What are the main barriers to accessing electronics?

The electronics sector includes consumer electronics, specialized electronics for other industries and components such as semiconductors. Barriers to entry are specific to each part of the sector. These barriers make it expensive or difficult for new companies to enter the market and help protect established companies from competition. The presence of these barriers and the resulting lack of competition allows incumbents to set higher prices, which limits demand.

Common barriers to entry include economies of scale and scope, research and development, capital-intensive production, switching costs and brand loyalty.

Key Takeaways

• The electronics industry includes consumer electronics, specialized electronics for other industries, and components.
• Entry barriers make it expensive for new companies to enter the market and help protect established companies from increasing competition.
• Established electronics companies benefit from economies of scale and scope, making it easier for them to increase production or launch new products.
• Research and development (R&D) hinders new companies because they often license the technology of established companies or must commit large amounts of capital to compete with the patents of established companies.
• Built-in switching costs make it difficult and expensive for customers to switch from one brand to another.
• Established brand loyalty requires new businesses to spend significant amounts of money on advertising and promotions to attract customers.

Economies of scale and scope

Consumer electronics with mass popularity are more sensitive to this economies of scale And domain as barriers. Economies of scale mean that an established company can easily produce and distribute a few more units of existing products cheaply because overhead costs, such as management and real estate, are spread over a large number of units. A small business trying to produce the same few units must divide overhead costs by the relatively small number of units, making production of each unit very expensive.

Similarly, economies of scale give established companies an advantage because they can use their existing machines and facilities to launch new products. If Apple (AAPL) for example wanted to launch a new device, the company could use its existing marketing staff, factories and other facilities to support the launch. All variable costs associated with Apple’s new product launch would be the same variable costs faced by new businesses, but the total unit costs for Apple would be lower because the new business would incur the fixed costs of salaried staff and rented space have to take.

Research and development (R&D) and capital-intensive production

Research and development (R&D) and capital-intensive production are usually the barriers to entry in the field semiconductors and non-consumer electronics. While consumers accept generic and simple electronics, companies demand electronics specialized in their sector, which requires more intensive research and development.

Barriers to entry have fallen in recent years thanks to more affordable components, crowdfunding, widely available technological knowledge and cheaper production.

Existing semiconductor companies have invested billions of dollars in developing patents and acquiring advanced technology. New companies are forced to either license processes and technology from established companies or tie up capital in an attempt to match the capabilities of established companies.

High switching costs and brand loyalty

In the electronics industry as a whole, high customer switching costs and brand loyalty are common barriers to entry. Common switching costs obviously include the difficulties of learning to use a new company’s products and installing new electronics in a business or home.

Established electronics companies can strategically build in switching costs to retain customers. These strategies may include contracts that are expensive and complicated to terminate, or software and data storage that cannot be transferred to new electronic devices. This is common in the smartphone industry, where consumers may pay termination fees and face application repurchase costs when considering switching phone providers.

Just like in many other sectors brand loyalty keeps buyers coming back to a company they have positive associations with, and new companies must invest heavily to match years of advertising and user experience.

The bottom line

Barriers to entry exist in every sector and the electronics sector has many, mainly due to the high costs associated with research and development and brand loyalty. Although these barriers exist, improved costs and widely available knowledge have lowered these barriers to entry in recent years.