some production sites in Europe, the positive impact for the European workforce will still be limited.

A trend underlined by trade union representatives is that more and more production sites are moving towards Eastern countries, where production costs are lower.

According to interviewed trade union leaders, one of reasons for which European manufacturers didn’t close more sites in Western countries is the protectionist national legislation and high compensation costs that would have incurred in case of site closures. Therefore, restructuring plans are taking place in countries where the legislation is more relaxed, such as in Spain, Switzerland and Italy.

Many manufacturers opened production sites in Eastern countries, including Poland and Romania, due to obvious reasons: cost‐efficiency and closeness to Western markets. For instance, Electrolux not only transferred the production of hobs and ovens into Romania, but also decided to create a R&D center that employs around 100 engineers. A similar R&D center was built in Krakow, Poland, with more than 500 employees. In spite of these



evolutions, the main R&D hub remains in Sweden. The goal is to concentrate the R&D workforce for each range of products in the same location in order to increase efficiency.

In many cases, components for products are imported from China and assembled at European sites. The immediate consequences for the European workforce are:

the decrease in the number of employees at the production sites in Europe as only

assembly process is necessary;

an indirect decrease in the number of employees in Europe as suppliers are

relocating their production to Asia.

Taking into consideration all of the above, the number of employees at European level will continue to decrease in the next 3 to 5 years, the time necessary for the main players to conclude their reorganizations/restructurings following the recent mergers and acquisitions. The weak European demand and some new M&A will lead to further reduction in workforce.

In a business as usual scenario, we expect a further 8% to 12% decrease of the number of employed persons in the European home appliance industry until 2020. Workforce should gradually decrease if the following factors are not countered:

Ongoing restructuring plans

Relocation of production sites in Asia and other low cost areas

Concentration of the sector through synergies, followed by redundancies

Missing the disrupting trends in technology, resulting in closing factories or even

divesting divisions

Poor demand for home appliances in Europe

High pressure on prices leading to cost cutting programs.

Chapter 6 _____________________

Cables


106 Chapter 6 ‐ Cables


Chapter 6 ‐ Cables 107


1.1. A highly fragmented sector with strong competitors in Europe

The cables industry represents the production and sale of power and telecom cables widely used in electric power industry, data communication, rail transit, automobiles, shipbuilding, and other industries. The development of the sector depends directly on the evolution of each consumer sector.

Power cables consists of medium, high, and extra high voltage copper and

aluminum cabling

Telecom cables consist of metallic external and internal cabling, as well as fibre‐

optic cabling.

According to the NACE classification (rev. 2), the manufacture of wiring and wiring devices is a sub‐sector of the broader `Manufacture of electrical equipment` sector. In European statistics, the sector is defined as `Manufacture of wiring and wiring devices (Group 27.3).

Cables are a very dynamic and competitive industry. The wide range of products for different applications creates a highly fragmented market. Demand for the wire and cable manufacturing industry has grown over the past five years, as the need for faster interconnectivity has intensified.

Cables market has grown at a reasonably strong rate and growth is expected to accelerate until 2019

Currently, the cables market is facing a set of challenges:

wireless links, such as cellular networks and satellite‐linked communication

increased roll of fiber to the home (FTTH) networks across Europe

in power market, solar panels which are costly to implement without government

support such as the feed‐in tariffs

in terms of power cables, new materials with lower power dissipation and higher

maximum current densities

one of the most important challenges, the decline of the supply of the raw

materials such as copper and aluminium

In spite of the challenges, the performance of the cable and wire market is forecast to accelerate, with an anticipated CAGR of 5.8% for the five‐year period 2014 ‐ 2019, which is expected to drive the market to a value of $28,652.8m by the end of 2019.40 In Europe, Germany accounts for 20.5% of the cables market value.

Power cabling is the largest segment of the cables market in Europe, accounting for 67.9% of the market's total value. Telecom cables account for the remaining 32.1%.41

40 http://www.marketline.com/ 41 http://www.marketline.com



European cables market has grown at around 5% per year in the last two years, in line with the global trends, supported by a range of trends:

investments in telecommunication and an increased demand for telecom cables,

in particular fibre‐optic cabling, a key driver in terms of volume

deployment of high speed broadband

securing and reinforcing energy grids

upgrading efficiency of building and industrial installations

development of renewable energy

Typical players in the cables market are well established, large sized companies. Such players are able to benefit from scale economies, and are therefore able to increase competitiveness on price.

General Cable Corporation, Nexans, Prysmian Group, NKT Cables Group, LS cable,

Southwires, Tyco, etc.

Besides large companies, niche players (geographic coverage/ sectoral niches) are serious competitors.

Leoni, NKT, LS Cable, Huber & Suhner, Omerin, etc.

‐15.0%

‐10.0%

‐5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0.00

5 000.00

10 000.00

15 000.00

20 000.00

25 000.00

2010 2011 2012 2013 2014

Europe cables market value

$ million

% Growth



Source: MARKETLINE

A highly fragmented market

Prysmian is the largest global player, with Nexans the second largest. General Cable is the largest US player. In Asia, Fujikura and Furukawa are less than half of the size of Prysmian and Nexans, but are focused more on telecoms and specifically optical fibres.

Germany21%

France8%

United Kingdom6%Italy5%

Spain1%

Rest of Europe59%

Europe cables market segmentation, 2014

Germany

France

United Kingdom

Italy

Spain

Rest of Europe



Top leading companies in 2014

Company Comments

European companies

Prysmian

Continued to beat market expectations, leader in all submarine applications with largest production capabilities and also in optical fibre cables. In the telecom sector, the highlights show a sound demand in the European (mainly France, Italy and the UK) market.

Nexans Outperformed the market in Europe interconnections, first in building cables in France, and strong market share in aerospace cables.

Leoni Major company with strong performance in the European automotive cables sector. Also provides industrial, healthcare and communication cables.

NKT Cables Strong presence in Germany and focused on high performance in China over‐head rail cable market.

US companies

General cables Strong market exposures in the communication sector. The Europe segment contributed approximately 22% of the Company’s consolidated revenues for 2014.

Southwire Market share in medium and HV cable, building cables and wire for automotive harnesses, electric motors and industrial equipment.

Asian companies

Fujikura Strong in the communication sector, cooper cables, industrial cables and magnet wires.

Hitachi Cables Strong presence outside Japan.

Furukawa Strong market‐share in Brazil in telecom cables.

LS Cables Offers power T&D cables, optical fibre cables and cables for the nuclear, rail, airport industries.



European top players have not managed to capture growth registered in the cables market in 2014, as the two biggest of them – Prysmian and Nexans– have registered decreased revenues in 2014 compared to 201342.

European leading companies 2014

Company Revenue 2013 Revenue

2014

2014/2013 Revenue Growth

1. Prysmian € M 7 273 6 840 ‐6.0%

2. Nexans € M 6 711 6 403 ‐4.6%

3. Leoni € M 3 809 3 917 +3%

4. NKT Cables € M 809 811 +0.1%

Source: Company reports, for NKT cables values are reported in DKK (6017 mDKK in 2013 and 6055 mDKK in 201443) and have been converted in EUR

In spite of growing demand, industrial footprint of the cables sector in Europe decreased

In spite of a dynamic market in Europe, local manufacturers have seen their footprint decreased in the last years. According to Eurostat, the number of registered companies in the sector of `Manufacture of wiring and wiring devices` fell from 4700 in 2008 to 4300 in 2013, a decrease of more than 10% in 5 years.

Among the first 8 European countries with the biggest number of cable manufacturers, only in 3 countries the number of companies grew since 2008: Slovakia, UK and the Czech Republic.

In Germany, the country with most companies in the sector, the number of enterprises fell from 1.5 thousands in 2008 to 1.2 thousands in 2013 (‐21%). In the same period, the number of companies fell by 2% in Romania, by 4% in Poland, by 15% in Italy, by 16% in France and by 37% in Spain.

42 https://www.integer‐research.com/ 43 http://www.nktcables.com/~/media/Files/NktCables/download%20files/com/EXCELLENCE‐2020.pdf



Source: Eurostat

In spite of a decrease of the number of companies, main economic indicators are positive:

The total turnover has known an increase from 22.9 bn€ in 2008 to an estimated

35.5bn € in 2013, a 55% growth in 5 years. The most significant increases in total

turnover were registered in Germany (+3.7bn€), Poland (+0.85bn€) and UK

(+0.7bn€). On the other hand, the total turnover has decreased in Italy (‐1.3bn€),

Sweden (‐0.65bn€) and Spain (‐0.5bn€).

The profitability of the sector was relatively stable during the last years, with the

gross operating rate (gross operating surplus/turnover) fluctuating between 6.5%

and 8.5%. As of 2013, highest gross operating rates were registered in Hungary

(14.7%), Latvia and Lithuania (above 13%), Austria (10.5%). German companies

registered a gross operating rate of 7.9% in 2013, slightly lower than during the

period 2010‐2012, when rates of around 9% were achieved.

However, in spite of increased turnover and stable profitability, investments in

tangible goods have decreased at the level of the EU, mainly due to shrinking

investments in France, where total CAPEX of the sector fell from 240M€ in 2009 to

128M€ in 2013. On the other hand, investments rose in Germany and Central and

Eastern Europe (Poland, Hungary, Czech Republic, Romania).

0

200

400

600

800

1 000

1 200

1 400

1 600

2008 2009 2010 2011 2012 2013

Evolution of number of enterprises`Manufacture of wiring and wiring devices`, by country

Germany

Italy

Czech Republic

United Kingdom

France

Spain

Poland

Slovakia



Source: Eurostat

Germany30%

Italy16%France

15%

Spain6%

UK5%

Poland4%

Czech Republic

3%

Others21%

Share of European countries in the total turnover of the sector 'Manufacture of wiring and wiring

devices' in EU, 2013

0

2

4

6

8

10

12

14

16

2008 2009 2010 2011 2012 2013

Evolution of the gross operating rate(gross operating surplus/turnover) of the sector of 'Manufacture of wiring and wring devices', by country

Germany

Czech Republic

Spain

France

Italy

Poland

UK

Hungary



2. Employment in the European cables sector: a drop of 15% since 2008

According to Eurostat data and our estimates, the sector of `Manufacture of wiring and wiring devices` employed around 213k persons in 2013, compared to 252k persons in 2008. From approximately 39k jobs lost during the period, Germany accounts for the biggest loss of 26k jobs, while Italy and Slovakia lost more than 4k jobs each.

On the other hand, the number of persons employed rose by 1.7k in Poland (+18%). In other Central and Eastern countries the increase in employment was modest.

As of 2013, with almost 80k employed persons, Germany accounted for 37% of the sector’s workforce in the European Union, while France represented 11% of the total, Italy 8% and Czech Republic 7%.

Source: Eurostat

79 737

23 138

17 478

13 960

11 078

8 860

5 767

5 430

3 510

3 487

3 448

3 438

2 997

2 913

2 908

2 528

1 488

1 419

1 132

1 074

984

800

623

010 00020 00030 00040 00050 00060 00070 00080 00090 000

Germany

France

Italy

Czech Rep

ublic

Poland

Hungary

Spain

Romania

Portugal

Bulgaria

Slovakia

Austria

Swed

en

Den

mark

Belgium

Netherlands

Finland

Croatia

Greece

Lithuania

Latvia

Ireland

Estonia

Number of persons employed by the sector of 'Manufacture of wiring and wiring devices', by country, 2013 (no data for UK)



3. Worldwide trends of the sector

Economic growth, aging infrastructure, the shift to renewable energy, demographic growth, urbanization, mobility of people and goods, energy transition, digital transformation and massively increasing volumes of data exchange are all generating considerable needs for energy, infrastructure, transport and buildings. These factors are driving long‐term demand for energy and data cables.

Big cable companies are expanding at fast pace worldwide. The sector relies on big renewal projects developed by other related sectors. European competitors are investing in the Asian market.

In the new environment, companies tend to be more flexible, to adapt faster to clients’ needs, new technologies and to have an internal organization that can respond faster to market changes.

Mergers, acquisitions and restructurings

Strong competition in the market forces players to permanently extend their portfolio in order to adapt to market demand. Some of the players chose to extend their market shares through acquisitions.

The traditional players have been buying cables firms with strong potential in order to broaden their portfolio or to enter new markets:

The adjustment process relating to the acquisition of Global Marine Systems by

Prysmian Group was completed on March 2014.

Also in 2014, Prysmian Group finalised the acquisition of the remaining 34% of the

subsidiary AS Draka Keila Cables, becoming the sole shareholder of this Estonian

company. The investment in Keila Cables will allow the Group to further accelerate

its growth strategy in this high‐potential region.

In 2014, Leoni has acquired several entities from Europe and Asia. The company

has consolidated two Chinese companies and two Russian into one legal entity.

In January 2015, OMERIN Group sealed a buyout deal to acquire a 100% equity

stake in Union Plastic, a company based in Saint‐Didier‐en‐Velay having 200

employees, and €26M turnover in 2014.

In February, 2014, Southwire purchased Coleman Cable, Inc. a leading

manufacturer and innovator of electrical and electronic wire and cable products.

Several companies have also continued their restructuring plans:

Nexans restructuring costs came to 51 million euros in 2014 versus 180 million

euros in 2013, corresponding primarily to restructuring plans in Belgium, France,

Germany and the Asia‐Pacific region.



In 2014, NKT Cables was restructuring its accessories and cabinet business with a

view to focusing sales operations and the product portfolio.

Prysmian closed its plant in Amsterdam and the Aubevoye plant of Draka Paricable

in France.


4.1. Leoni, the largest European player, is highly dependent on the automotive sector

Leoni indicators

Indicator 2010 2011 2012 2013 2014 2014 vs 2010

Revenue € M 2,956 3,701 3,809 3,918 4,103 39%

No of employees worldwide 55,156 60,745 59,393 61,591 67,988 23%

No of employees Europe 21,432 26,074 25,248 28,802 28,000 31%

Germany 3,775 4,017 4,172 4,222 4283 13%

Eastern Europe 17,702 20,008 19,129 22,596 23659 34%

Rest of Europe 1,955 2,049 1,947 1,984

% Europe in total employees 39% 43% 43% 47% 41%

R&D employees worldwide 1,116 1,042 1,329 1,636 1,637 47%

R&D employees from total 2% 1,7% 2,2% 2,7% 2,4%

R&D spent as % of revenue 2.6% 2.3% 2.5% 2.7% 2.7%

Leoni’s production network consists of 35 production facilities in 17 countries, including China, Mexico, North Africa and Eastern Europe. The locations are chosen strictly on the basis of cost efficiency and logistic requirements. In 2014, production was extended in China, Serbia and Romania.

Strategy

Leoni`s strategy responds to the global trends and focuses on innovative topics, development of new areas, strengthening system competences, expanding services offered in the areas of automotive, industry and healthcare, communication and infrastructure.

Leoni would like to expand its presence into environmental technology markets, directing its portfolio of products and services at key markets have been identified as dynamic areas of the future. However, the automotive sector still represents 80% of the consolidated sales.




Leading position in Europe

Wide range of technologies

Strong distribution channels globally

Large low‐cost proportion in the cost‐sensitive product areas

International customer base

Small market shares in China, India, Brazil

Highly dependent on the European market and on the automotive sector

OPPORTUNITIES THREATS Technological changes towards hybrid

and e‐drive

Innovation in electrical systems and electronic systems

Expansion of system business

Expansion of non‐automotive business

Increasing wages in low‐cost countries

Heavy pressure on prices

4.2. Prysmian restructured its activities in the Netherlands and France

Prysmian indicators

Indicators 2009 2010 2011 2012 2013 2014 2014 vs 2009

Revenue € M 3,731 4,571 7,583 7,574 6,995 6,840 83%

No of employees worldwide 12,352 21,547 20,427 19,769 19,232 19,436 57%

R&D spent as % of revenue 1.0% 0.9% 0.9% 1.0% 1.0%

The Italian group Prysmian has 89 production facilities and/or companies in Asia, Latin America, the Middle East and Eastern Europe. 51 plants are located in EMEA. The Group currently has 17 Centres of Excellence for R&D purposes and over 500 highly skilled professionals.

In line with its cost reduction strategy, Prysmian has closed its plant in Amsterdam, laying off 78 employees and transferring production to the plants in Delft and Emmen. In 2014, Draka Paricable (France) closed the Aubevoye plant, laying off 92 employees and transferring production to the Group’s plants in Amfreville and Gron.

According to the company, the plant closures were a response to the need to optimise manufacturing footprint at individual country level, with the aim of realigning industrial presence with the potential of the relevant business/market and of improving production capacity utilisation, as well as overall economic performance, through economies of scale.



On the other hand, in the optical cables field, at Slatina plant in Romania, now one of the major European centres of optical cable production, investments continued for a significant increase in production capacity of the Flextube and Drop cables.

Strategy

The Group has pursued its growth strategy by focussing :

on investments in its high value‐added businesses

on ongoing actions to reduce costs

improving the efficiency of its organisational structure

maintaining a wide geographical presence to minimise distribution costs

In particular, Prysmian is driving forward the process of concentrating high‐tech product manufacturing in a smaller number of plants, with the goal of creating centres of excellence with high levels of know‐how, where economies of scale can be achieved by improving manufacturing efficiency and reducing capital employed.

Prysmian has targeted R&D activity towards the submarine cables area, with the aim of further strengthening the Group's technological leadership. The Telecom business introduced innovations to optical fibres to boost their capacity and performance and to meet the specific requirements of broadband cabling projects.


Good financial standing

Focus on R&D activities

Development of optical cables production

Leadership in submarine cables area

Innovations in optical fibres area

Reduced footprint in Western Europe due to plant closures

Lower R&D expenditure compared to competitors

OPPORTUNITIES THREATS Submarine cables development

Positive outlook for cable market

Highly competitive market

Heavy pressure on prices, especially on the lower range



4.3. Nexans is pursuing transformation

Nexans indicators

Indicators 2009 2010 2011 2012 2013 2014 2014 vs 2009

Revenue € M 5,045 6,179 6,920 7,178 6,711 5,300 5%


No of employees Europe 14,277 14,618 14,884 14,752 14,679 15,214 7%

% employees in total employees 63% 62% 61% 59% 56% 58%

R&D spent as % of revenue 1.0% 1.1% 1.0% 1.0% 1.1% 1.4%

The French group Nexans has an industrial presence in 40 countries and commercial activities worldwide.

In line with the 2013‐2015 Strategic Plan, overseen by the Transformation Program Office, the company launched the following initiatives:

Capacity reductions and an improvement in cost‐efficiency in Europe and Asia;

An improvement in operating conditions in the submarine high‐voltage business;

Cost savings achieved for both manufacturing and purchasing operations.

The group places a particular focus on innovation and to this end has research teams dedicated to developing new materials, products and technologies. More than 600 researchers, engineers and technicians work in the Group's technical centres, which form part of four Research Centres. The Group currently has a portfolio of approximately 670 patent families, and 78 new patents were filed in 2014.

Strategy

Regaining competitiveness by optimizing fixed and variable costs and working

capital, and improving productivity and operating efficiency;

Strengthening market leadership in the four end‐markets by expanding product

and service, notably through innovation and R&D capabilities;

Pro‐actively managing the portfolio by favouring targeted investments in high‐

potential businesses.




Strong market share also in the Asian markets

Strong R&D activities

Strong label

Restructuring plans may affect the activity

OPPORTUNITIES THREATS Expanding its market opportunities to

high‐potential businesses

Submarine high‐voltage business

High level of competition

Rapid technological changes in the sector

Heavy pressure on prices, especially on the lower range

4.4. NKT Cables grows through acquisitions and targets cost cutting

NKT Cables indicators

Indicators 2009 2010 2011 2012 2013 2014 2014 vs 2009

Revenue € M 1,136 1,516 1,618 1,518 1,599 1,555 37%

No of employees 3,127 3,490 3,503 3,395 3,560 3,211 3%

R&D spent as % of revenue 0.5% 0.7% 0.5%

NKT Cables has 12 production units in Europe, including 4 in Germany, 3 in Czech Republic, 2 in Poland, 2 in Denmark and 1 in Norway. The company is strongly positioned in the European market for on‐ and offshore high‐voltage power cables and accessories.

In the last years, the company has carried a range of acquisitions, including the purchase of IndustroClean (Nilfisk), the acquisition of Ericsson’s power cable operations in Sweden as at July 2013 (NKT Cables), as well as a number of minor acquisitions carried out by Nilfisk in 2014.

Currently, NKT Cables focuses on a process aimed at increasing production capacity and accommodating higher sales. NKT Cables is well positioned to meet the expected growth in demand in European markets where customers have increasingly solution‐based demands that combine supply of cables, accessories and services.

STRATEGY

The company’s strategy combines its willingness to increase its market share with a tight control of costs.

In 2014, NKT Cables implemented Drive, an efficiency improvement programme aiming to increase profitability through:

Cost reductions



Keeping cost focus

Excellence in production, sales and support functions

Accelerate profitable organic growth

Introduce new products


Strong position in the European market for on‐ and offshore high‐voltage power cables and accessories

Lower financial costs

Capital market access

Global market footprint

Long‐term transformation

Sustained operational breakdowns at manufacturing or distribution sites

Dependence on key suppliers

Lower R&D expenditure compared to competitors

OPPORTUNITIES THREATS Attractive growth opportunities in

China

Continue growth through acquisitions

Challenging market competition

New market entrants

Decreasing global demand

Significant change in customer demand towards low‐price products

4.5. General Cables restructuring actions including in Europe

NKT Cables indicators

Indicators 2009 2010 2011 2012 2013 2014 2014

vs 2009

Revenue $ M 4,385 4,856 5,808 6,060 6,421 5,980 36%


General Cables has 7 manufacturing facilities in Europe (France, Germany, Norway, Portugal and Spain). Additionally, the Europe segment has regional centres of excellence and state‐of‐the‐art laboratories for high and extra high voltage power cables and systems, submarine power and communications systems, and halogen‐free flame retardant technology and compounding.

The Europe segment contributed approximately 22% of the group’s consolidated revenues in 2014.

In 2014, General Cables announced and implemented a restructuring program focused principally on operations in North America, Latin America and Europe. The program is focused on closing or selling underperforming assets and consolidating or realigning other facilities. As part of the plan, restructuring actions were undertaken in two manufacturing facilities in Europe and one manufacturing operation was closed.



Strategy

Growth through acquisition

Focus on lowering the cost base

Restructuring program and simplifying the global operations by divesting the

manufacturing operations in Asia Pacific and Africa


Worldwide brand

Low cost base

Capital market access

Global market footprint

Strong position in high and extra high voltage power cables and systems

Minimal differentiation against industry participants

OPPORTUNITIES THREATS Possible growth through acquisitions

Diversity of operations in Asia and Africa

Competition from European companies in Europe

USD / EUR exchange rate

Highly competitive industry

Global demand for its products remains below historical levels

4.6. Tele – Fonika, a strong local player in Central and Eastern Europe

Tele – Fonika is the largest cable company in Poland and Central and Eastern Europe. It has 8 production plants in Ukraine, Serbia and Poland. With an annual turnover of around 100$M, it has around 3,000 employees.


Domestic market in Central and Eastern Europe

High growth rate

Reduced labour costs

Competitive market

Brand portfolio

Lower investments in R&D activities

OPPORTUNITIES THREATS Growing economy

Growth rates and profitability

New products and services

New markets

Increasing costs

Rising cost of raw materials

Technological updates




Trends of the employment in the sector of cables in Europe are:

Relocation of jobs from Western Europe into Asia, especially India. The relocated

jobs usually require lower level skills, which are less expensive in other regions

compared to Western Europe.

Within the European Union there is a trend of relocating manufacture sites to

Eastern countries. Operational activities are concentrated in countries such as

Czech Republic, Poland, Romania, and Bulgaria. Western countries maintain

competence centres, sales and client support functions.

The sector was confronted with restructuring and reorganization measures. In

many companies, redundancies are taking place regularly.

The issue of competencies

The industry faces many challenges and ensuring employees are competent and fit to practice is essential. Companies face difficulties to find necessary competencies at the level of public higher education and try to support the educational system by organizing field excursions to the plants, jointly organized job fairs, apprenticeship and training programs. Young employees are going through comprehensive internal programs that help them adapting to technologies used by the companies. For example, Leoni, with the support of the Leonardo project of the National Education Agency for Europe, promoted networking between apprentices and trainees.

Revolutionary sectors such as green technology require new skills and many companies have invested in developing needed competences.

The aggravating shortage of skilled professionals makes it hard to find and augment staff loyalty, and most companies offer internal programmes to provide employees with further qualifications and wide range of social benefits.

Prospects for the development of the sector in Europe

In a business as usual scenario, we expect a 5% decrease of the number of employed persons in the European cable industry until 2020. Workforce should gradually decrease if restructurings are pursued and market players continue to consolidate through mergers and acquisitions.

Europe is still producing most of the wiring it uses, but Turkey is rising as an important regional player and could threaten to destabilize the industry in the future. Production in Central and Eastern Europe is growing, but Western Europe still accounts for much of the demand and the biggest share of the wiring production in the EU (more than 70% of the production value). Fundamentally, the structure of the supply and demand in the sector in Europe is not expected to change until 2020.



The weak construction sectors in most of EU countries, lower fixed investments and a reduction in economic growth are expected to drag on the general wiring demand in Europe in the years to come.

Several years ago some analysts anticipated a growth of demand due to shale gas developments in Europe, but the projects have not proven to be viable. In the energy sector however, demand could be driven by network investments and the switch from thermal and nuclear electricity (especially in Germany) to renewables. Grid investment will most probably increase in the medium term, providing a source of demand.

Other sectors such as data and fibre optics could benefit from interconnectivity projects. In the construction sector, opportunities for specialized products such as Fire Performance Cables exist. On the other hand, the automotive sector is facing some difficulties and prospects are sluggish in terms of volume.

Chapter 7 ______________________

Computers and industry‐related IT services


126 Chapter 7 ‐ Computers and industry‐related IT services


Chapter 7 ‐ Computers and industry‐related IT services 127


1.1. A highly fragmented sector with a reduced footprint in Europe

The computer or information technology, or IT industry is the range of businesses involved in designing computer hardware and computer networking infrastructures, developing computer software, manufacturing computer components, and providing information technology (IT) services.

According to the NACE classification (rev. 2), the computer industry is a sub‐sector of the broader „Manufacture of computer, electronic and optical products” sector. In European statistics, the sector is defined as „Manufacture of computers and peripheral equipment (Group 26.2)”. The related IT services are defined as „Computer programming, consultancy and related activities” under the NACE code J.62.

The group of „Manufacture of computers and peripheral equipment” comprises establishments primarily engaged in manufacturing and/or assembling electronic computers, such as mainframes, personal computers, workstations, laptops, and computer servers; and computer peripheral equipment, such as storage devices, printers, monitors, input/output devices and terminals.

The wide range of products enumerated above, as well as their different features and classification creates a highly fragmented market, making the analysis of the computers and peripheral equipment group a difficult task. Computer industry is one of the most dynamic, fast changing and competitive industries in the world, characterized by constant cycles of innovation and commoditization.

A decline in the PC market in 2015

The computer sector is facing a set of challenges due to a range of market trends, such as :

the decline of the PC market;

the market shift towards tablets, some analysts have argued that the emergence

of low‐cost tablets such as Amazon's $50 Fire tablet represent a threat to

traditional PCs44;

the growth of multi‐architecture devices running competing operating systems;

the market shift to cloud‐related infrastructure, software, and services;

the growth in software‐as‐a‐service business models.

Among the most important challenges, the decline of PC sales has affected Europe recently. According to the International Data Corporation (IDC), in the first quarter of 2015 PC shipments in EMEA (Europe, Middle East and Africa) fell 7.7% year on year, to 20.2 million units.45 All three EMEA sub‐regions posted declines, shipments of PCs in Western Europe

44 http://www.zdnet.com/article/playing‐with‐fire‐will‐amazons‐50‐tablet‐burn‐the‐pc‐business‐and‐save‐the‐world 45 Worldwide Quarterly PC Tracker http://www.iteuropa.com/?q=europes‐pc‐sales‐drop‐back‐expected



(WE) contracting by 2%, in Central and Eastern Europe (CEE) by 23% and in Middle East and Africa (MEA) by 10%. Political and economic factors, especially unfavourable exchange rates, negatively impacted numerous countries across the region.46

The decline is driven by a decrease of sales to business clients, as the PC renewals in the biggest Western European companies contracted. On the other hand, consumer shipments in Western Europe held better than expected, leading to a 8.4% growth in consumer portable PC.

According to the IDC, worldwide PC shipments are expected to fall by 8.7% in 2015 and will not stabilize until 2017.

Growth not expected to resume before 2017

PC Shipments by Product Category and Region (Shipments in millions)

Product Category

Region 2015

Shipments (M)

Market Share

2019 Shipments

(M)

Market Share

5‐Year CAGR

Portable PC

Mature 87.60 31% 90.50 32% 0.8%

Emerging 76.80 27% 82.20 29% 1.7%

Portable PC Total 164.40 58% 172.80 61% 1.2%

Desktop PC

Mature 44.60 16% 39.30 14% ‐3.1%

Emerging 72.50 26% 70.00 25% ‐0.9%

Desktop PC Total 117.20 42% 109.30 39% ‐1.7%

Total PC Mature 132.20 47% 129.80 46% ‐0.5%

Emerging 149.40 53% 152.20 54% 0.5%

Grand Total 281.60 100% 282.10 100% 0.0%

Source: IDC Worldwide Quarter PC Tracker, August 25, 2015

According to the latest forecast from IDC, growth should resume in 2017 after five years of decline. The growth should be led by the commercial market, while consumer volume will continue a small decline until 2019.

The dynamics of the sector are hindered by a large inventory of notebooks and severe constraints posed by the decline of major currencies relative to the US Dollar. In addition to economic issues, free upgrades of Windows 10, a relative scarcity of newer models in the short term, and the reluctancy of distribution channels to take stock also limit growth prospects through 2016. Tablets sales will also be affected by saturation and "good enough computing" sentiments47.

IDC predicts a modest recovery in 2017, when the prospect of the next refresh cycle and the cessation of a free Windows 10 upgrade should provide opportunities in notebooks and commercial segments. On a 5‐year cycle, growth is expected to be mainly driven by emerging regions.

46 http://www.idc.com/getdoc.jsp?containerId=prUS25372415 47 http://www.businesswire.com/news/home/20150826005571/en/PC‐Shipments‐Expected‐Shrink‐2016‐Currency‐Devaluations#.VgF‐gzYVjIU



Server market grows in Europe

In the first three months of 2015, EMEA server shipments grew 3.5% year on year even as the big players adjusted their price structures to compensate for the strengthening dollar. This marked the fourth consecutive quarter of year‐on‐year unit shipment growth in EMEA. Server revenues rose even higher, at 6.3%, as a move towards richer configurations fuelled a rise in vendor average selling prices.

Market was driven by new projects in the cloud space and a broad infrastructure refresh on latest‐generation x86 chips, especially in large global organisations. The non‐x86 market also built on the positive signals, as volume shipments for non‐x86 more than doubled year on year.

HP remained the EMEA market's biggest player, with a market share above 35%, ahead of Dell on 17.2%, IBM on 11.1%, Lenovo on 7.5% and Cisco on 6.9%.

The growth trend in the server market is confirmation of the large IT investment taking place, despite dramatic change occurring in system software due to open source projects such as Docker and OpenStack48.

Big players keep strong

The decline in shipments was not evenly spread among competitors. In fact, four among the top five players – HP, Lenovo, Dell and Apple – have managed to increase their PC shipments in 2014. Among the big players, only Acer has posted a slight decrease in shipments last year.

Lenovo continued to beat market expectations across EMEA. For the first time,

the vendor reached more than 20% market share fuelled by strong momentum in

Southern Europe (France, Italy, Spain, Greece, and Portugal).49

HP outperformed the market in 2014 and expects strong gains in the portable PC

area in 2015. Results in WE and MEA were strong last year. The vendor focuses on

product innovations and Go‐to‐Market execution as keys elements of its success.

Dell’s growth of 10% last year is much based on a strong performance in

notebooks in the U.S. and Asia/Pacific (excluding Japan), while its growth in

Europe slowed.

Acer was the only major company to post a decrease in shipments last year, but it

expects to recover due to the success of its Chromebooks and entry‐level

notebooks.

Apple posted the largest growth among the top 5, supported by price cuts and

improved demand in mature markets.

48 http://www.channelnomics.eu/channelnomics‐eu/news/2413200/emea‐server‐market‐still‐growing‐despite‐price‐increases 49 http://www.iteuropa.com/?q=europes‐pc‐sales‐drop‐back‐expected



Top 5 Vendors, Worldwide PC Shipments, 2014

(Units Shipments are in thousands)

Company 2014

Shipments

2014 Market Share

2014/2013 Growth

1. Lenovo 59,233 19% 10%

2. HP 56,849 18% 9%

3. Dell 41,665 14% 10%

4. Acer Group 24,104 8% ‐2%

5. Apple 19,822 6% 16%

Others 106,952 35% ‐18%

Total Market 308,625 100% ‐2%

Source: IDC Worldwide Quarterly PC Tracker, January 12, 2015

A reduced footprint in Europe

Historically, the number of companies in the business grew in line with the demand for computers. However, the growth in the last decade was mostly centered in North America and Asia. It is widely considered that Asia attracted most of the manufacturers because of successful investment in research and development, lower production costs and relatively low wages. 50 In the new competitive landscape, European or American computer manufacturers were acquired by Asian companies, such as Dutch‐based Packard Bell acquired by Acer or the computer manufacturing branch of IBM acquired by Lenovo. American companies also concentrated most of the manufacturing in Asia.

Currently, there is no European player among the top computer manufacturers and the presence of the industry in Europe is mostly due to R&D and test facilities, service centres, distribution and sales forces. A few production sites exist in Europe, such as Apple and HP facilities in Ireland.

Manufacture of computers and peripheral equipment

According to Eurostat, the number of registered companies in the sector of „Manufacture of computers and peripheral equipment” fell from 7300 in 2008 to 6000 in 2013, a decrease of 18% in 5 years. Among the first eight European countries in which the sector comprises the biggest number of companies, only Poland has registered growth, from 433 companies in 2008 to 757 companies in 2013 (+75%), and has become the second European country behind Germany according to this indicator. The number of registered companies fell between 2008 and 2013 in other main countries: by 20% in Germany, by 9% in UK, by 21% in Spain, by 45% in Italy, by 31% in Czech Republic, by 4% in France and by 43% in Romania. However, the number of companies in the sector has to be interpreted with precaution, as it does not necessarily reflect the size of the sector in terms of workforce – for instance, in Ireland there were only 6 companies registered 2013, but these firms employed 4500 workers, whereas the 672 companies registered in Spain employed only 1900 workers in the same year.

50 http://www.reddit.com/r/europe/comments/1lv73d/why_are_there_so_few_european_computer/



Source: Eurostat

Other economic indicators of the sector reflect the reduction of the perimeter in European Union:

The turnover of the sector fell from 47bn€ in 2008 to 27.8bn€ in 2013, a 41%

decrease in 5 years. The most significant drops in turnover were registered in

Ireland, from 16.1bn€ in 2008 to 6.2bn€ in 2013 (‐62%), and in Germany, from

12.2bn€ in 2008 to 5.7bn€ in 2013 (‐53%).

The production value of the sector fell in line with the activity, from 41.1 bn€ in

2008 to 25.6bn€ in 2013, a 38% drop. The indicator fell from 15.1bn€ in 2008 to 6.1€

in 2013 (‐60%) in Ireland and from 9.5bn€ in 2008 to 5.1bn€ in Germany (‐46%).

Source: Eurostat

0

500

1 000

1 500

2 000

2008 2009 2010 2011 2012 2013

Evolution of the number of companies „Manufacture of computers and peripheral equipment”, by country

Germany

Poland

UK

Spain

Italy

Czech Republic

France

Ireland; 24%

Germany; 20%

Czech Republic;

18%

UK; 9%

France; 7%

Italy; 6%

Hungary; 6%

Other countries; 10%

Share of European countries in the total production value of the sector „Manufacture of computers and

peripheral equipment” in EU, 2013

Ireland; 22%

Germany; 21%

Czech Republic;

17%

UK; 9%

Hungary; 7%

France; 7%

Italy; 6%

Other countries; 13%

Share of European countries in the total turnover of the sector

„Manufacture of computers and peripheral equipment” in EU, 2013



In this context of footprint reduction, the profitability of the sector also degraded. With the exception of UK, where the profitability of the sector is high since 2011 (gross operating rate above 25% between 2011 and 2013), in other main countries for the sector the operating rate was decreasing (Germany, Hungary, Romania) or remained low (France, Czech Republic).

Source: Eurostat

Computer programming, consultancy and related activities

The sector of ”Computer programming, consultancy and related activities”, as defined by NACE Rev. 2 under the code J.62, is characterized by a larger number of dynamically developing companies. Unlike the ” Manufacture of computers and peripheral equipment”, the sector of computer programming and consultancy in Europe is characterized by a growing number of companies, an increased turnover and a growing headcount. However, most of the dynamics is due to small and medium businesses, most often non‐unionized.

According to Eurostat, the number of companies in this sector in EU rose from around 510,000 in 2010 to more than 613,000 in 2013. The main EU countries in terms of number of companies are:

UK with 127,000 companies in 2013 and a growth of 22% since 2010

France with 78,000 companies in 2013 (+33% since 2010)

Germany with 68,000 companies in 2013 (+18% since 2010)

The Netherlands with 51,000 companies in 2013 (+53% since 2010)

Poland with 44,000 companies in 2013 (+45% since 2010)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2008 2009 2010 2011 2012 2013

Evolution of the gross operating rate (gross operating surplus/turnover, in %) of the sector „Manufacture of computers and peripheral

equipment”, by country

Ireland

Germany

Czech Republic

United Kingdom

France

Hungary



The vast majority of these companies are small and medium enterprises. The average number of persons employed in these companies is 5 at the level of the European Union and below 9 in every country.

The turnover of the sector at the EU level rose from 361bn€ in 2010 to more than 460bn€ in 2014, an increase of more than 37%. Germany, with a turnover of 107bn€ in 2014 (+39% since 2010) and UK, with a turnover of 101bn€ (+36% since 2010) are the biggest two countries for this sector in Europe. France is third with 56bn€ comes, and Italy is fourth with 33bn€. The size of the sector in Spain and the Netherlands is of around 25bn€. Although the number of companies is increasing fast in Central and Eastern European countries, the turnover of the sector remains relatively low in this region: 8.8bn€ in Poland, 3.4bn€ in Hungary and 3.1bn€ in Romania.

The profitability of the sector was stable in recent years. The gross operating rate (gross operating surplus/turnover) was flat at around 15% since 2010. As per 2013, the highest profitability of 24.9% was registered in UK. German companies had an average gross operating rate of 17.3%, while French companies were near the bottom of the list with only 6.9%. In most of the Central and Eastern European countries, including Poland, Romania and Hungary, the gross operating rate of the sector is from 12% to 15%.

1.2. Employment in the Computer sector in Europe: a drop of more than 30% since 2008

According to Eurostat data, the number of persons employed by the European sector of „Manufacture of computers and peripheral equipment” fell from 117,000 in 2008 to 80,000 in 2013, a drop of 31%. From the total of 37,000 lost jobs during the period:

Germany accounted for 11,000 jobs,

Ireland for 6,000,

Hungary and UK for 3,100 each,Italy and Spain for 2,200 each,

Romania for almost 1000.

The only countries in which the number of persons employed by the Computer sector increased since 2008 are Belgium, Portugal and Slovakia, but the increase in each country is modest at around 200 people.

As of 2013, Germany accounted for 30% of employees in the sector in the European Union (21,000), while Italy and Hungary accounted for 10% each (7k persons). Unfortunately, no data was available on employment of the sector in UK, but we assess the sector employs more than 8,000 persons, which represents more than 10% of the European total. Other important countries for the employment in the sector are Czech Republic (6,000), Poland and France (5,500), Ireland (4,500) and Romania (3,000).



Source: Eurostat

In the broader sector of ”Computer programming, consultancy and related activities”, the number of persons employed in EU rose from 2.6 million in 2010 to more than 3.1 million in 2014 (+22%). The largest number of persons employed is registered in:

Germany, with 638,000 persons employed in 2014 and an increase of 155,000 since

2010 (+32%);

UK, with 610,000 employed in 2014, or an increase of 88,000 since 2010 (+17%);

Italy, with 243,000 employed and Spain, with 217,000 employed (+5% since 2010 in

each country);

In Central and Eastern European countries the growth in employment in the

sector was significant: in 2014 the number of employed persons reached 142,000

in Poland and 62,000 in Romania, or an increase of more than 50% since 2010 in

both countries.

However, the overwhelming part of the growth of this sector is due to small companies employing less than 10 persons, and thus represents an increase of the number of non‐unionized workforce.



European computer sector is going through major transformation and reorientation towards services as the hardware production is moved to cheaper locations or even divested. The focus is on cloud services, big data, mobile and security.

Big companies are expanding at fast pace, through internal or external growth, but this expansion is made mainly outside of Europe. Huge amounts of money are invested in data centers (at least 10 in Europe already completed and yet to follow). For big projects,

21 323

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6 818

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5 476

4 467

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1 942

1 637

1 282

1 150

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975

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793

751

329

315

219

186

131

128

61

0

5 000

10 000

15 000

20 000

25 000

Germany

Hungary

Italy

Czech Rep

ublic

Poland

France

Ireland

Romania

Spain

Swed

en

Slovakia

Belgium

Portugal

Croatia

Austria

Den

mark

Netherlands

Bulgaria

Finland

Greece

Slovenia

Lithuania

Estonia

Latvia

Number of persons employed by the sector „Manufacture of computers and peripheral equipment”, 2013



multinational companies can find synergies in spite of their competition on commoditized products.

One way of increasing the market share and/or enter new markets is through acquisitions. We’ve already seen major M&A on the European market and new ones are in pipeline. Speed is the key word in this environment and, as stated by one of the trade union representatives, if a company is not fast enough in adapting to new market demands, the end can come very quickly.

In the new environment, companies tend to be more flexible, to adapt faster to clients’ needs, new technologies and to have an internal organization that can respond faster to market changes.

2.2. Trends in storage systems business

The storage industry is undergoing rapid changes. New technologies such as software‐defined storage, object storage and big data are providing new options for architecting solutions to meet the demands of the business. Also, a transition towards hybrid cloud services can be observed. Hybrid cloud allows for new levels of elasticity and reduce IT costs. The impact is that applications and data are diverted into the public cloud, and the amount of infrastructure required within on‐premises data centers is reduced over time.

According to NetApp51, several technological trends are driving the storage market in 2015 :

The Internet of Things will combine with Big Data Analytics to produce smart

systems. The rise of integrated telemetry in industrial equipment, health

monitoring devices, mobile payment systems and a host of new sensors for

measuring the world will spawn the next wave of business analytics.

Flash is transformative to the future of enterprise storage systems, but it is

expected that at least 80% of enterprise data will continue to reside on disks.

Multi‐Vendor Hybrid Clouds will evolve. Avoidance of lock‐in, leverage in

negotiations or simply a desire for choice will drive IT decision makers to deploy

multi‐vendor hybrid clouds. However, insufficient data mobility between data

centers and public cloud providers can be a significant barrier to hybrid cloud

adoption. In a recent CIO survey conducted by IDG Research Services, 78% of

enterprise IT organizations viewed the ability to manage data across multiple

clouds as critical or very important—but only 29% of these organizations viewed

their ability to do so as either excellent or good52.

Software‐Defined Storage (SDS) solutions that can be deployed on a variety of

hardware platforms will provide a consistent way for applications to access data

51 http://searchstorage.techtarget.com/NetAppSponsoredNews/Buckle‐Up‐The‐Top‐Storage‐Technology‐Trends‐for‐2015 52 http://community.netapp.com/t5/Technology/The‐Hybrid‐Cloud‐is‐Driving‐Big‐Changes‐in‐Storage/ba‐p/102658



across clouds, and it will simplify data management when moving existing

applications into the cloud. Those SDS solutions will actually reduce the cost of

moving data to and from the public cloud, and they will lower the cost of storing

active data in the public cloud for long periods of time.

New Hyper‐Converged Infrastructure will enable Direct‐Attached Storage to be

shared across several servers, making each “compute unit” more resilient while

enabling the sharing of non‐local enterprise data over a LAN or SAN.

2.3. European Cloud of Clouds initiative

At the beginning of 2015, HP has launched the Cloud28+ initiative, a self‐governing organization aimed at using OpenStack to “standardize” what are now 28 different European cloud systems. HP are advocating the creation of a federated, European cloud ‐ a "Cloud of Clouds," made in Europe and secured locally. According to an IDC study, a unified cloud could increase the EU gross national productivity by 250 billion Euros and create 3.8 million jobs, compared to growth of 88 billion and 1.3 million jobs without the political involvement of the various authorities53.

2.4. Mergers and acquisitions

On October 6, 2014, Hewlett Packard announced it was planning to break into two separate companies, separating its personal‐computer and printer businesses from its technology services. The split will result in two publicly traded companies: Hewlett‐Packard Enterprise (IT services) and HP, Inc. (manufacture of computers and peripherals). The split was completed by the end of 2015.

In May 2015, Hewlett‐Packard Co sold a controlling 51% stake in its China‐based data‐networking business to China's Tsinghua Unigroup for at least $2.3 billion, forming a partnership designed to create a Chinese technology powerhouse.54

Since the beginning of 2012, DELL has completed a significant number of acquisitions that bring many new capabilities in areas such as scalable storage solutions, application migration, and software. DELL completed several of these acquisitions in 2013, including acquisitions of SonicWALL, Inc. ("SonicWALL"), Wyse Technology Inc., and Quest Software, Inc. ("Quest Software").

In July 2014, Apple acquired Beats Music, LLC, which offers a subscription streaming music service that offers a curated listening experience and complements the Company’s other music services and offerings.

On May 26, 2014, Atos acquired Bull for $844m, saying that it intends to create a dedicated entity under the Bull brand focused on big data and cybersecurity. In 2015, Atos also acquired Xerox ITO, a move that will allow it to expand into the American market.

53 https://www.mirantis.com/openstack‐portal/external‐news/cloud‐europe‐hp‐looks‐unification‐orange‐buy‐cloudwatt/ , http://www.cbronline.com/news/hp‐call‐for‐cloud‐of‐clouds‐4489638 54 http://www.reuters.com/article/2015/05/22/hp‐ma‐tsinghuaunigroup‐idUSL3N0YD04820150522



IBM also invested in cloud data development and cloud security. In 2013, IBM purchased for 2bn USD Softlayer, an American specialist of hosting and services for public cloud infrastructure. In 2014, the company also bought Cloudant (a supplier of data base services in cloud for mobile applications and Big Data), the Italian company CrossIdeas and Lighthouse Security Group. In 2015, IBM acquired AlchemyAPI, Explorys, Phytel in the sector of healthcare management.

Western Digital has acquired for $4.3bn the Hitachi‘s hard drive unit, after agreeing to sell some production assets due to European Commission requirements. The market for 3.5‐inch hard drives is dominated by Western Digital and Seagate Technology, which recently acquired Samsung’s hard drive unit.


3.1. HP targets cloud, mobile, big data, security

HP indicators

Indicator 2009 2010 2011 2012 2013 2014 2014 vs.

2009

Revenue, in M USD 114,552 126,033 127,245 120,357 112,298 111,454 ‐3%

Net revenue ‐ Personal Systems Group, in M USD

35,305 40,741 39,574 35,843 32,179 34,303 ‐3%

Net revenue ‐ Enterprise Storage and Servers, in M

USD 16,121 20,356 22,241 29,643 28,081 27,814 73%

No. of employees worldwide 304,000 324,000 349,600 331,800 317,500 302,000 ‐1%

No. of employees EMEA 80,000 75,128 68,660

% EMEA in total employees 24.1% 23.7% 22.7%


In 2014, HP cut 7k positions in European part of its strategy to save costs and reinvest back into cloud, mobile, big data, and security. The company argued that its restructuring plans "addressed current markets and business pressures." HP did not comment on how many staffers were to be redeployed over being made redundant, but said it did not expect the layoffs to breach the 15% mark.

Since 2011, the company has already laid off approximately 47,600 positions as part of its global reductions plan.

The locations of HP`s major product development, manufacturing, data centers, and laboratory facilities in Europe are: Grenoble (France), Leixlip (Ireland), Sant Cugat del Valles (Spain), Billingham, Erskine, Norwich, Sunderland and Bristol lab (United Kingdom).

In 2015, the company split in two entities: Hewlett Packard Enterprise and HP Inc. Hewlett Packard Enterprise unit will be focused on developing cloud solutions, while HP Inc. will get



the lower‐margin PC and printer business, which has been one of the main business lines of the company for a long time.

Strategy (as presented prior to the split, but focused on Hewlett Packard Enterprise businesses)

Deliver superior products, high‐value technology support services and

differentiated integrated solutions that combine HP`s infrastructure, software and

services capabilities

New product introductions, including the HP Elite products

Adjust to new and future requirements relating to the chemical and materials

composition of its products, their safe use, and the energy consumption

associated with those products, including requirements relating to climate change

HP may modify or develop new go‐to‐market practices in the future, which may

result in changes in selling prices

HP long‐term strategy is focused on leveraging the portfolio of hardware,

software and services as the company adapts to a changing and hybrid model of

IT delivery and consumption driven by the growing adoption of cloud computing

and increased demand for integrated IT solutions.


HP is a worldwide brand

Strong R&D activities

Strong distribution channel globally

Strong presence in China

Solutions for the home, office and publishing environments

As a result of the separation in two companies, a decrease in employee morale and the failure to meet operational targets

OPPORTUNITIES THREATS Expansion in alternative client

computing architectures and other emerging mobile computing devices gives a good opportunity for HP

Focus on emerging markets

Capitalize on important market opportunities in cloud, big data and security


Decreasing PC market




3.2. DELL turned private and focused on end‐user computing

DELL indicators

Indicator 2009 2010 2011 2012 2013 2014 2013 vs. 2009

Revenue, in M USD 61,101 52,902 61,494 62,071 56,940 n/a ‐7%

No. of employees worldwide 78,900 96,000 103,300 109,400 111,300 n/a 41%


In 2013, DELL returned into a private business back, with founder Michael Dell buying out shareholders for a total of $24.9bn alongside private equity firm Silver Lake Partners. The company claims the private ownership structure allows it to “be more flexible and entrepreneurial” with a “single‐minded purpose [to] drive the innovations that will help them [customers] achieve their goals”.

Dell ceased all manufacturing in Europe in 2009. Dell has effectively unloaded its manufacturing operations in Europe to the world’s largest electronics manufacturer, the Taiwanese firm Foxconn. The company had winded down its Limerick manufacturing plants, with the loss of 1,800 jobs and shipped these functions to a new operation in Lodz, Poland. Following the transfer, Dell continued to source desktop and notebook computers, servers and storage systems for EMEA customers from Lodz via Foxconn.55

In 2014, reports showed that Dell intended to reduce workforce by around 15,000 on a global scale, but some sources claimed that it effectively reduced its headcount by 2,000 to 3,000 persons. On the other hand, in July 2015, Dell has revealed its plan to supplement its business with 1,000 new employees globally, with almost half being spread across Europe, the Middle East and Africa.

Now that the company is private, information on its workforce and results is no longer public.

Strategy

to become a leading provider of scalable end‐to‐end technology solutions, to

continue shifting the portfolio to products and services that provide higher‐value

and recurring revenue streams over time

expanding Enterprise Solutions Group (ESG), software, and services offerings

focus on the most attractive areas for profitable growth in the IT business include

data center and information management, cloud computing, and software

End‐User Computing ("EUC") — EUC includes desktop PCs, thin client products,

notebooks, tablets, third‐party software, and EUC‐related peripherals is believed

55 https://www.siliconrepublic.com/companies/2009/12/02/dell‐ceases‐all‐manufacturing‐in‐europe



to be critical to DELL long‐term success and continues to be an important part of

their strategy


DELL is a worldwide brand

DELL outsources most of the computer manufacturing, allowing the company to focus on marketing and logistics

Selling at low‐costs

"Build‐to‐order" or "configure to order" approach to manufacturing—delivering individual PCs configured to customer specifications

The company has such a huge range of products and components from many suppliers. There have been cases in which the company had to recall its products from the market due to technical failures.

Dell is a computer maker, not a computer manufacturer. The company is reliant on external suppliers.

OPPORTUNITIES THREATS Market opportunities in cloud, big

data and security High level of competition


3.3. Apple has a limited manufacturing presence in Europe

Apple indicators

Indicator 2009 2010 2011 2012 2013 2014 2014 vs.

2009

Revenue, in M USD 42,905 65,225 108,249 156,508 170,910 182,795 326%

Sales in Europe, in M USD 11,810 18,692 37,883 36,323 37,883 40,929 247%

% sales in Europe from total 28% 29% 35% 23% 22% 22%



Apple's headquarters for Europe, the Middle East and Africa (EMEA) are located in Cork in the south of Ireland. The company owns a manufacturing facility in Cork, Ireland that also houses a customer support call center. 56 The majority of the European workforce is involved in marketing, distribution and sales.

While substantially all of the Company’s hardware products are currently manufactured by outsourcing partners that are located primarily in Asia, the Company also performs final assembly of certain products at its manufacturing facility in Ireland. The supply and manufacture of a number of components is performed by outsourcing partners in the U.S., Asia and Europe.

56 Apple Annual Report 2014



The Company continues to develop new technologies to enhance existing products and to expand the range of its product offerings through R&D, licensing of intellectual property and acquisition of third‐party businesses and technology. Total R&D expense was $6.0 billion in 2014, up from $4.5 billion in 2013 and $3.4 billion in 2012.

The corporation continued to receive significant criticism regarding the labour practices of its contractors, as well as for its environmental and business practices, including the origins of source materials. In December 2014, the Institute for Global Labour and Human Rights published a report which documented inhumane conditions for the 15,000 workers at a Zhen Ding Technology factory in Shenzhen, China, which serves as a major supplier of circuit boards for Apple's iPhone and iPad.

Strategy

unique ability to design and develop its own operating systems, hardware,

application software and services to provide its customers products and solutions

with innovative design, superior ease‐of‐use and seamless integration

to expand its platform for the discovery and delivery of third‐party digital content

and applications through the iTunes Store.

building and expanding its own retail and online stores and its third‐party

distribution network to effectively reach more customers and provide them with a

high‐quality sales and post‐sales support experience.

continual investment in research and development, marketing and advertising is

critical to the development and sale of innovative products and technologies.


Enjoys a high level of brand loyalty

Continuous and strong R&D activities

Its own operating systems, hardware, application software and services

According to the 2014 edition of the Interbrand Best Global Brands report, is the world's most valuable brand with a valuation of $118.9 billion

Depends on its own power to innovate both hardware and software

OPPORTUNITIES THREATS Expanding its market opportunities

related to personal computers and mobile communication and media devices





3.4. IBM exited PC business and focuses on cloud, big data and cognitive computing

IBM indicators

Indicator 2009 2010 2011 2012 2013 2014 2014 vs.

2009

Revenue, in M USD 95,758 99,870 106,916 59,453 57,655 55,673 ‐42%

No. of employees worldwide 399,410 426,750 433,360 434,250 431,210 379,590 ‐5%

R&D rate (% of revenue) 5.9% 10.6% 10.0% 9.8%

In 2005, IBM sold its personal computer business to Lenovo and has decided to concentrate of cloud solutions, big data and revolutionary cognitive computing. In accordance with its strategy, IBM has developed its European activities in software related businesses: cloud, analytics, mobile solutions, security. The company has very limited manufacturing presence in Europe (one factory in Hungary).

In the last years, IBM had a very strong external growth, acquiring a range of companies specialized in the cloud segment. These purchases are going be supplemented by investments:

1.2 bn USD in 15 data centers, including one in London and one in Paris

1bn USD in the construction of the cloud platform Bluemix.

In 2013, IBM purchased for 2bn USD Softlayer, an American specialist of hosting and services for public cloud infrastructure. Later, the company also bought Cloudant, a supplier of data base services in cloud for mobile applications and Big Data.

The year 2014 was important for IBM as the company cut workforce at the global level, divested a range of units, created the Watson business unit, sold its commodity server business to Lenovo, and established a partnership with Apple in the enterprise and cloud services. IBM also divested its unprofitable chip design and manufacturing business to GlobalFoundries, to which IBM will pay $1.3bn net for the takeover of the “bad asset”. GlobalFoundries, a technology investment fund wholly owned by the government of Abu Dhabi, said it was more interested in acquiring IBM’s engineers and intellectual property than the factories.

IBM announced that it targets 7bn USD in sales on cloud computing in 2015. By 2018, IBM targets 40bn of sales increase due to its strategic branches: cloud, Big Data, mobile and security.

The cognitive computer Watson is already marketed in Europe, but its applications in the European markets are limited by its dependence on the English language. The implementation of Watson in other European languages would require investment in highly qualified personnel and could be one of the future challenges of IBM in Europe.



The number of IBM employees in Europe has remained relatively stable in the last years, but the turnover of the personnel was very high. For instance, in Germany on a three years horizon the retention rate is of only 50%. The profound shift in strategy has translated into a high turnover of its personnel in the last years. IBM has deployed a strategy of creating Competence Centers, concentrating personnel with similar functions in big clusters which offer services on a multinational scale.

Strategy

Profound shift of the business to more lucrative, higher‐margin technologies, such

as cloud and mobile technology

High investments in R&D and development of revolutionary products such as the

cognitive computer Watson

Shifting resources and spending to areas where the company sees most

opportunity, including Watson, SoftLayer, Bluemix, and in support of the Apple

partnership.

The company is likely to be laying off workers in slower growth areas (or outright

sells businesses such as the x86 server unit) and hiring in other units such as

Watson and cloud


IBM is a worldwide brand

“Hybrid Cloud” ‐ Ability to connect new technologies with the currently running systems in enterprises is a key value‐added service and market differentiator for IBM.

Strong R&D activities to build its capabilities in

big data and analytics.

Focus mainly on corporate solutions

Need to pay for divesting “bad assets”

OPPORTUNITIES THREATS Market opportunities in cloud, big

data and security

Investing in analytics that can use data for all industries and professions

Cognitive computing Watson

Partnership with Apple

Increasing competition in the cloud computing market



3.5. Atos expands through the acquisition of Bull and Xerox

ATOS indicators

Indicator 2009 2010 2011 2012 2013 2014 2014 vs. 2010

Revenue, in M EUR 5,021 6,812 8,844 8,615 9,051 80%


Atos underwent major changes at European level in the last years, as it expanded its activities following two major acquisitions:

The acquisition of Bull has opened new prospects for the development of Big Data

& Security businesses. This acquisition is the main driver of the workforce increase

in 2014, when 9,197 employees entered the group.

The acquisition of Xerox ITO will help Atos to develop its activities in the American

market, providing data centers, cloud and workplace services.

Unlike other big players presented in this chapter, Atos is mainly a European player, with the biggest part of the workforce based in Europe. Around 60% of the total workforce is direct personnel employed in Europe. As of the end of 2014, Atos employed:

9,744 direct personnel in UK and Ireland

7,954 direct personnel in Germany

13,103 direct personnel in France, including 3,946 from the acquisition of Bull

9,637 direct personnel in Central and Easter Europe

5,118 direct personnel in the Iberian peninsula

According to the company, Atos will leverage the Xerox ITO customer centric approach and Atos’ industrial capacities and portfolio of cutting‐edge services and technologies, particularly in Cloud, Big Data, Cyber‐security, and in High Power Computing to support clients handle the massive volumes of data generated in the digital world.

The increase of the perimeter, though positive for the business, does not promise much in terms of employment in Europe. Synergies between the companies will most probably result in job cuts.

Traditionally, unlike many other companies of the sector, Atos was a real “European company”, with most of the workforce concentrated in France. However, in search for savings, many functions were transferred to lower cost countries. The trend does not for the moment represent a risk for high skilled and competent workers, but lower qualified functions are threatened.

Strategy

Concentrate on new digitalization and virtualization markets



Deliver the whole value chain of Big Data, from service to technologies, and

achieve high results in the sectors acquired from Bull

Maintain proximity with the European (French) clients

Maintain and improve the quality of the traditional Atos products and services

Enter the American market through Xerox client base

Generate the necessary free cash flow in order to sustain external growth


Strong brand

Specialized in Systems Integration services, Cloud operations

Strong political support in France

Proximity with clients in Europe (France)

Integration of the newly acquired companies can be demotivating for employees

Growth is mainly external

OPPORTUNITIES THREATS Accessing the American market

through the acquisition of Xerox

New operations in big data and security acquired from Bull, with possibilities of synergies with Atos products

Cloud technologies

Loss of competencies due to relocation of workforce

Increasing competition in the cloud computing market

3.6. Fujitsu business shrinks in Europe, focuses to services

Fujitsu indicators

Indicator 2010 2011 2012 2013 2014 2014 vs. 2010

Revenue, in M USD 54,662 52,960 46,614 46,569 46,237 ‐15%

Revenue EMEA, in M USD 10,590 10,203 9,835 8,150 8,990 ‐15%

% EMEA from total revenue 19% 19% 21% 18% 19%

No. of employees worldwide 172,438 172,336 173,155 168,733 162,393 ‐6%

R&D rate (% of revenue) 4.8% 5.2% 5.3% 5.3% 4.6%

According to its Annual Report, Fujitsu is shifting the focus of their business portfolio in continental Europe from hardware such as PCs and servers to services. This transition had an impact on the workforce, as Fujitsu has performed reductions in continental Europe, more than 1,5k workers being laid off in 2014. According to the head of Europe, Middle East, India, Africa division, the top priority in Europe is “implementing the established business



model of continuing to stabilize the product business and expanding the services business to create stable earnings […] to effectively utilize the new global matrix organization to provide global solutions and aim for an ensured service framework, while also proactively recruiting and training our talent in the services sector”57. Unfortunately, this does not sound very promising for activities in Europe.

Strategy

Modernization of existing business systems, expantion of ICT Usage Areas for

Enterprises

Focus on end user services, which provide customers with tailor‐made solutions

made of classic, virtual, mobile and collaborative workplaces – complemented by

Application, Data Center, Cloud, and Service Desk Services

3.7. Hitachi has a broad range of activities in Europe, including Enterprise Storage System

Hitachi indicators

Indicator 2010 2011 2012 2013 2014 2015 2015 vs. 2013

Revenue, in M USD 87.0 90.4 93.8 87.7 93.3 81.5 ‐7%

No. of employees worldwide 329,703 323,919 336,670 2%

Hitachi Group's operations in Europe employ about 10,300 people in total. Taken together, these operations represent around 8% of Hitachi Group's global net sales. Hitachi group in Europe is expanding its already significant presence through organic growth of its four strategic sectors. These sectors include Power Systems, Rail Systems, Construction Machinery and Enterprise Storage System58.

The activity of Enterprise Storage System is based in France. As the leader in storage virtualization, Hitachi Data Systems offers platforms that abstract data so it can be accessed for a broad range of business needs.

Hitachi Computer Europe France (HiCEF), as a part of the division "Storage Systems" of Hitachi Global, supplies the entity Hitachi Data System (HDS) with high‐capacity data storage systems to sell them on the European market. HiCEF is in charge of IT platforms and the assembly of servers and storage solutions with high capacities. These storage devices meet the needs of large enterprises and SMEs in terms of storage solutions.

57 Fujitsu Annual Report 2014. 58 http://www.hitachi.co.uk/about/hitachi/



Strategy

Maintain market share of storage solutions in EU

Improve the supply chain in order to reduce costs


Reliable products

Strong ties with clients in Europe

Production limited to assembly

Controller boards for data storage devices produced in Japan

Dependence on the distribution center located in the Netherlands

OPPORTUNITIES THREATS Market demand for storage capacities Competition from cloud solutions


According to the interviewed worker representatives, employment in the sector in Europe is characterized by:

Relocation of jobs from Western Europe into other regions such as Asia or Eastern

Europe. The relocated jobs usually require lower level skills, which are less

expensive in other regions compared to Western Europe. Most of the support

centers are located in India. However, not all service centers are transferred

outside of Europe, as it is difficult to find workers that speak other languages than

English.

Within the European Union there is trend of relocating support functions to

Eastern countries. Back office functions are concentrated in countries such as

Czech Republic, Poland, Romania, and Bulgaria. Western countries maintain

competence centres, sales and client support functions. However, employment in

Eastern Europe is not secure for the long term, as shown by the recent divestment

of an IBM Service Center in Bulgaria. Big outsourcing deals also affect some

support functions of some companies.

The sector was confronted with restructuring and reorganization measures. In

many companies, job cuts happen regularly.

The profound shift in strategy has translated into a high turnover of personnel in

the last years. The low retention rate is explained by the presence of numerous

young employees, who tend to be less attached to their first employer, are more

volatile and have higher expectations.

Some companies, as for instance IBM, have created Competence Centers,

concentrating personnel with similar functions in big clusters which offer services



on a multinational scale. As stated by an employee representative, these

companies are “no longer multinational, but global”.

The issue of competencies

According to an interviewed trade union representative, skills provided by Universities are one generation behind high market requirements. The technological acceleration has widened this gap, making it more difficult for companies to find necessary competencies at the level of public higher education. In order to overcome this issue, in some countries mechanisms have been put in place allowing young personnel to attend formal education and work in parallel, scholarships being provided by the companies. Otherwise, young employees are going through comprehensive internal programs that help them adapting to technologies used by their companies.

Facing a need for new competencies, many companies prefer to replace older employees with young workers, considering that they present more advantages, such as:

Reduced costs – young people are cheaper than employees with several years of

experience;

Higher adaptability to new technologies and fast learning.

Mobility – young people are more willing to relocate in other parts of Europe

(especially from Eastern Europe)

The development of products such as cloud businesses or cognitive computing require new qualifications, and bigger companies are sometimes able to get them by acquiring smaller players. In some cases there is a need to correlate high‐end skills with the ones developed in United States or Asia.

Specialized employees are still hard to find, and most companies offer high salaries and benefits in order to attract them. Business headhunting is also used for finding key personnel.

Social dialogue, Information & Consultation rights

In the interviews we conducted in the sector, worker representatives said that the implementation of Information & Consultation rights in their companies is rather correct. However, there were signs that in some companies management has been blocking the functioning of the European Works Councils, especially in cases when major decisions were at stake, such as divestments or acquisitions. All in all, the situation of (European and national) works councils improved over the years, but there are still things that can be done better:

The quality of the received information is not always good enough. The

confidentiality is an excuse often used by the management for not providing

information.



Information and consultation processes often take place after the decisions are

taken or even implemented.

It is difficult to have management representatives from relevant levels of decision

making.

Inclusion of new employees from the acquired companies in the European or

national works councils is not easy.

Participation of Eastern European representatives in EWCs is limited, and their are

no trade union structures in many new member states.

The unionization rate in the sector is low (5%‐10%), due to multiple reasons, including the cluster nature of many companies, the high turnover in personnel, and the lack of interest from young workers. This is an important issue for the unionists, and they have great difficulties in attracting new members.

Prospects for the development of the sector in Europe

In a business as usual scenario, we expect a further 10% decrease of the number of employed persons in the European computer industry until 2020, as defined by NACE sector “Manufacture of computers and peripheral equipment”. Workforce should gradually decrease if the following factors are not countered:

Continued restructuring plans and optimizations

Relocation of employees to Asia and other low cost areas, especially affecting

lower qualifications

Low retention rates in the sector, pressure from other ICT sectors

A need of ICT skills outside the ICT sector

Redundancies related to synergies created from market consolidation

Continued divestments of big PC players in Europe

Disruptive technologies will continue to be developed outside Europe (Watson).

Chapter 8 ______________________

Industrial electronics


152 Chapter 8 ‐ Industrial electronics


Chapter 8 ‐ Industrial electronics 153

1. Overview of sectoral trends

1.1. Sector profile

Global electronics industry is shaped by the rapid rise of China

As a sub‐sector of the electronics industry, industrial electronics is not defined exactly in statistically terms. In fact, it is ‘hidden’ in various segments of the electronics related manufacturing sectors industry.59 The electronics industry is a broad economic sector that covers innovative cross‐cutting and technologies in the productive, industrial as well as consumer goods markets. With view on the International Standard Industrial Classification (ISIC) around 30 different classes (4‐digit) are linked to the electronics industry, most of them with the classes 26 (electronic and optical goods) and 27 (electronic equipment); further ISIC classes however linked to production of audio, visual and data media, electronic tools, automotive electronics, railways or medical equipment.

Against this it is not surprising that the electronic industry is one of largest industrial sectors globally as well as in Europe with a global market/turnover of estimated 3.7 trillion Euros in 2013. Since 2003 the sector as a whole has faced an average annual growth of 6.5% which means that the market has doubled during this decade.

Figure 1 : Electronics industry: Global market volume/turnover, trillion Euros

* forecast. Source: ZVEI 2015: Die globale Elektronikindustrie – Daten, Zahlen und Fakten, Zentralverband Elektrotechnik‐ und Elektronikindustrie e.V., Frankfurt a.M.

59 Such as NACE Rev 2 codes 26.1 electronic components/boards, 26.2 computers, 26.3. communication equipment, 26.4 consumer electronics, 26.5 (instruments and appliances for measuring, testing navigation), 26.6 irradiation, electro medical and –therapeutic equipment, 26.7 optical instruments, photographic equipment, 26.8 magnetic and optical media, 27.11 electric motors, generators and transformers, 27.12 electricity distribution and control apparatus, 27.2 batteries and accumulators 27.3 cables and wires, 27.4 Manufacture of electric lighting equipment, 27.5 electric domestic appliances, 27.9 other electrical equipment, 28.1 engines, turbines, power equipment, pumps and compressors, bearings, gears, gearing and driving elements, 28.2 lifting and handling equipment, office machinery and equipment, power‐driven hand tools, non‐domestic cooling and ventilation equipment , other general‐purpose machinery, 28.3 agricultural and forestry machinery, 28.4 metal forming machinery, 28.4 other machine tools, 28.9 machinery, 29.3 electrical and electronic equipment for motor vehicles. Industrial electronics furthermore is part of the manufacturing of ships, boats, railway, aerospace, automotive, and other transport equipment (NACE 29 and 30).

3.23.5 3.5

3.73,9*

4,1*

2011 2012 2013 2014 2015 2016

10,8%15,6%



In 2013, two thirds of the global electronic production was located in East Asia, 16% in Europe (most of which in the EU, 11% in the U.S. and 3% in Latin America. With view on market volumes (i.e. defined as production minus exports plus imports) around half of the global market volume consists of Asia, Europe is accounting for around 20%, 16% in the U.S. and 5% in Latin America.60

However, the shares within the global production of electronic products in 2013 show that Asia is contributing around 70% to the global industry output, while the shares of Europe and the Americas is only 16% and 14%.

While in the year 2000, the U.S. were the largest single producer of electronic products (followed by Japan, China, South Korea and Germany), the ranking has changed since then mainly due to the rapid increase of China as the leading producer of electronic products. In 2013, China by far has been the largest producer of electro‐technical and electronic products with a share within the global production of 47% (compared to 17.5% in 2002) while the top‐5 group still is comprised of the same countries as in 2000. However, compared to 2003, the share in global production of the U.S. as well as Japan has halved. The situation in Germany has been more positive: In contrast for example to Japan that also experienced a decrease in the total production volume, production in Germany between 2003 and 2012 grew by 1.9% per year (despite the 2009 crisis).

Figure 2: Regional shares in global electronic production, 2013

Source: ZVEI, op.cit. During the last decade not only regional but also sub‐sectoral shifts and changes have characterised the global market for electronic products: As the following figures shows, in 2013, around 30% of the global market falls upon electronic components, that include also semiconductors. It should be noted here that ten years ago, the leading position was held

60 Gontermann, A. 2012: Die deutsche Elektronikindustrie im globalen Vergleich, IFO‐Schnelldienst 18/2012., 22.

Asia70%

Americas14%

EU13%

other Europe3%

Global production: 3,525 billion €

Largest producers:1. China (1,6 bn €, 47%) 2. USA (353 bn €, 10%) 3. Japan (268 bn €, 8%) 4. South Korea (216 bn €, 6%) 5. Germany (130 bn €, 4%)



by the segment of information and communication technologies that today accounts for one quarter of the global market volume. These two leading segments are followed by automation technology with 15%, domestic appliances (9%) and energy technologies and entertainment electronics that have shares of 7% each.

During the last decade, in particular energy technologies, automation and domestic appliances have experienced the strongest growth while the markets share of the ICT segment degreased by more than 10%. The markets for automation and domestic applications have more than doubled.

It should be noted also, that according to the German employer association of the electronics industry, ZVEI, the automation market is expected to experience the strongest growth during the coming years with market growth rates of 6‐8% in sub‐segments such as electric drives, measuring and process technologies as well as switching devices.

Figure 3: Shares in the global electronic market, 2013

Source: ZVEI 2015: Die globale Elektronikindustrie – Daten, Zahlen und Fakten, Zentralverband Elektrotechnik‐ und Elektronikindustrie e.V., Frankfurt a.M. With view on the shares of regions in global production segments, Asia today is dominating the segments of components, ICT and entertainment electronics. In all of these segments Asian producers have shares of around 4/5.

After most of most of the consumer electronics manufacturing has left Europe during the last decades the European manufacturers still play a significant role in market segments such as health care electronics (34% in 2013), automation (28%) and energy technologies

Automation15%

Energy7%

Healthcare3%

ICT25%

Domestic Appliances

9%

Light4%

Entertainment7%

Electrotechnical Components

30%



(27%). In Germany, the automation segment with a share in the overall electronics production of 28% was by far the most important single segment in 2013.

These segments are also those that are key technological drivers of the digital transformation of the whole industry. Electronic technology contributes to the accelerated automatization and networking as well as to the internet of things. Thus, the electronics industry both is facing technological innovations within the own industry as well as functioning of an enabling technology for the digital transformation in other sectors.

According to the employer organisation Orgalime, the electrical, electronics and instrument industry is among the largest industrial sectors in Europe with a turnover of more than €625 billion in 2014. The sector according to the definition of Orgalime employs more than 2.5 million people.

Industrial automation still a European strength

The convergence of the physical and the virtual worlds through Cyber‐Physical‐Systems (CPS), and the consequent fusion of business processes and technical processes have set the pace of the industrial control and factory automation concept. Industrial Control and Factory Automation brings lot of advantages such as improved efficiency and reduced costs compared to conventional manufacturing processes. Such a network production capacity is believed to change the way a factory works and create more opportunities in the future.

The industrial control and factory automation market is expected to reach USD 202.42 Billion by 2020 at a CAGR (Compound Annual Growth Rate) of 6.73% between 2015 to 2020. Factors such as adoption of IoT, advancement in the M2M communication technology, and increasing demand of robots in the industrial sector have resulted in a positive impact on the industrial control and factory automation market.

Nearly 60% of the global automation market is concentrated in four countries: China in 2011 had a share of around 1/3, followed by the U.S. with 13.5%, Germany with 6.4% and Japan with 6.3%. A similar picture emerges in regard to global production shares where China in 2011 held 34%, followed by the U.S. with 13%, Germany with 11% and Japan with 10% (figures by ZVEI).

1.2. Employment: Europe still holds significant employment

Against the difficulty to single out correctly industrial electronics within the electronics sectors in general, it is not possibly to quantify employment that is related to industrial electronics in particular. As a key area of the digitalisation of the economy as a whole, industrial electronics in fact should be regarded as an increasingly horizontal technology that stretches into many different application sectors.

Given the absence of reliable data the following analysis of employment data and trends focusses thus on the electronics industry in general, however with a special consideration of those segments that are particularly interesting from the industrial electronics perspective.



In 2013, global employment in the electronics industry was estimated at 24 million workers. Since 2003, the sector reported a global growth of around 9 million jobs of which most have been created in China where the workforce in the sector since then has nearly tripled and is reported to be around 14.5 million, more than half of the global workforce.

In contrast to China, employment in other world regions decreased, e.g. in the U.S., Japan as well as in Europe. In the U.S., the sector experienced a loss of more nearly 440,000 jobs during the decade after 2003 and in 2013 the workforce was reported to be around 1.2 million. Japan saw a less dramatic reduction in sectoral employment which went down by around 181,000 since 2003 to 1 million in 2013.

Figure 4 : Employment in the global electronics industry

Source: ZVEI 2014: Die Elektronikindustrie weltweit. Branchenstruktur und Entwicklung, Zentralverband Elektrotechnik‐ und Elektronikindustrie e.V., Frankfurt a.M.

The European electronics industry since 1990s has experienced a reduction of employment due to the demise of whole sub‐segments (e.g. mobile phone production, home entertainment electronics), offshoring of more labour‐intensive manufacturing to lower cost countries as well as increased competition from South Eastern Asian producers. Since 2000, the overall employment is reported to have decreased by around 400,000 from 4.2 million to 3.8 million in 2013.

Employment in the European electronics industry is concentrated mainly on five countries: Germany, France, Italy, the UK and Spain. However, Germany by far is the largest player with more than 840,000 employees in 2013 which is more than the total employment in the

total

without China



four remaining countries (Italy: around 270,000; France: 240,000; UK: 200,000 and Spain around 125,000; figures for the year 2010.61

The Germany electronics industry was also able to manage structural change during the last decade better than other EU countries: Since 1995 and 2010, real production has grown on average by 3.5% per year and the sectoral workforce in 2013 was higher than before the 2008 crisis. In contrast, only in France the electronics production between 1995 and 2010 reported a slight output increase by 0.7% per year, while the output contracted (in Spain by 1.5% on average per year, in the UK by 0.8% and in Italy by 3.2%, see Gantermann 2012, p. 45).



The European electronics industry can expect a number of opportunities

The European electronics industry today – after the disappearance of most consumer electronics production during the 1990s and first years of the 21st Century – today mainly produces components and system solutions for other business, i.e. investment goods. This market today accounts for 4/5 of the total turnover.62 Key areas where European producers still hold a global leading position are automation and energy technology as well as medical technologies.

At the same time the electronics technology is a key driver of the automation and interconnectedness of working and social life and a catalyst of the digital transformation of manufacturing.

Thus, the electronic industry in particular the segments mentioned above can benefit not only as supplier of hardware for the internet of things and the digitalisation of things but also as an applicant of the related technologies. In this regard the sector has high growth potentials as it delivers the components for smart machines, vehicles, domestic appliances, etc.

In the shape of digital power electronics, the industry also has in its hands one of the keys to the efficient use of energy. New technologies have the potential to transform the entire energy production. As soon as the idea of smart grids is applied to an industry or application field, there is a growing demand for smaller systems for energy production and energy networks as well as the respective hard‐ and software solutions. New opportunities to make power plants more efficient by analysing performance data are also emerging. By no means least, decentralized power generation within a smart grid architecture creates heavy demands in terms of flexibility and security. The circuits in smart power grids have to be switched within milliseconds, which in turn require a high quality of service in the corresponding communications networks. Especially in mobile communications, this plays an important part in distinguishing between time‐critical and non‐time‐critical traffic.

61 Gontermann, A. 2012: Die deutsche Elektronikindustrie im globalen Vergleich, IFO‐Schnelldienst 18/2012. 62 Roland Berger 2015a: Analysen zur Studie “Die digitale Transformation der Industrie“, 17.3.2015, p. 21..



For this reason, ongoing development in the direction of the "tactile internet" and next‐generation systems (5G) is of paramount importance, not only in the energy sector.

The following overview, taken from a study on next generation embedded systems, provides an overview of main drivers of change and disruptive technologies in sectors and market segments where industrial electronics plays a key role.

Table 1 : Drivers of structural change and game changing technologies in various sectors

Sector Drivers Disruptive technologies

Automotive, logistics

Carbon footprint Mobility Consumer expectation changes

Automotive control devices Infotainment devices Transportation telematics Smart charging, vehicle‐to‐grid

Energy Carbon footprint/sustainability Energy prices

Smart meters, grid sensors neighbourhood/wide area networks (wireless mesh, WiMAX) Meter data and grid management systems

In‐home displays, smart thermostats, smart appliances Home area networks CRM systems, analytics and customer portals

Health Ageing population Increasing costs Prevalence of chronic disease / changing life style Labour shortages

Intelligent/connected medical devices (glucometers, pulse oximeters, blood pressure monitors) Wide/home area networks Care management systems (enables remote care by clinicians) Electronic medical record (EMR)/personal health record (PHR) systems Patient portals Telepresence/video conferencing

Source: own, based on IDC 2012: Final Study Report: Design of Future Embedded Systems (SMART 2009/0063), IDC France, Paris.

Example: automotive industry

Already today, as much as 25% of the vehicle cost is in embedded systems components (hardware, software and services). The ratio is the fast growing as 80% of product innovations are including embedded systems.

One of the main technological challenges of the future automotive production will be to manage the increasing complexity which is driven by the increasing functional scope encompassing functions. The typical car in Europe currently has about 65 MCU (Multipoint



Control Unit) ‐ based systems, with high‐end luxury vehicles having well over 100 MCUs according to JRCAUTO with more than 950 signal paths according to INTEL. In addition, the complexity of embedded systems is growing due to the connectivity of systems and their interactions which in return highly increase the cost of development.

In order to cope with increased product differentiation and cost constraints the industry focuses on modularity of components and high reuse across product lines, and on highly controlled functional integration and concentration on innovation with novel functions. This reuse of technology relies on standards and communities such as AUTOSAR63 for specifications, and Genivi64 for implementations. The future pathway innovation is to concentrate on innovations for high level models of vehicle and implementation of stored/ imported process and development achievements on lower range of vehicle.

Car makers and their supply industry are already in the process of transformation and have triggered large‐scale programs, such as the in‐vehicle introduction of the Internet Protocol (IP) or highly automated and autonomous driving. Critical questions regarding future market positions and control over restructured value chains are in particular:

Who will control the digital communications interface to the driver and vehicle owner?

Who owns the data generated in and in relation to the vehicle?

Which software standards will become established in vehicles?

How will automated cars change our understanding of individual mobility and our car purchasing behaviour?

How can vehicles be given effective protection against cyber‐attacks?

Other important issues are acceptability of driver‐less cars and vehicles, insurance questions and liability

63 AUTOSAR (AUTomotive Open System ARchitecture) is a global strategic development partnership of major automotive producers, suppliers and other companies from the electronics, semiconductor and software industry that was established in 2013. The objective is to develop establish an open platform and joint standard of software architecture. Core partners are BMW, Daimler, Volkswagen, PSA Peugeot‐Citroen, Ford, Toyota, GM as well as Bosch, Continental. See: http://www.autosar.org/. 64 GENIVI is a nonprofit industry alliance aiming at developing an open standard for aligned automotive and infotainment, i.e. in‐vehicle infotainment software. The organisation brings together major car‐producers, suppliers and software developers. See: http://www.genivi.org.



Example: smart building technology

A Smart Building (SB) system is defined as a set of intelligent technologies that enable the building owner/manager to measure, monitor, control and optimize the operations and maintenance of a building.

The primary focus of most SB systems is energy management. However, these systems differ dramatically from conventional energy conservation efforts. According to the IDC 2012 study65, the four principles of these next‐generation systems are:

Automation: The sensor network and the controls which it is connected to are highly automated. Thus, outside of the initial setting phase of the system, there is little need for any human hand to physically turn things on or off;

Non‐intrusion: Unlike earlier efforts to encourage energy conservation, smart building systems focus on waste eradication as opposed to reducing comfort to save energy;

Persistence: Smart buildings are adaptive and are in constant communication with their sensors and the outside world. Thus they tend to have a very long period of time during which energy savings persist;

High ROI: Building owners are traditionally hesitant to make capital investments in their properties without the possibility of a high return on investment (ROI). Payback periods for such capital equipment purchases must usually be kept below two years in the buildings market. Most new smart building systems have an ROI that is at or near that extremely high target.

Traditional Building Automation Systems do little more than turn on and off machines at preset intervals. The new generation of systems, which we refer to as SB systems, can control subsystems on a finely calibrated scale and also respond to external feedbacks such as wholesale electricity prices and weather forecasts. Just as the smart grid is changing the way electricity is being delivered from the power plant to the meter, the SB will change how we consume that energy, using less of it more efficiently.

IDC believes that smart building systems are an emerging high growth market that has tremendous disruptive potential for the energy industries. IDC estimates that the SB systems market will be growing at a 27% CAGR over the next five years.66

Internet of Things and big data

Data can be referred to as the raw material of the 21st century. Indeed, the amount of data available to businesses is expected to double every 1.2 years according to a recent study.67 A plant of the future will be producing a huge amount of data that needs to be saved, processed and analysed. The means employed to do this will significantly change. In France,

65 IDC 2012: Final Study Report: Design of Future Embedded Systems (SMART 2009/0063), IDC France, Paris. 66 ibidem. 67 Roland Berger 2015b: INDUSTRY 4.0 The role of Switzerland within a European manufacturing revolution, p. 8.



63% of plant managers consider cyber security to be crucial to their competitiveness.68 Innovative methods to handle big data and to tap the potential of cloud computing will create new ways to leverage information.

While at the beginning of the 21st century connectivity was a feature of only the digital world, in smart manufacturing and digitalised industry the digital and real worlds are connected. Machines, workpieces, systems and human beings will constantly exchange digital information via Internet protocol. This means physical things will be linked to their data footprint.

Driven by the Internet of Things, sensors are increasingly being slotted into applications above and beyond their uses to date. This development is opening up new data sources not only in industrial machinery, but also at the interface to the customer – in vehicles, for example, and in portable computers (smartphones, tablets and wearables).

Modern analytical technologies are allowing companies to crunch this data faster and in greater detail than ever before. Drawing on traffic and requirements data, today's logistics providers can adjust the routes for their transportation fleets in real time. Algorithms enable mechanical engineering firms to predict possible machine outages. Hundreds of data points help optimize numerous production workflows. The most important factors in this context are access to data and the ability to analyse it. A data monopoly of the kind Google has already achieved in many aspects of everyday life and increasingly crowd out other market players.

Data ownership, platforms and standardisation

There are a number of crucial questions related to data ownership, control, security and other aspects that strongly demonstrate the need for regulation at EU level:

It is still unclear who is entitled to the data that accumulates during production in a smart factory. Is it the user, the manufacturer or the IT service provider? There are sound arguments for all of these claims, and each would have far‐reaching consequences for the control of production processes, the coordination of logistic flows and maintenance cycles as well as optimization on the shop floor.

What if companies were to outsource the analysis of their production data to the digital platform provider? This provider would obtain superior data resources that would let it develop standards and value‐added services. This in turn would create new dependencies: It could be, for example, that some specialized manufacturers would find themselves in the unfortunate situation that a standardized benchmark inadequately reflects the benefits that set their products apart from mass‐market manufacturers.

Although there will naturally still be a need for excellent engineers even in this scenario, their importance to the overall product will dwindle. Today's heavyweight industrial champions could very quickly find themselves relegated to the status of suppliers to digital

68 Roland Berger 2014: INDUSTRY 4.0. The new industrial revolution. How Europe will succeed, March 2014, p. 8.



platform providers, with all that this would entail for their vertical integration – and their margins.

The biggest challenge is the standardization and virtualization of IT platforms in the context of factory control, because this is where IT risks will find their way into production. We don't need to go as far back as the pitched battle over video recorder systems in the late 1970s: Recent developments in information and communications technology (ICT) are sufficient to underscore the tremendous importance of standards.

While Cisco in particular built absolutely everything around the Internet Protocol in the 1990s, European equipment manufacturers stood by their proprietary and closed – network technology standards for corporate customers and telecom firms for the longest time. Although it was less flexible, the open model ultimately won the day, as standardization quite simply offered too many benefits. As a result, European ICT providers – companies posting revenues in the tens of billions – gradually saw their competitiveness erode, dissolved completely or were swallowed up by global rivals.


The digitalisation of industry will affect the electronics sector both as a sector that provides the “hardware” of digitalised manufacturing as well as an user and applicant of new technologies and solutions. Will it be a threat or an opportunity for European companies?

Both, as it turns out. Manufacturing companies in the traditional sense will surely remain in the market. But established players will undoubtedly change their organizations, processes and capabilities in whole or in part during the industrial revolution. And there will be new competitors with radically new industrial business models.

As the Internet as a technology did not invent social networks, but social networks developed thanks to the Internet, and enabled it to develop further, digitalised industry will bring new functionalities that will change the rules of the game for the industry players.

Digitalised manufacturing brings more freedom and flexibility into the production process. So it will become possible to create products tailored to segment‐by‐one customer needs at relatively low marginal cost. Also distribution processes for spare parts or not too complex customer goods might get easier, if nothing but data has to be transferred while the physical production can be done locally.

This becomes visible in the broadening of 3D printer usage: The market for 3D printers and related services rose to EUR 1.6 billion in 2012, and is estimated to rise to about EUR 4.4 billion annually by 2017.69 This approach can become a game changer if you think about producing in a high‐ or a low‐cost country. A 3D printing plant can become economically viable and competitive in a high‐cost country, by being less sensitive to labour cost while still providing the proximity necessary for affordable personalization.

69 Roland Berger 2014: INDUSTRY 4.0. The new industrial revolution. How Europe will succeed, March 2014, p. 12.



Businesses will operate in dispersed locations, drawing on skills spread across their substitutes. Groups of suppliers concentrated in small areas help ideas flow more freely as the frontiers between the information and physical world are blurring. The challenge for business lies in the assumption that the complexity of production and supply networks will grow significantly.

In a more complex and intertwined manufacturing network, the roles of designers, physical product suppliers and the interfaces with the customer (contractor) will change. The first step is the fragmentation of the value chain. We have seen this before in monolithic industries like music or the media: After fragmentation, countless small entrants have lower barriers to entry. As business leaders rethink and restructure their value chains new challenges in regard to cost and profit ownership arise.

It is a well‐known fact that traditional industry boundaries are becoming blurred, as are the boundaries between industrial and non‐industrial applications. Currently we experience an even closer cooperation between traditional manufacturing companies and IT/telecommunications/software firms. And there is a danger that the latter in some cases become the new industry leaders. The most recent examples: Facebook is aquiring a stake in the drones business and Internet giant Google is investing in new generation robotics, autonomous vehicles, smart building or biotechnologies. It is very likely that in digitalised manufacturing, the supplier hierarchies are likely to change.

Figure 5 : Google’s industrial projects and investments (as of 2015)



Source: Roland Berger 2015a: Analysen zur Studie “Die digitale Transformation der Industrie“, 17.3.2015.





In contrast to all other ICT sectors, European producers are still playing a strong role in the industrial electronics market. This is particularly striking in the industrial automation sector, where three out of the top‐5 global leaders are located in Europe, i.e. Siemens, ABB and Schneider‐Electric.

Table 2

10 global leaders in industrial automation (Turnover, Mio USD, 2013, global employment, 2014)

Siemens Germany 12.7 340,000

ABB Switzerland 11.1 140,000

Emerson U.S. 8.9 115,000

Rockwell Automation U.S. 6.1 22,000

Schneider Electric France 5.7 170,000

General Electric U.S. 3.7 301,000 (2011)

Mitsubishi Electric Japan 3.6 107,000 (2010)

Danaher U.S. 3.4 71,000

Yokogawa Electric Japan 3.4 20,000

Honeywell U.S. 3.3 132,000 (2011)

Sources : Ranking and turnover: MarketsandMarkets; employment figures: own research.

The strong role of European manufacturers and providers of industrial electronics is even more evident when the dynamic market of industrial robotics is looked at. In the context of strong global industrial automation trends, the market has experienced strong growth rates. In 2014, the number of sold industrial robotics increased by more than ¼ against the previous year.

According to the Chinese business portal china.org.cn the top‐10 producers of industrial robotics are dominated by European and Japanese companies, with only one company on the list located in the U.S.:



Table 3

Top 10 industrial robotic companies in the world 2015 by region and rank

Europe ABB (1), Coma (9), Kuka (3), Stäubli (7)

Japan Yaskawa Electric (2), Fanuc (4), Kawasaki (5), Epson (6), Nachi Fujikoshi (8)

U.S. Adept Technology (10)

Source : China.org.cn, 17.09.2015

European producers of industrial electronics components, systems and solutions not only in the field of industrial automation but also in other fields have been able to profit from the general trends of digitalisation of manufacturing and further trends such the growing interest in smart energy solutions in buildings, providing technologies and services for building automation, smart houses or electricity/grid management and control.

A joint feature of the major players in Europe has been the reorganisation of business models and corporate strategies towards core competences and future markets where strong growth in the future is expected. At the same time companies have disinvested in divisions and segments where either business conditions has worsened or where the company is not or no longer playing a leading role. Prominent examples here are Siemens, Schneider Electric or ABB.

Siemens in recent years not only has emerged as the most important provider of solutions for smart manufacturing but also focussed the business consequently on the entire value chain around electricity and energy (production, transforming, and applications/smart grids). The company also is a global leader in growth markets such as medical technologies, smart building solutions. At the same time the company has left markets that are no longer regarded as falling within core competences or where the market conditions have worsened, e.g. large household appliances and solar energy technologies.

Based on a smaller portfolio of products and services, also ABB and Schneider‐Electric have emerged as major players in crucial and strategic segments of digitalisation.

Schneider Electric in the core business fields has been able to strengthen its market position and technological leadership by consequently focussing on the digitalisation trend. This related to energy management (low and medium voltage energy providing solutions from grids to final user applications) and industrial automation, management and control of machines and systems in manufacturing, infrastructure and buildings. In this context Schneider Electric has also entered new business such as the cooling of IT data centres.



Figure 6

Source: Presentation held by Thierry Jacquet, EWC Schneider‐Electric at the industriAll Workshop, 4th Nov 2015.

This is also illustrated by a number of acquisitions by which the company has gained additional IT and software competences and technological know‐how such as the acquisitions such as American Power Conversion, APC (2007), parts of Arevas energy transmission and distribution business in 2010 (affecting 22,000 employees), the French building management software developer Vizelia in 2010 and further service and IT providers in the field of smart grids and building automation such as Summit Energy (U.S.) or Telvent (Spain) in 2011. In 2014 Schneider‐Electric took over the UK multinational engineering and information technology firm Invensys with 9,800 employees.

Schneider Electric is also cooperating with global software giants such as IBM and Cisco in the field of expanding the business of building management automation. However, a deal with the British AVEVA group, a software producer for the design oil rigs, ships and nuclear power stations that was announced in summer 2015 was abandoned later that year as too expensive and risky.70

Schneider Electric in fields such as low‐voltage and building automation, medium voltage distribution and smart grids as well as process automation is not only competing on the global market with Siemens and mainly U.S. companies (such as Eaton, Legrand, General Electric, Rockwell and Emerson) but also with Swiss‐based ABB.

ABB during the last years has strongly focussed its business strategy on the core fields of industrial automation/robotics and low voltage products. These segments are also reporting the strongest growth rates within the ABB group, while in other business divisions the market has been increasingly difficult and turnover as well as employment has decreased. In particular the energy technology division (that employs around one third of

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the total ABB workforce) in 2014 was facing a strong decline, resulting in speculations of a disinvestment and sale in autumn 2015.

At the same time ABB has been very successful in the field of industrial automation and robotics. ABB currently is the world leader in industrial robotics and amongst the most innovative providers of the new generation of collaborative robotics. The company also is profiting from a long tradition or R&D in this field. ABB Robotics employs a workforce of about 4,600 globally, has installed more industrial robotics than any other competitor and is also leading in research and development. The company has R&D sites in Sweden, the Czech Republic, Norway, Mexico, Japan, the U.S. and China. In 2015 ABB presented YuMi (stands for «you and me»), the most advanced collaborative, dual arm, small parts assembly robot solution that includes flexible hands, parts feeding systems, camera‐based part location and state‐of‐the‐art robot control for the next generation ‘human friendly’, collaborative robots generation in manufacturing.

A further strategic business field where ABB has focused investments and R&D resources is building technology and management, e.g. via its subsidiary Busch‐Jäger, a leading Germany company in the smart building segment. Similar to Schneider Electric (its main competitor in the European market), ABB has focussed during the last years strongly on the development of IT and software know‐how and competences.

In 2015, ABB, together with Bosch and Cisco Systems have announced the formation of an international joint venture (mozaiq operations) to develop and operate an open‐software platform for smart homes. According to ABB, the joint venture «fits perfectly with ABB’s strategy to leverage the expanding opportunities of the Internet of Things, Services and People for consumers and companies alike».

3.2. Trends for the employment in Europe / scenarios

Underlying hypothesis

The European electronics industry since the 1990s has experienced a strong trend of restructuring that has been characterised by offshoring of large parts of the production, the emergence of new competitors in the consumer electronics segments and a significant reduction in employment.

On the other hand, our sector study shows that in the investment good markets such as industrial automation, energy technology or embedded electronics, European players not only have been able to maintain a strong position but – as the company examples illustrate – expand and increase a leading role within the global market. European companies in this context are amongst the main players and technology providers of the internet of things, smart manufacturing/building management and smart energy grids.

It t is very likely that also in the coming years, the electronics sector will be characterised partly by employment losses and decreasing employment in consumer product markets. At the same time, in other segments employment will grow. These are in particular those related to digitalisation of manufacturing, smart technologies and applications that respond to major challenges such as the need to green the economy and increase energy



efficiency. European companies will be amongst the leading actors and will be able to also increase employment in Europe. Examples in this context are particularly smart grids, industrial robotics and automation as well as energy technologies.

At the same time, according to experts as well as company representatives, the most important challenge in the medium term will be to adjust to the strong trends towards digitalisation and ”softwarisation” of manufacturing. Thanks to the technological leadership and strong innovative capacity of the industrial electronics sector, the risk to become ‘Ubered’ (e.g. sidelined by totally new business models) seems relatively low. The major risk the sector is facing is stronger role of global software and IT giants as a result of the emergence of big data, internet of things, interconnectivity and the new quality of producer‐consumer interfaces.

Against this, the largest threat European industrial electronics producers and providers are facing in the medium run is that they become transformed from end users and controllers of the respective value chains (e.g. automotive/power drives technologies, energy grids and management, building automation) into simple suppliers of hardware because they have lost.

To sum up, with view on the industrial electronics of “embedded electronics” sector, there is a large potential for growth, also given the diversity of the sector.

At the same time, perhaps much more than in other ICT segments, the market is undergoing a rapid transformation and restructuring due to digitalisation and an increasing role of IT and software related for manufacturing (embedded software, internet of things, big data, smart x, automation control and programming, etc.)

While European manufacturers still are holding strong positions in global markets such as industrial automation, energy, medical or automotive technologies, not only competitors from East Asia are catching‐up but also the software and internet giants have emerged as new and powerful actors in the market.

Against this, industrial electronics should be regarded as a manufacturing segment that is well placed in regard to the major challenges in the context of digitalisation. Key assets are sectoral competences, innovation capacities of established players in the field and a highly skilled workforce. However, given the space of current technological change and corporate restructuring in the market as well as the emergence of new business models, the future also is not certain. Very much will depend on the ability of the regulatory and industrial policy framework at European level to support European producers and developers.

‘Business as usual scenario’

From this analysis the strong message is arising that with view on the coming years there will be no scenario that could be described as ‘business as usual’.

Instead, there is a strong need for an active industrial policy that support the electronics industry as a strategic sector and enabler of digitalisation not only of the whole manufacturing industry but also many other sectors in our economy.



With view on the estimated total workforce of 3.8 million jobs in the European electronics sector, ‘business as usual’ would most likely mean:

That the sector in those countries with still a significant workforce in electronics that until today have experienced quite strong job losses, the employment reduction will continue and even accelerate during the decade to come (i.e. Spain, Italy, the UK as well as France)

Employment might slightly increase only in Germany (on a moderate pace) as well as in countries that host high quality and white collar jobs in the electronics industry (e.g. Austria, Sweden)

Thus, looking at the EU as a total, the ‘business as usual scenario’ would mean a further reduction of jobs in the industrial electronics sector in the coming years – given the increasing competences and competitiveness of non‐European providers as well as the strong trends of digitalisation and automation, this job reduction might happen even in an accelerated pace.

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