The Consumer Electronics Show (CES), the technology world’s January jamboree in Las Vegas, provides an annual snapshot of the industry. Every year, established players and new market entrants vie with each other to grab the attention of the media and the public, showing off the ideas they hope will become the next generation of blockbuster products.
Four years ago, the opportunities seemed remarkably straightforward. The laptop computer, once a key consumer technology product, had been replaced by a new king: the smartphone. Sales were booming around the world, and manufacturers were vying for their own niches in the exploding market. High-end handsets competed to outdo each other with brighter screens or fancier cameras. Low-cost models aimed to tempt the middle classes in developing economies. Niche designs were focused on business users or teenagers.
More recently, the picture has become far more complex. Annual growth in smartphone sales has slowed from more than 10 percent in 2014 to an estimated 1.6 percent in 2016. Visitors to this year’s CES event were faced with a bewildering diversity of offerings: drones that fold up and fit in the pocket, ready to film that impromptu remote selfie; hairbrushes and toothbrushes that provide digital feedback on the user’s technique or the condition of their hair; virtual reality headsets and robots designed to entertain children or monitor the wellbeing of elderly people living alone.
Some of the items on show were barely products at all, merely minimalist interfaces to sprawling service offerings delivered from the cloud. Analysts estimate that sales of devices designed to interact with Amazon’s voice-controlled, artificially intelligent assistant Alexa reached 10 million last Christmas, for example. The internet retail giant is investing heavily in the service, recruiting hundreds of extra staff this year to work on the project. Forecasters predict that the installed base of “home assistant” devices using services like Alexa could pass 150 million by 2022.
Other notable participants in the CES show came from outside the traditional technology sphere. Automotive companies were there in force, for example, both newcomers like Tesla and Faraday Future, together with established players showing off home-grown autonomous driving technologies or the results of partnerships with technology players. Luxury carmaker Audi used the event to announce a partnership with visual computing company Nvidia that it says will produce a fully autonomous vehicle by 2020. The two companies even had a working prototype at the show.
Our high-tech customers are facing a huge strategic challenge as they think about their future direction.
Waves of change
This complex, even confused, explosion in novel types of product and service is the industry’s response to a powerful trio of disruptive forces. The first of these is widespread digitization. Almost every part of society, from agriculture and manufacturing to medicine and transportation, is now being transformed by new digital technologies. That’s being driven by low-cost, ubiquitous sensors and networked devices at one end of the scale, and huge increases in data storage, communication and processing power at the other. Large-scale digitization fundamentally changes the scope of the high-tech sector. Increasingly, rather than producing standalone items for its end customers, high-tech companies are seeing their work incorporated ever more seamlessly into the products and services of other industries.
Then there is competition. The barriers to entry in many parts of the technology sector are coming down fast. Increasingly modular hardware and software technologies can be combined quickly in innovative ways to create new products. Small companies and startups now have cheap, easy access to the components, development tools and manufacturing capabilities that were once the preserve of a small number of large, wealthy organizations. If their ideas prove successful, they can take advantage of shared infrastructure to scale up rapidly in the face of rising demand.
The third disruption is acceleration. The technology sector has always been a fast-moving environment, but the exponential nature of that acceleration, especially in areas such as artificial intelligence and “deep learning,” means some technologies that were confined to the laboratory just a few years ago are already seeing widespread commercial use. Some observers believe that computers will achieve human levels of intelligence some time this century, potentially triggering a further explosion in technological advancement, along with unprecedented economic and social change.
Such a dynamic and uncertain environment creates huge strategic challenges for technology companies. Many are facing difficult decisions about which industry sectors, product categories and markets they want to enter. And in the absence of any single “blockbuster” category, the quest for growth may mean increased diversity and complexity.
A review of the growth forecasts in a handful of consumer product sectors shows why. The $300 billion global mobile phone market is forecast to grow a further $4.8 billion by 2019. The much smaller consumer drones market is likely to see similar absolute growth over the same period. The market for wearable electronic devices, like smart watches, fitness trackers and head-mounted displays, is worth less than $30 billion today, but is expected to double in size by 2019.
Companies also need to decide what role they want to play in future markets. As early adopters of internet-connected lightbulbs and other domestic IoT technologies have discovered, the utility of such products is determined not just by the capabilities of the hardware, but by how well they work with wider ecosystems of products and services, from home security systems to intelligent assistants that can manage your calendar and your shopping list.
Building your own successful ecosystem is hugely difficult, and many players are sidestepping the challenge by positioning themselves as providers of the underlying technologies rather than complete systems. Nvidia’s work with Audi, for example, is part of a wider strategy to offer “off-the-shelf” self-driving technologies to carmakers. Intel has developed a credit-card sized computer designed to slot into TVs and other products to provide upgradeable “smart” capabilities.
It isn’t just consumer products where the software and service offerings that surround a product are becoming at least as important as the hardware itself. Once, companies would have bought dedicated servers to run their enterprise systems, websites and online software offerings. Today, they are increasingly likely to rent capacity from organizations that provide computing power as a service.
Those providers, in turn, use smart software to share storage and processing power between their customers according to demand. That trend has slowed the growth of server sales, as providers are meeting growing demand with higher efficiency and better utilization. It has also pushed prices down. There is less need to pay a premium price for a computer that claims to offer a high level of availability if you can make do with a cheaper model and switch seamlessly to another machine in the event of a breakdown.
Hardware still matters
Hardware still matters, of course. Digital services must interact with the end user in some way, whether that’s through the TV in the living room or a microphone concealed in a brooch. And the cloud isn’t really a cloud, it is thousands of servers and network switches racked in data centers around the world. In fact, the pressure on hardware design, production and distribution is increasing, as innovative products have an ever-shorter window in the market before competitors catch up or supersede their latest offerings.
Building the supply chains that work in this complex, fast-moving and volatile environment requires companies to take a highly segmented and agile approach, says Rob Siegers, President, DHL Technology. “There is no single best supply chain model. Companies need to tailor their supply chains for particular products, specific markets and different stages of the product life cycle.”
To illustrate this point, look at the mobile phone markets and the U.S. and India respectively. The U.S. market is five times larger than the Indian market today, but sells 25 percent fewer units. Sales in the saturated U.S. market are expected to decline by around 3 percent annually in the coming years. In India, sales are growing by 10 percent. The average retail price for a smartphone in the U.S. is $455. In India, it is only $215. In terms of units sold, the Indian phone market is already bigger than that of the U.S. “Serving the Indian market requires a completely different approach from one that would work in the U.S.,” says Siegers, noting that four of the five top handset players in India are local companies.
Entering new markets is challenging for other reasons, too. Companies need to navigate complex local tax and customs regulations, for example, and there is an increasing chance that they will be required to include locally sourced components or labor inputs. In its latest report on the outlook for the global technology market, consultancy Deloitte cites “increasingly burdensome global regulation” as a key challenge for the sector.
“Each local market has its own rules governing privacy, security and the handling of data crossing or within borders,” the report’s authors note. “There are also competing regional and country views regarding how an enterprise ought to be taxed and how it ought to treat incentive programs.”
A high-speed supply chain is critical during the days and weeks after a product launch, when companies must be ready to push large numbers of products through their retail channels to meet early customer demand. That calls for fast transportation and strong inventory control capabilities. Increasingly, says Siegers, companies are making use of advanced concepts such as dynamic routing, allowing them to switch the final destination of products already moving through their supply chains so as to maintain availability in markets facing unexpectedly strong demand.
As products reach maturity, prices and volumes both tend to come down. The supply chain needs to react as well, with a shift to lower cost transportation, perhaps replacing air freight with rail or sea transport. Other techniques can help companies meet multiple supply chain objectives. Postponement, for example, allows the final assembly, packaging or even programming of products to be completed in downstream facilities or distribution centers. The approach can help companies balance speed, inventory costs and demand volatility by allowing products to be prepared for their final customer only when needed.
Technology companies are enthusiastic about adopting their own innovations too, says Thomas Dammann, VP Strategy, DHL Technology, with many at the forefront of robotics, IoT and big data in supply chain applications. “These kinds of technologies are equally applicable for any industry, but the technology sector has a high affinity for them,” he notes. “Increasingly, technology players are teaming up with logistics companies like DHL to develop and roll out innovative supply chain technologies. Ultimately, they want to take technologies they have refined in their own supply chains and sell them to their customers.”
Partnerships matter too. Just as modern high-tech products are an intensely collaborative effort, so are supply chains. “Our high-tech customers are facing a huge strategic challenge as they think about their future direction of development. There are many new opportunities, but there’s always the threat that by trying to do too much they lose their focus,” concludes Dammann. “As a logistics partner, DHL can’t simplify that business environment, but we can help them by taking on some of the supply chain complexity, so our customers can focus on their strengths. Today, we are having a lot of conversations along those lines, looking at outsourced supply chains, logistics partnership arrangements and other innovative models.” — Jonathan Ward
Published: May 2017
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