What Are the Key Barriers to Entry in Electronics?

The electronics sector includes consumer electronics, specialized electronics for other industries, and component parts such as semiconductors. Barriers to entry are specific to each part of the sector. They make it costly or cumbersome for new firms to enter the market and help shield established firms from competition. The presence of these barriers and the resulting lack of competition enable established firms to set higher prices and this 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 component parts.
• Barriers to entry make it costly for new companies to enter the market and they help protect established firms from increased competition.
• Established electronics companies benefit from economies of scale and scope, making it easier for them to increase output or launch new products.
• Embedded switching costs make it difficult and costly for consumers to move from one brand to another.
• Established brand loyalty requires that new companies spend significant amounts of money on advertising and promotions to attract customers.

Economies of Scale and Scope

Consumer electronics that enjoy mass popularity are more susceptible to economies of scale and scope as barriers. Economies of scale mean that an established company can more easily and cheaply produce and distribute a few more units of existing products. Economies of scope give established firms an advantage because they can use their existing machines and facilities to launch new products.

Apple (AAPL) could use its existing marketing staff, factories, and other facilities to support the launch if it wanted to introduce a new device. Any variable costs associated with Apple’s product launch would be the same variable costs that new firms face but the overall cost per unit to Apple would be lower because a new firm would be required to take on the fixed costs of salaried staff and leased space.

Research and Development (R&D) and Capital-Intensive Production

Research and development (R&D) and capital-intensive production are more typically the barriers to entry in the field of semiconductors and non-consumer electronics. Consumers might accept generic and simple electronics but businesses demand electronics that are specialized in their industries and this more intensive research and development.

Important

Barriers to entry have come down in the last few years due to more affordable components, crowdfunding, widely available technology know-how, and lower-cost manufacturing.

Existing semiconductor firms have invested billions of dollars into developing patents and acquiring cutting-edge technology. New firms are forced to either license processes and technology from established firms or tie up capital in an attempt to match established firms’ capabilities.

High Switching Costs

High customer switching costs and brand loyalty are common barriers to entry in the electronics industry as a whole, Occurring switching costs naturally include the difficulty of learning to use a new company’s products and installing new electronics in a company or home.

Established electronics companies might strategically build in switching costs to retain customers. These strategies can include contracts that are costly and complicated to terminate or software and data storage that can’t be transferred to new electronic devices. This is prevalent in the smartphone industry where consumers might pay termination fees and face the cost of reacquiring applications when they consider switching phone service providers.

What Is Brand Loyalty?

Brand loyalty keeps buyers coming back to a company or a product with which they have positive associations. New firms must invest heavily to match the years of advertising and user experience established by well-known and favored companies.

What Are Some Companies With Significant Brand Loyalty?

Amazon, Dominos, and TikTok rank high if you eliminate electronics from the equation. Apple ranks #1 overall in several studies.

TikTok and Apple face other difficulties, however. A U.S. federal appeals court upheld a decision in late 2024 ordering that the China firm ByteDance would face a ban if it didn’t divest TikTok in the United States. Apple and Google must remove TikTok from their app stores by Jan. 19, 2025.

What Are Economies of Scale?

An economy of scale occurs when overhead costs such as management and real estate are spread out over a large number of units. A small firm that’s attempting to produce these same units must divide overhead costs by its relatively small number of them. This makes each unit very costly to produce.

The Bottom Line

Barriers to entry exist in every sector and the electronics sector has many. They’re primarily the high costs associated with research and development and brand loyalty. These barriers to entry exist but improved costs and widely available knowledge have brought them down.