NCAB 2019 Market Report: Competition Is Heating Up
Nolan Johnson talks with Chris Nuttall, chief operations officer and VP of technology, about NCAB Group’s most recently released market report. Johnson and Nuttall discuss some of the market drivers and conditions the industry can expect to close out in 2019 as well as what to prepare for in 2020.
Nolan Johnson: Chris, our topic is the market report that has just recently been released by NCAB Group. Are you the author for this report?
Chris Nuttall: I am, along with contributions from our team in China.
Johnson: Let’s start out with an executive summary of what’s in the report. Can you give us some context?
Nuttall: As we finished 2018, the industry saw the landscape change—most notably, the trend was one of a reduction in spending on consumer electronics, which has been widely publicized. We moved into 2019 with more of cloud, servers, and networking products picking up some of the slack that the reduction in consumer electronic spend had caused. Then, everything changed when the tariffs arrived. We’ve seen a level of uncertainty creep in and start to influence the changing global economies and global trade to a degree where even equipment sales are slowing. We’ve seen the industry forecasting smaller increases, and the numbers are suggesting that with changes on the horizon—such as tariffs in the U.S. and China or changes within the European Union—it might get bumpier as we move through this year. Even though the industry expects this year to be tougher, there was a little more optimism moving into next year, but a lot of that optimism depends on two elements: the health of the changing global economies and the development of some of the more high-tech electronic industries.
Johnson: In the report, you make the statement that 2019 will be a tougher year for global electronics growth. You just mentioned that tariffs are a key driver. In your opinion, are they the primary driver, or are other drivers exerting influence?
Nuttall: I certainly think it’s a key driver, but I’m not sure whether or not it’s the primary driver. As referenced in NCAB Group’s Q2 report, there are a lot of uncertainties over global trade being influenced by the tariff discussions. We have also seen that the mobile phone or handset market has changed quite drastically; it has really slowed down. For example, 2017 was a great year for consumer electronics—such as handsets—but that’s changed now as some of the upcoming technologies—including 5G networks—being slower than anticipated to be put in place, both in the U.S. and in China. Right now, the U.S. is planning for 2020–2021. China is investing very heavily, and as a result, many consumers are holding back buying new handsets; instead, they are waiting until the next models are available and making use of the 5G network.
I’ve read a little bit about how China’s Ministry of IT has actually signed off the mandate that four network providers will be tasked with implementing the 5G network, which will mean 100,000+ base stations to support the networks in the main urbanized areas within China. The push for delivering the 5G network sooner rather than later has also been seen to influence Huawei who have been pushing for orders of their newer handsets to be brought forward. If this is the green shoots of an upturn in this sector, then this may very well be something that helps to cover some of the cracks from the tariffs.
Johnson: That’s interesting. Apple also recently reported that its revenues grew even though iPhone sales declined by 12%, which is positive news overall. Apple seems to be following the global trend right now, which is also reflected in your numbers. You were talking about PCB production declining about 0.2%, and then returning to positive territory. So, those data points seem to track, and they amplify the point you were just making.
Nuttall: Regarding the handset or smartphone market, they fell close to 3% in Q1 of this year compared to Q1 in 2018.
Johnson: Do you see factors like labor pool shortages, retooling for smart factories, and automation as being influences in this report?
Nuttall: The move toward increasing levels of automation is going to be a natural transition, whether we’re in China, the U.S., Europe, or any region in the world; labor costs will only go one way, and that will be to increase. In some geographies, the labor pool is reducing; it’s something that is certainly impacting China, where there is a decline of the working-age population. On the other side, if we look at some of the more emerging markets with regard to electronic products, there’s a lot of talk about autonomous cars, AI, etc., and this will continue to cover other areas.
Combine this with the fact that the development of robotics is gathering a lot of pace, and we can see that automation will feature more and more as factories develop. Some factories that we work with are investing in more automation to help temper the increasing labor costs and also mitigate the risk of a reducing workforce. It’s inevitable that these factors and trends will translate across all geographies. I also hear that there has been quite a big investigation into autonomous or automatic PCB factories; while there is the potential for doing that, the only way is with smart automation at the heart of it.
Johnson: Automation seems to go hand-in-hand with getting ready for producing technologies, such as 5G and IoT.
Nuttall: Yes. And those technologies will continue to take off. In China, we’re already seeing the impact of automation in a number of factories. In terms of the technologies mentioned, wherever factories are involved in the 5G business, their order book is pretty busy. We’re lucky enough that we have enough purchasing power where we can guarantee a level of capacity for our order, and the level of capacity utilization is just going to continue. Once China is over the peak of it, then all of the other demands will come from the rest of the world.
Johnson: To that point, as you’re looking through your report, which region or regions globally seem to be weathering this moment in the demand cycle the best or worst?
Nuttall: We have a lot of our spend in China, and if we look at the numbers, China PCB output has grown. From 2017–2018, China grew 10% based on value, and the closest to that was Japan at just under 4%. The Americas and Europe were neck and neck at just under 3%. If we look forward to 2019, this is where we’ve predicted a slightly challenging perspective based on the industry-released numbers and figures. China is forecasting a more modest 3.2% increase, America will be down 0.2%, and Europe will be down 0.4%. If we look at the top-line numbers, that’s where they will weather the storm.
Johnson: What are the key takeaways for the PCB industry itself, including manufacturers and providers?
Nuttall: Keep in mind that we’re in a slightly different position because we’re operating in pretty much all territories, and the competition is heating up. I think the industry is mindful of what’s happening with the tariffs, and we’re seeing a slightly more aggressive approach from factories—both in terms of looking to secure both their domestic and export business. Factories begin to fish down to secure their order books. What we’ll find is that there will be much tighter competition, which will also translate into Europe and the Americas. Again, there is an expectation that the top-line estimates for the global year-on-year growth numbers will show a drop, but if we look at the areas that are expected to grow, military, aerospace, medical, industrial, and perhaps automotive may stabilize. This is also the area of technically challenging boards to provide higher performance. This will be the same in Europe as well. If that’s the kind of business manufacturers and providers have, that’s where I would focus my efforts.
Johnson: What should the consumers of our industry’s services be paying attention to right now?
Nuttall: Irrespective of where they are, pay attention to anyone offering bargain-basement prices as the reliability and quality of the product matches the cost. In this time where people are mindful about securing the business—not just now but for the second half of the year too—low prices often equal low-quality PCBs. In my view, that’s a short-term gain for long-term pain and sadness.
Johnson: You still get what you pay for.
Nuttall: Absolutely. Those are some of the challenges facing our sourcing team at the moment in China. We almost have to have sanity checks on the benchmarking that we do because we see some crazy prices. But when we visit the factories as a part of our pre-audit activities, we definitely wouldn’t place any orders there.
Johnson: One of your value-adds is being able to have a clear awareness of what’s really going on in that facility, whereas your customer may not.
Nuttall: Yes, and we’re looking at it not just as something that we do in Asia—which is obviously a large benefit having eyes and ears on the ground constantly—but also something where we continue to develop as part of our U.S. and European supply chain activities, both pre- and post-approval.
Johnson: Is there any industry-wide concern or caution that you see as you look forward?
Nuttall: The challenge will be the risks or downsides to what’s going to happen in the rest of the coming year. If we consider comments from the International Monetary Fund (IMF), they are predicting that world trade volumes will reduce in 2019 yet are expected to pick up in 2020. You could read the market watch report like it’s going to be doom and gloom, or you could read the report and say that it’s going to get tougher, but it’s a much better outlook for next year. Yes, we have slightly weaker global trade. Trade between Asia and the Western world is softening. The outlook is overall positive in that it may be tough for semiconductor and component suppliers and providers of circuit boards or services, but this is where you take the time to look inside and make sure that you’re best suited to weather the storm and continue strong in 2020. It’s going to get bumpy, but I believe there’s a light at the end of the tunnel.
Johnson: Companies that take this as an opportunity to retool, reconfigure, reapportion, and reprioritize are going to be the winners.
Nuttall: I agree, and companies that listen to the needs of the customers will also win. There is a more cautious approach to ordering patterns being seen, certainly in the U.S. and Europe as well, where there are ongoing Brexit issues. There is a level of destocking happening with customers operating on lower stock levels and ordering only when the demand is there. This means that dynamic lead-time management is key, and we have to be incredibly reactive and attentive to our customers changing, and potentially suddenly, in demand. In these situations, if you don't have the supply chain or the customers aren’t front and center to everything you do, you will miss opportunities.
Johnson: Wise words. Thank you, Chris. This particular report is quite insightful, and you and your team do great work putting it together every six months.
Nuttall: Thank you very much.
If you would like to learn more, NCAB Group would be happy to provide the full version of its most recent MarketWatch report.