Walt Custer’s Market Report
At the recent EIPC Conference, Walt Custer delivered his annual report detailing the trends he’s been seeing in the electronics industry for 2016 and into the first quarter of 2017. Barry Matties sat down with Walt to discuss his findings, including his forecast for the upcoming year. Also discussed are Walt’s prognosis for the market segments with the most promise and those that cause him concern.
Barry Matties: Walt, you’ve just wrapped up your report. Please give our readers an overview.
Walt Custer: The year 2016 finished up quite well, and the first quarter of 2017 was strong worldwide. Almost all the sectors were up and almost all the geographies were up. The leading indicators were positive. Europe did especially well. Worldwide, I think electronic equipment sales were up about 2.8%. Now, it doesn’t sound like a lot, but it’s been four successive quarters of growth when we had contraction for a while, and Europe was up about 5% the first quarter and all its sectors grew.
Now, we are seeing some signs of slowing, or at least slower growth, but not contraction worldwide. Looking at the leading indicators out of Asia China contracted again. It dropped down below 50 for PMI. Korea has been contracting, Taiwan is still up, and Japan still up, so I think we’ve had some good times, but the rate of growth has peaked in parts of Asia.
Matties: Is that what you expected in China?
Custer: Well, I think they’re having their problems, you know, financial problems and the like so, no, I wasn’t expecting it. I don’t think the people who released the data were expecting it, but the data is what the data is and we’ll watch it. All I’m saying is I’m a little cautionary that we have had some decent growth, which felt really good, but now we’re also seeing slowing.
By end-market, semiconductor fab equipment is doing incredibly well, but that’s true of capital equipment in general during the upturns in a business cycle. In good times capital spending grows like gangbusters and in bad times it contracts. The automotive industry is up, medical electronics is up, and the instrument control sector is doing better. Even cellphone sales picked up, so there were a lot of sectors that had a good first-quarter growth.
My biggest concern is the global economy, which is fragile because of political situations. North Korea could quickly get out of hand and the Middle East is always a worry, so things could turn very quickly if some crazy person decides to push a button.
Matties: There are a lot of crazy people in the world right now.
Custer: Yeah, there are a lot of crazy people in the world. But I would say it was a very encouraging first quarter. Semiconductor sales are through the roof, but I think that will be unsustained because they are substantially outgrowing electronic equipment.
In 1Q17 electronic equipment sales grew 2.8% while semiconductors grew 18%. Sure, there’s increased semiconductor content, but not enough to make up for that first quarter growth difference. That implies that people are over-ordering and/or building chip inventories. Once people realize they have enough stock, then they will all of a sudden turn off the spigot.
In the first quarter, semiconductor capital equipment was up over 40% and that’s a bubble—mirroring semiconductors being up by 18%.
Matties: PCBs were down for a bit, weren’t they?
Custer: Well, PCBs are just not growing as fast as the other sectors. I think in the first quarter I calculated PCBs were up about 1.2% or 1.5%, but that’s compared to semiconductors, which are up 18%. People aren’t stockpiling PCBs, and the good news is that PCBs won’t crash dramatically in a slowdown, but then the bad news is that PCBs are just not growing as much as the other electronic sectors. Whether some of the slower growth is price-related or demand-related, I don't know, but PCB sales are not growing that much. We recently saw a growth in laminate, but I think some of that was panic-buying because of worries with copper foil and glass shortages.
Matties: And it could also be the price increase as well.
Custer: I think that a laminate price increase was a significant part of it. If you looked at the growth or sales of laminate by month versus printed wiring boards in China and Taiwan, laminate did a big spike-up, which could be price-related. But probably people heard that things were going to be in short supply, so they were out doing some ordering. I think you have to look at that data over a couple of months and not any one month to draw that conclusion.
Matties: That panel discussion on laminate was interesting, regarding competing industries for the product line that have higher margins and less demand on quality.
Custer: Sure. Where would you sell it if you could get it at a much better price for copper foil in another industry?
Matties: With less demanding customers.
Custer: Exactly.
Matties: So when you look forward for the PCB fab sector in the U.S., what’s your forecast there?
Custer: History says it’s going to be flatter or a slow contraction. It’s been declining for years at a couple of percent a year. Every once in a while we get a growth spike, but if you average it out, it hasn’t been a growth industry.
Matties: When you see the call for manufacturing back to America, political persuasions aside, one thing that you mentioned is we might be getting manufacturing back, but it’s not necessarily bringing jobs back.
Custer: Sharp and Foxconn Hon Hai are considering building a flat-panel display plant. My guess is that it’s not going to employ a lot of people. It's probably going to be a fairly automated facility, but at least it’ll be bringing some business back to the U.S.
Matties: Supply chain business, anyway.
Custer: And if Apple really assembles in the USA, it’s likely that most of the components will come from Asia, at least initially. So, yes, I think maybe the tide has turned, but I don’t think it’s going to be a boom in six months. It’s going to take time. The whole supply chain has moved to Asia, so getting it back is not just convincing Apple to assemble iPhones here. It’s a lot more than that. Final assembly based in the USA using all imported components will only be a modest step forward in bringing electronic manufacturing back to the USA.
Matties: I know you do a lot of research. Any surprises over the last year that came to you?
Custer: Well, I’ve been spending a lot of time thinking about what’s going to be the next big market drivers, because personal computer and tablet demand has flattened out.
Matties: You could say it’s automotive, but…
Custer: Yeah, certainly automotive. The electronic content in cars is going up all the time, virtual reality, augmented reality, the Internet of Things. I think that’s going to be mostly a component boom but those IoT sensors still have to be packaged and “talk” to something.
Robots…I was talking to Happy [Holden] and I said that I think robots are a two-edged sword because they’re going to automate manufacturing but they’re probably also going to put people out of jobs. His theory was, at least short-term, robots aren’t going to grow as fast as I had thought because there aren’t engineers to program those robots, so that a massive robot takeover is going to take time. And robots still aren’t as nimble as humans for a lot of things. They can do repetitive tasks but are not as flexible as humans for many applications.
There are a lot of things on the horizon. The medical electronics industry and remote surgery is a pretty exciting field.
Matties: Then the point about reliable Internet needs to be considered, too [laughs].
Custer: But a lot of these things are going to take time to develop. I think 5G is probably going to have the biggest volume impact short-term because not only are people going to go to 5G Internet connections, but 5G is also going to drive the Internet of Things. It’s going to drive autonomous cars. It’s going to drive a lot of things that rely on fast connection. It has to be very fast and very reliable, and so that will have a lot of demand.
Matties: Any final thoughts for our readers?
Custer: If anyone wants a copy of the talk I gave today you can write to walt@custerconsulting.com and I’ll send you the charts.
Matties: All right, and you also provide a news service to the industry. Tell the readers a little bit about that.
Custer: Well, I think you guys do that, too, to some extent, but my son Jon scours the world for news articles and tries to find one of each kind. I think it’s fairly good. We have a lot of people who get it. It has no ads, and then, it’s strictly news delivered six days a week. We have a cover page where you can click on each individual item, and go to a full news story.
Matties: Good, and people can subscribe to that at your website as well?
Custer: Yeah, or send us an email. You could also subscribe to all our charts and data which are downloadable from a Sharefile site, so we offer those as annual subscription products.
Matties: Walt, thanks for your talk today, and thanks for taking the time for our readers.
Custer: Thanks, Barry.
