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Taking a Breather . . .Torrid Growth Rates Cool a Bit (Dec 2000)
December 4, 2000 |Estimated reading time: 14 minutes
The year 2000 will be remembered as a great year for the electronics industry. Domestically rigid PCB $ shipments will be up about 16% versus 1999 as all the electronic equipment end markets demanded increasing volumes of circuit boards. But the Fed's inflation-fighting interest rate hikes have finally calmed our economy as 3Q'00 U.S. GDP growth was up only 2.7%, much less than the 5.7% growth of the prior quarter. Taking a Breather . . .Torrid Growth Rates Cool a Bit
by Walt Custer
December 1st, 2000
The year 2000 will be remembered as a great year for the electronics industry. Domestically rigid PCB $ shipments will be up about 16% versus 1999 as all the electronic equipment end markets demanded increasing volumes of circuit boards. But the Fed’s inflation-fighting interest rate hikes have finally calmed our economy as 3Q’00 U.S. GDP growth was up only 2.7%, much less than the 5.7% growth of the prior quarter. At the same time, personal computers (especially for business uses) and cell phone growth slowed a little. To put things in perspective, PC shipments were still up 15.2% globally in 3Q’00 and cell phones will close 2000 up 50% over 1999. By most measures this is still great growth.
Strong electronic equipment demand caused some component shortages and over-ordering of PCBs in early- to mid-2000. I believe we will soon see a minor correction. Chart 1 shows the 3-month growth (3/12 rate of change) of PCBs vs. electronic equipment orders. Notice that both the PCB and equipment expansion is now moving at a slightly slower pace. PCB orders are only up 29% and equipment up 19%--still not bad! Chart 2 expands the electronic equipment growth into its four components: computers, communications, instruments and military. Both communications equipment and military electronics growth rates have slowed a bit.
In the face of slower equipment growth and some probable excess orders, the PCB (Chart 3) and even more noticeably the total electronic component (Chart 4) book/bill ratios have dropped noticeably. Part of this drop is just due to shipments catching up to orders. Orders now seem closer to being in line with true demand.
Now for some good news. The decline in electronic equipment growth shown in Charts 1 & 2 is on a 3-month (July–September) basis. However, a poor August pulled the 3-month average down. September 2000 actually showed improved equipment order growth – up 21.2% over September 1999. End market demand is holding! This would lead me to believe that PCB orders will still correct a bit into the new year, but “the bottom will not fall out.”
From a sales and earnings viewpoint, domestic PCB makers (including the CEMs with PCB fab capacity) all had a good third quarter (Charts 5 & 6). With the exception of Sheldahl (which hadn’t reported when I wrote this article) and recent IPO Coretec (which took a one-time charge related to paying down its subordinated debt), everyone was profitable. In fact, Coretec showed good Q3 profits prior to its one-time charge. Q3’00 was good to the PCB industry – and I believe Q4 will be OK also. Happy Holidays!
General Business Conditions
The Internet will be 2000 times larger in five years, said John Shoemaker, Executive VP, Systems Products Group at Sun Microsystems. All of the servers in the market today represent less than 4% of the Internet's expected capacity in five years.
Taxes, a lack of infrastructure and paper work costs have persuaded foreign maquiladora to redirect up to $800 million in potential investment away from Mexico. Jaime Reyes Heroles, head of the National Chamber of the Electronics, Communications and Information Industries, stated, "A disadvantageous tax situation, the lack of transport infrastructure, paper work, ports, and other things," are to blame. The Mexican government irritated some maquiladora owners this year by levying taxes on payroll and inventories in Mexico as part of an agreement with the USA to avoid double taxation. Sanyo Electric’s North America president Masufumi Matsunaga said that production costs in Mexico "have reached the point where companies are evaluating going to Indonesia or China.”
Matsushita Electric Industrial will cut 60% of the workforce at its Wales plant. The strong British pound against the euro has hurt earnings at the plant, which exports televisions and other appliances to countries in Europe. Matsushita had already been shifting production of color TVs to its plants in Czech Republic.
The global mobile phone market is starting to slow down after several quarters of phenomenal growth. Motorola gave an estimate of 525-575 million global handset sales for 2001, down from a previous estimate of 600-650 million. Evli Securities expects worldwide mobile phone unit sales to hit 563 million units in 2001, up from 424 million this year and 284 million in 1999.
September "electronic and other electrical equipment” Durable Goods orders increased $4.8 billion or 11.8% to $45.3 billion, due to electronic components and communication equipment.
Electronic Equipment
Worldwide personal computer shipments surpassed 33.9 million units in the third quarter of 2000, up 15.2% over the same period last year, according to Dataquest. "The expectation is that the home market will see some signs of replacement sales in the fourth quarter of 2000, but the corporate upgrade cycle will not gain momentum until 2001," said Dataquest’s Charles Smulders (see Chart 7).
Intel is seeking a local partner in Vietnam to produce personal computers on an OEM basis. Intel country manager Than Trong Phuc said 70% of Vietnam's annual market of 300,000 PCs was currently split between about 400 local assemblers and quality varied greatly.
Dell Computer captured 15.1% of the 1999 education PC market per Dataquest. Apple, which had been first with 14.6% of the market in 1998, dropped to 12.5%.
Quanta Computer, Taiwan, the world's No. 2 maker of notebook computers, has started production of systems using Transmeta’s processor that should be in the market by 4Q’00.
Quanta also will market mobile phones starting in Taiwan this year, as part of a plan to enter other Southeast Asian markets. Quanta has made notebooks for IBM, Dell Computer and
Hewlett-Packard.
Ericsson reported that its handset and related businesses, which have already posted losses of $1.6 billion in 2000, are expected to remain profitless through 1H’01. Component shortages and selling fewer high-margin, full-featured handsets are key causes. The company will move handset production from Kumla, Sweden, and Lynchburg, VA, to low-cost manufacturing centers in Asia, Eastern Europe, and Latin America. Rumors persist that it may spin off its cell phone business to concentrate on more profitable lines.
Acer Communications & Multimedia, Taiwan's largest mobile phone maker, will increase monthly production by about 50% as it captured more orders from Motorola and Ericsson. Acer Communications expects to make 5-6 million mobile phones this year. Motorola is subcontracting more of its production to boost competitiveness.
AirPrime, a provider of CDMA-based wireless access solutions, chose Flextronics to produce its wireless access products.
Litton Industries will sell its Advanced Electronics group, which includes its navigation and electronic warfare businesses. It will retain its Springfield, Missouri PCB facilities.
Palm and Delphi Automotive Systems plan to sell wireless services for the new hands-free communications system they have designed for automobiles. The system, called the Mobile Productivity Center, works by linking a Palm organizer and mobile phone to a car's audio system.
Western Digital was awarded a multi-year contract by Microsoft to supply hard drives for its forthcoming Xbox future-generation video game console, which is expected to begin shipping to retail outlets worldwide during 3Q’01.
PCB Fabrication
Aspocomp posted nine-month profits up 26% and expects sales growth next year to surpass 40%.
"The growth of sales and margins during the third and fourth quarter were slowed by ramp-up delays, higher material costs, component shortages and the strong U.S. dollar and Japanese yen", said Aspocomp CEO Jarmo Niemi. He forecast sales growth of over 35% in PCBs for mobile phones and 40% for its telecom unit, which makes components for wireless networks.
Aspocomp will form a joint venture with Taiwanese Chin-Poon Industrial to make HDI circuit boards in China, with production set to start in the third quarter of 2001.
Aspocomp also said it would raise its stake in Thailand's second-largest PCB producer, P.C.B Center (Thailand) Co., Ltd., to 51% from its current 12.5%, possibly even before the end of 2000.
Aspocomp said it plans to expand into the North American and possibly Latin American markets and expand further in Asia in the future.
Bartlett Manufacturing, Cary, IL acquired the PCB division of Albuquerque-based General Technology Corporation. The new division will be named GTC Circuits and will remain located in Albuquerque, NM.
Compositech was delisted by the NASDAQ. It is pursuing a “reverse takeover” where it would first “buy” Farmbid.com and then rename itself Farmbid. Presumably this would allow Farmbid to become a publicly traded company – perhaps with some Compositech tax advantages.
Coretec completed an initial public offering of 4.4 million common shares at C$10 a share for gross proceeds of C$44 million. It used C$25 million to repay all its subordinated debt.
Elec & Eltek International shares rose as much as 12% in late October on speculation its parent was close to selling the Singapore unit.
Ericsson is selling its technology center for PCBs in Kumla, Sweden to Multek, a subsidiary of Flextronics International.
Flexxtech has increased its ownership from 67% to 80% in Primavera Corporation, the parent company of North Texas Circuit Board Co.
Omicron Circuits SL was created in Gurb, north of Barcelona, Spain to make MLBs.
Nan Ya Plastics' net profit for the first nine months of 2000 soared 118% from a year earlier due to strong growth of copper-clad laminate.
Park Electrochemical will sell the assets and business of its Nelco Technology “mass lamination” unit to Flextronics International’s Multek PCB operation. The companies will enter into a long-term supply agreement, under which Park will supply electronic materials to Nelco after the transaction. Nelco’s mass lamination business had sales of $21 million for the first half of year 2000.
Parlex Corporation has been included on Forbes' annual list of the 200 Best Small Companies in
America published in the October 30, 2000 issue of the magazine.
Sanmina is acquiring a 49.9% equity ownership in INBOARD, a wholly owned subsidiary of Siemens AG. INBOARD, which has approximately 360 employees, manufactures microvia PCBs and is the world's only provider of SIMOV technology printed circuits.
Sheldahl’s talks with International Flex continue. Under preliminary terms disclosed last June, Morgenthaler and a closely held company it owns, International Flex Technologies, would take a controlling 43% stake in Sheldahl in exchange for perhaps as much as $40 million of capital infusion.
PCB Assembly
Celestica opened a Japanese sales office. "Japan is a major influence in the global electronics market," said Eugene Polistuk, president and CEO of Celestica. "Although Japanese companies have not significantly used EMS partners in the past, there are signs that things are changing.“
C-Mac Industries offered to purchase Dy 4 Systems.
Elcoteq Network of Finland will substantially increase outsourcing of Ericsson's mobile phones to Elcoteq's European plants -- most notably in Hungary. Elcoteq has been a supplier to Ericsson for the past 15 years and is also a major subcontractor for Nokia. The company has manufactured Ericsson mobile phones in Estonia since 1997 and in Hungary since the beginning of this year.
Kent Electronics sold KEC Electronics, its contract manufacturing division, to Thayer-Blum Funding II LLC for $225 million.
SCI Systems will acquire CMS Hartzell, a Lexington, KY-based electronics enclosures company.
SCI Systems will produce all current and future radio-base telephone systems of L.M. Ericsson Telephone, under a multiyear, multi-billion dollar outsourcing agreement. Ericsson said SCI would acquire its Lynchburg, VA plant.
Solectron will purchase NatSteel Electronics of Singapore for about US$2.4 billion. NatSteel is the sixth-ranked CEM based upon global sales. With this acquisition, Solectron now expects to generate full-year sales in excess of $23 billion.
Solectron will acquire certain assets associated with two Sony manufacturing facilities: Sony Nakaniida Corporation in Miyagi, Japan, and Sony Industries Taiwan in Kaohsiung, Taiwan. These facilities currently produce high-end consumer products such as automobile satellite navigation systems, car audio systems and lithium ion battery packs. Combined, they have about 490,000 square feet of manufacturing space. Sony will then outsource EMS from these factories.
SMTC Corporation has been selected by Alcatel Canada (formerly Newbridge Networks) as the primary manufacturer for a selection of high complexity PCB assemblies. The two companies value this long-term supply agreement at approximately $350 to $400 million over the next three years.
Thayer Capital Partners, in partnership with BLUM Capital Partners, acquired K*TEC Electronics Corporation, a provider of vertically integrated electronic manufacturing services based in Sugar Land, Texas, from Kent Electronics Corporation. Thayer's EMS portfolio also includes control investments in TTM Technologies, a joint holding with Brockway Moran and Partners; Cosmotronic Corporation; and EFTC Corporation, a joint holding with BLUM Capital Partners.
Taiwan's Quanta Computer will invest US$26 million to set up two plants in China - $20 million to build a plant in Shanghai to produce motherboards and $6 million to set up a plant to assemble computer cases.
Viasystems Group will buy Laughlin-Wilt Group, an EMS provider. Laughlin-Wilt's two facilities, in Orange County, CA and Beaverton, OR have combined manufacturing space of 107,000 SF.
Semiconductors
Driven by sales of communications equipment for data networking, broadband, wireless & optoelectronics and continued strong demand for the personal computers, the global semiconductor industry will exceed $200 billion for the first time in 2000 and grow to $319 billion in the next three years, the SIA reported. While the Americas will remain the world's largest market, Asia-Pacific is the fastest growing (see Chart 8).
Semiconductor Shipments (3-month average in $ Billions)
Market August 2000 September 2000 % Change Americas 5.83 5.88 0.9% Europe 3.55 3.61 1.8% Japan 4.04 4.22 4.3% Asia Pacific 4.63 4.69 1.2% Total 18.06 18.40 1.9% Month-to-Month Sales
Market September 1999 September 2000 %Change Americas 4.02 5.88 46.2% Europe 2.66 3.61 35.9% Japan 2.79 4.22 51.2% Asia Pacific 3.20 4.69 46.6% Total 12.67 18.40 45.2% Year-to-Year Sales
IBM will build a $300 million computer chip packaging plant in Shanghai in anticipation of heavy demand in China. The plant is scheduled to begin production in early 2002 with a workforce of 1,800.
IBM canceled plans to use a Transmeta Crusoe processor in a new Thinkpad laptop that was to come out later this year.
IBM will build a $2.5 billion chip manufacturing plant in E. Fishkill, NY and also announced a $2.5 billion investment to expand chip-making capacity in plants in Burlington, Vt., and Yasu, Japan.
Intel will build a chip production plant in Egypt with a $500 million of investment. It will create about 3,000 jobs.
Kobe Steel will sell its 75% stake in its DRAM joint venture to its partner Micron Technology for $584.4 million.
LSI Logic and AMD will develop advanced solutions for the wireless handset market. According to Dataquest, 68 million Code Division Multiple Access (CDMA) handsets are anticipated to be sold this year, increasing to an estimated 264 million units by 2003. This collaboration will use AMD's high performance flash memory technology and LSI Logic's CDMA baseband processor.
As semiconductor manufacturers continue to embed more functionality in their products, sales of Systems-On-Chip are booming, according to Cahners In-Stat Group. In-Stat said that SOC sales reached 345 million units in 1999, more than double the 160 million units sold in 1998. It projects 31% average annual market growth, reaching 1.3 billion units in 2004, In-Stat says communications products are the leading market segment for SOCs and over the next several years, the consumer products segment will grow the fastest, averaging 43% annual increases in units sold through 2004.
Via Technologies, Taiwan's largest chipset maker, and Intel in late October cut production at Taiwan Semiconductor Manufacturing Corp. reportedly because personal computer demand was lower than expected.
Other
Scientists at Bell Labs have built a “Quantum Cascade” semiconductor laser that emits light in the far infrared spectrum. The new laser may be used for very sensitive chemical analysis and diagnostic applications. A QC laser operates like an electronic waterfall. When an electric current flows through the laser, electrons cascade down an energy staircase; every time they hit a step, they emit a photon of infrared light. The emitted photons are reflected back and forth inside the semiconductor layers at the core of the laser, stimulating the emission of other photons. This amplification process enables high output power.
Danang Investment Consulting and Technology Development Co. has commissioned a capacitor factory in Vietnam following a month of trial production. The VND23-billion factory produces 32 types of capacitors and is able to make 144 million of the electronic components annually.
Electronic component firms are increasingly relying on ceramics as an alternative to tantalum capacitors. Ceramic component producers, such as Murata Electronics and Vishay Intertechnology, are now upgrading their ceramic capacitors, usually used for smaller electrical charges.
Matsushita Electric Industrial will set up a joint venture in Shanghai with three Chinese companies to produce and sell plasma display panels. This is the latest in a series of recent alliances among global electronics manufacturers in the PDP market. Demand is soaring for PDPs, which are mainly used as screens in flat, wall-hanging television sets. Sales of such TVs are expected to jump as broadcasters convert from analog to digital technology. Matsushita expects the global PDP market to top four million units in 2005.
In Closing
If you would like to receive this type of market information on a daily basis, ask for a free 30-day trial of my news service. E-mail me.
Walt Custer Custer Consulting Group Phone: 707 785-1777 FAX: 707 785-1988http://www.custerconsulting.com/
E-mail: America Online waltcuster@aol.com Internet wcuster@mindspring.com
This article was originally published in CircuiTree magazine and is reprinted here with permission.