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Business Conditions: Following the High, Bumpy Road (August)
August 2, 2000 |Estimated reading time: 11 minutes
Business Conditions: Following the High, Bumpy Road
Everything that I have written in recent months still holds true: robust global economic conditions, strong end-market demand, overzealous PCB ordering, extended lead times, volatile month-to-month component bookings, and widespread shortages throughout the supply chain. Nothing has changed!
At the June IPC TMRC meeting in Washington, D.C., full order books, long lead times and "firmer" prices were common discussion topics. During this well-attended meeting, we learned that the 1999 world market for rigid and flexible printed circuits reached US$36.2 billion (Chart 1) as Japan and Southeast Asia gained share at the expense of the Americas and Europe. Japan's large HDI production pushed it into the number one spot, and the China/Hong Kong/Taiwan combo became a strong number three behind the USA.
However, North American PCB orders are growing still rapidly. Our May rigid PCB book/bill reached 1.24 on a three-month basis (Chart 2). And . . . semiconductor shipments to North America are up almost 30 percent on a three-month (3/12) basis versus last year (Chart 3).
What's supporting this component surge? Although I believe that over-ordering is a big factor, the underlying demand for electronic equipment remains VERY strong. Chart 4 shows the three-month growth of PCBs versus electronic equipment. Unlike the 1995 bubble (that burst in 1996), year 2000 equipment growth remains solid, suggesting that the current PCB boom will last. We have survived the "traditionally" slow springtime and are now moving into the busy fall. Communication equipment, computers, and instruments and control equipment all doing very well. Chart 5 speaks for itself. Look at the three-month growth figures. Only military electronics are flat.
Short-term, I believe the limit to industry growth will be supply chain shortages. If an assembler is missing just one component, then the finished product cannot ship. Longer term, increased interest rates (Chart 6) will take their toll - first in the consumer and automotive sectors and then in industrial electronics. However, our huge, widespread demand for electronic goodies will ensure that the Fed-induced slowdown is only modest. Chart 7 shows the effects of past interest rate hikes on our industry. A 12/12 graph of the reciprocal of the Fed Funds rate versus PCB shipments shows that there is about an 18-month lag between a Fed rate hike and a subsequent PCB slowing. This correspondence would suggest that we will begin to feel some "interest rate" effects by year-end. However, assuming that the Fed does not have to resort to ongoing, major rate increases, 2000 and 2001 still look like pretty good years for our industry.
General Business Conditions
New orders for manufactured durable goods in May increased $12.3 billion or 6 percent to $218.9 billion. Electronic and other electrical equipment had the largest increase, $9.6 billion or 26 percent to $46.5 billion, due to electronic components. This is the largest increase since August 1997.
Factory orders for electronic and other electrical equipment increased 26.4 percent in May, following a 17.6 percent drop in April. Electronic parts alone jumped 76 percent in May, after a 36.2 percent decline in April.
Salomon Smith Barney analyst Jonathan Joseph cut his rating on the semiconductor industry: "Though a slowdown in the group may take six to nine months, we see 'first mover' evidence of a trend reversal to decelerating industry unit shipments . . ." The reversal is "coupled with price declines and contracting lead times in commodity memories and passives segments that were most severely impacted in the shortage." He added that the sector is likely to see peak capital spending growth rates this year.
Electronic Equipment
IDC projects the 2Q'00 worldwide PC market to be 30.3 million units, up 15.2 percent over 2Q'99.
Intel President and CEO Craig Barrett expects the personal computer market to remain strong this year and microchip shortages to continue. He said that under-investment in 1997 to 1999 and inaccurate growth forecasts for wireless devices and PCs are partially to blame for the shortages. "I would not be surprised to see shortage in the industry over the next six to 12 or 18 months before some of the new capacity comes on line," he said.
Compaq reportedly partially switched notebook computer outsourcing in Taiwan from Arima to Quanta. Quanta is projected to ship 40-50,000 units/month to Compaq. The new Compaq order will be primarily sub-US$1000 notebook PCs with AMD or Celeron CPUs, and 12.1 STN displays. Quanta also announced that Compaq expects to purchase LCD monitors from Quanta Display.
Dell Computer has not been restricted by any lack of supply of components, said vice chair Jim Vanderslice in mid-June. He said there was some tightness, but that Dell always runs a tight ship.
Responding in June to reports of a high level of unsold personal computers (retail inventories), Michael Larson, Compaq's senior VP for consumer products, said, "We're very comfortable about our inventory position at this point in time." He also said the company has "not slashed prices to address any excess inventory." PC maker eMachines recently blamed a "significant accumulation of inventory" and discounting by rivals for its weaker-than-expected second-quarter sales.
Anders Edlund, Marketing Director of Ericsson's Bluetooth division, stated: "At the end of this year there will be several Bluetooth products on the market, but the real boost will come next year when consumers can buy cameras, telephones, video recorders, and walkmans equipped with Bluetooth technology." Ericsson estimates that annual sales in 2005 will be between 500 million and one billion Bluetooth units. "By that time there will be between one billion and 1.5 billion Bluetooth users," Edlund said. Revenues for this market will exceed $1 billion by 2002 and $3 billion by 2005, according to In-Stat Group. Edlund said the mass production of Bluetooth semiconductors had been delayed by silicon production.
Hitachi and IBM have agreed to an alliance to develop a new CPU for mainframe computers.
Demands for improved car safety and comfort plus the automation of more driving functions will boost sales of global auto components over the next five years. Sales will be driven by:
- Higher replacement demand reflecting a 10 percent increase in global vehicles in use, to 578 million in 2005 from 525 million in 1999.
- Growth in annual world car output of 15 percent over the same period, to 40 million.
- Standard features including satellite navigation, side airbags, electronic stability devices, and high intensity lights.
- Demand for radar cruise control, keyless entry, air conditioning, cabin filters, entertainment systems, electronic braking, and automatic transmissions.
Motorola and industrial equipment maker Eaton are planning an alliance to make and market high-tech automotive component assemblies and modules. The companies said the alliance received its first contract from General Motors for transmission modules for model 2003 vehicles.
IDC projects the worldwide market for data projectors will increase from approximately 750,000 units in 1999 to more than 2.5 million units in 2004.
Printed Circuit Boards
Sanmina completed its merger with Hadco. Hadco is now a wholly owned subsidiary of Sanmina. The combined company will have annual revenue of about $3 billion.
Merix signed a strategic agreement with Golden Ocean Electronics and Tripod Technologies in Taiwan to provide Merix's customers access to offshore manufacturing for low and medium technology product and augment Merix's high technology product portfolio. Golden Ocean Electronics acts as Merix's purchasing agent, and Tripod Technologies is the manufacturer providing circuit boards for Merix customers.
GSI Lumonics received a $3million-plus order for its GS600 Laser Drilling Systems from Viasystems Group. The multiple units will be installed at Viasystems' sites worldwide, including sites in North America, Europe, and China.
Compeq, Taiwan is increasing production of Flip-Chip IC substrates, targeting 2 million dice per month in June or July-the break-even point of Flip-Chip Division. The company plans to have production of 4.5 - 5 million dice per month by year-end 2000. Total IC substrates will represent 15-20 percent of Compeq's total sales in 2000.
Multek acquired CUMEX Electronics, Mexico's largest PCB manufacturer. Founded in 1993, CUMEX specializes in prototypes, pre-production, and volume production of high quality PCBs. The company offers multilayer, double- and single-sided PCB technologies. Multek acquired the existing 60,000-sq-ft facility with an experienced management team.
Pentex-Schweizer Circuits, Singapore has set up a wholly owned subsidiary in Wuxi, China, to make and sell PCBs to electronics multinational corporations in China as well as for export out of China. Operations are expected to begin in January 2002.
Wong's Circuit will sell its PCB business for US$178 million to Pacific Circuits Ltd. Pacific Circuits, incorporated in the Cayman Islands, produces complex PCBs.
Ibiden has set up a subsidiary in Batangas Province, Philippines, and will start producing semiconductor packages for personal computers in October. The new firm, capitalized at US$8.6 million, will handle post-processing work, including inspection, using semifinished products shipped from Ibiden's domestic plants.
Matsushita Electric Works bought Multicon Electronics GmbH (MCE), an Austrian laminate manufacturer for US$18.6 million.
Compositech has signed a letter of intent to acquire The Aeon Group, a Business-to-Business e-Commerce software company. Upon completion of the merger, the continuing company will be named The Aeon Group. (This appears to be a "reverse takeover" to allow Aeon to become a public company.)
Sheldahl announced in late June that it had begun exclusive negotiations with International Flex Technologies, a privately held company headquartered in Endicott, NY, where Sheldahl would acquire IFT in exchange for shares of Sheldahl's common stock. In addition, Morgenthaler Partners (the majority owner of IFT) and other potential investors have proposed to infuse approximately $40 million in new capital into Sheldahl in exchange for shares. IFT acquired IBM's fine line flexible circuit business in February 1999.
Assembly
Plexus will acquire Keltek Holdings Ltd., a privately owned 35-year-old UK company, for $29.6 million. Keltek's annual sales are $55-60 million. Plexus will acquire a 37,000-sq-ft plant in Kelso, Scotland and a 40,000-sq-ft plant in England. A 57,000-sq-ft facility is under construction to replace the Scottish plant by the end of the summer.
Sanmina completed the purchase of InterWorks, a designer and manufacturer of standard and custom modular subsystems, focused on the networking equipment and communications sectors. InterWorks, Orange County, Calif., will have $50 million in revenues in 2000.
Celestica acquired NEC do Brasil, Ltda. The agreements include a five-year supply agreement worth US$1.2 billion. The operation will continue to manufacture NEC communications network equipment for distribution throughout Brazil and will employ approximately 680 people. Celestica will open a new 55,000-sq-ft manufacturing and testing facility in Aurora, Ontario.
ChipPAC, Sanmina, Hewlett-Packard and Alpha Metals formed an alliance to evaluate the reliability of lead-free printed circuit assemblies.
Finnish electronics manufacturing company Elcoteq Network Oyj will start the manufacture of subassemblies for mobile phones and GSM network equipment in Beijing. Elcoteq, a major supplier for both Nokia and Ericsson, said it would also boost the operations of its existing plant in Dongguan, southern China. Besides China, Elcoteq has plants in Estonia, Finland, Germany, Hungary, Poland, Russia, and Mexico.
Jabil Circuit will expand (from 170,000 to 268,000 sq ft) its Meridian, Idaho manufacturing facility, doubling its manufacturing space and creating additional office areas.
Jabil Circuit will acquire Telenor Technology Services, a repair and logistics services division of Telenor, a Norwegian provider of telecommunication, data and media communication services.
Lexmark Electronics opened its new contract electronics manufacturing plant in Reynosa, Tamaulipas, Mexico.
Solectron completed its acquisition of IBM's manufacturing operations in Sao Paulo.
Solectron completed its acquisition of four Nortel Networks manufacturing Facilities. The acquired plants in Calgary, Canada; Research Triangle Park, North Carolina; Monterrey, Mexico; and Cwmcarn, Wales, will offer prototyping, PCB assembly, small sub-assembly, and repair services to Nortel Networks.
Spindex Industries Limited will build a $7 million plant in Guadalajara, Mexico. The Singapore- based company manufactures electronic circuits for Hewlett Packard and others.
Semiconductors
In June, the SIA forecasted that the semiconductor industry would grow an average of 20 percent through 2003. This expansion will be driven by the Internet and the wireless communication products and will expand such semiconductor product segments as digital signal processors, flash memory, analog, and optoelectronics. Overall growth will be 31 percent to $195 billion in 2000, 25 percent to $244 billion in 2001, 14 percent to $279 billion in 2002, and 12 percent to $312 billion in 2003.
AMD has commenced commercial shipments of Athlon processors manufactured with 0.18-micron copper interconnect technology from its newest "megafab" in Dresden, Germany.
DRAM supplies remain tight. The spot price of a 64MB SDRAM was $8.50 per chip in late June, up from a low of $4.50 per chip in February. With plants now operating at maximum capacity, the only way to increase the number of chips coming onto the market is to build new factories, and that can't be done overnight. Even the planned new capacity may not be enough to keep up with increasing demand. The numbers of devices that require memory chips are multiplying as cellular telephones, digital audio players, PDAs, and digital televisions all become more common. The amount of memory being put into existing devices is also increasing. Prices are increasing, and fast growth in markets such as cell phones is being impacted.
Intel will record a $200 million charge to cover the remaining costs for replacing one million motherboards with faulty memory translator hubs.
IBM will offer Transmeta's Crusoe chip in some ThinkPad notebooks to extend battery life by 50 percent (to eight hours).
Lucent Technologies plans to spin off its microelectronics unit in a deal worth up to $40 billion, according to BusinessWeek.
Daily News Service
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Walt Custer Custer Consulting Group Phone: 707 785-1777 FAX: 707 785-1988http://www.custerconsulting.com/
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This article was originally published in CircuiTree magazine and is reprinted here with permission.