The Post-IMS Report Card

Over the last couple of years, smart phones have become critical platforms for the use of maps and navigation. Now, those devices are beginning to propel the market for location-based services (LBSs). Currently, for example, Apple's iPhone already has more than 6000 LBS applications available. With manufacturing costs in China set to rise, however, smart-phone makers will soon be pressured to adapt their manufacturing needs to a changing global economy.

According to iSuppli Corp., the number of smartphone- based OEM and aftermarket on-board navigation systems in use is projected to rise to 81 million units in 2010up from 8 million in 2009. By 2014, usage will increase to 297 million. In this chicken-and-egg scenario, the ability for smart phones to offer maps and now navigation and LBSs is clearly driving this growth. Conversely, such navigation and location-based capabilities have become a "killer app" that is pushing the increased adoption of smart phones. For smart phones to continue gaining popularity, however, history dictates that prices for these devices have to drop to levels at which the average consumer is comfortable.

According to a July 5 New York Times article titled, "Supply Chain for iPhone Highlights Costs in China," the smallest part of the new Apple iPhone 4's manufacturing costs are derived from work done in Shenzen, China. Yet even that small portion may pose a concern, as manufacturing in China is expected to become much more costly. The NY Times' David Barboza states, "Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising house costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras, and smart phones."

A manager at Foxconn Technologyone of Apple's major contract manufacturersis quoted as saying that the company plans to reduce costs by moving hundreds of thousands of workers to other parts of China. The article also notes that Apple has profit margins approaching 60 percent and pricing power to absorb some of those costs. It should therefore fare quite well. But what about other smart-phone manufacturers? Even as smart phones offer more features like LBSs to tempt consumers, their rate of adoption may not increase if their prices rise instead of decline.

It is important to watch such trends in the mainstream electronics market, as they will trickle down to the microwave segment. In the last decade, a number of RF and microwave firms have opened offices or moved manufacturing to China. Yet the business model for doing business in China may now be at risk. In some areas of the country, manufacturing will remain cheap for the foreseeable future. Yet the fact remains that China's economic growthcombined with the constantly decreasing price of electronic deviceswill eventually cause manufacturing to move to a new destination.

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