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Dissecting the Current Downturn (May 2001)
May 1, 2001 |Estimated reading time: 13 minutes
Dissecting the Current Downturn by Walt Custer May 1st, 2001
The present downturn in North American PCB orders is the worst in history. While most people agree that inventory reductions throughout the supply chain are the main cause there is an underlying worry that this "inventory correction" will evolve into a broad recession. I can understand these fears! Yet when I look at some key data I feel a bit better.
Ten years ago I wrote the first of these monthly columns for CircuiTree. My initial article was appropriately titled "The Business Cycle." It contained a graph similar to Chart 1 depicting the inventory buildups and reductions for each level of the supply chain in periods of expansion and slowing. 2000 was surely an expansionary year. The many component shortages and the addition of the EMS providers to the supply chain further complicated the matter. Assuming that each layer of the chain added a "buffer stock" of 1½ months, it is easy to see why we now have six months of inventories to burn off!
Chart 2 shows the 12/12 rate of change (annual growth rate) for orders for PCBs vs. the three main end markets - communications, computer & office and measurement & control equipment. A 12/12 value of 1.2 signifies 20% growth vs. the prior year. While Chart 2 is "messy" notice that the strongest PCB order growth occurs when the three major equipment markets all grow in phase. In late 1999 and much of 2000 all the end markets were growing but communications equipment orders were especially strong.
In late 2000 equipment orders slowed although certainly not to extent of electronic components. The February 1-month book-to-bill ratio (Chart 3) for N. American rigid PCBs plunged to 0.60 (an all time new low). Our current "inventory burn" was in full swing as the $ value of electronic component orders (primarily semiconductors) dropped 43% (Chart 4) from their May 2000 peak. Rigid PCB orders (Chart 5) performed even worse - down 65% from their mid-2000 highs! Layoffs, plant closures and a general "sky is falling" mentality now pervade our industry.
Now for the brighter side. Electronic equipment orders are holding up much better than PCBs. Chart 6 shows the actual $ value of communications equipment orders. Other than a huge blip in June 2000 they have been relatively flat since October 1999. And total electronic equipment orders (Chart 7) look even better. Admittedly they are declining but February was only off 11% from the summer 2000 peak (while PCBs were down 65%). Assuming the U.S. does not plunge into a major recession our "inventory correction" theory seems to be holding. PCBs orders have plunged primarily because OEMs are consuming the huge stocks in the supply chain - rather than ordering new product.
Reports from Asia regarding a modest PC order rebound and firming DRAM pricing suggest that personal computer related inventories are now "flushed." Domestically the communications companies, i.e., Nortel & Lucent and the Internet infrastructure providers, i.e., Cisco, reportedly still have 6-9 month stocks. But . . . we have to assume that these companies will move on to new products with new design PCBs. The "rumor mill" says that attempted PCB returns by overstocked OEMs to their PCB/CEM suppliers are high. Aging inventories are being carefully scrutinized for "quality issues" and/or any other justifications for return. 9-month supply chain inventories may get pushed aside as OEMs move to new products.
My current "forecast" is that 2001 will be a flat year for the domestic PCB industry. The first half will be VERY painful but we should see some relief by late summer. Unfortunately because the timing of capital equipment purchases lags PCB shipments by six months, PCB process equipment suppliers will not see recovery until 2002.
Also multinational PCB makers seem to be shifting production from their higher manufacturing cost facilities in the USA and Europe to their plants in China.
Looking back I "called" the timing of this downturn fairly well but certainly underestimated its severity. However, as Michael Dell notes below, a "U" or "V" shaped recovery is quite possible once supply chain inventories are finally exhausted. Keep watching Chart 8 for signs of the inevitable turn around.
General Business Conditions
Michael Dell said in early April that the computer market shakeout will "leave the strong companies stronger and the weak ones will weaken and go away. "I won't even guess how long the downturn will last and when the turn will come, but growth will be single-digit this year," he said after addressing the Montreal Board of Trade. "But I do see a V-shape or U-shape recovery forming out there some time." "The most exciting period for computing is yet to come ... the Internet is becoming part of daily life and companies will spend US$370 billion to build Internet capabilities.
Hyundai Electronics' president Sang Park disagreed with analysts who said more bad news is ahead in the computer memory chip business. ``The worst time is over,'' said Park, who leads the world's second-largest memory chip supplier. ``There is no inventory in the channel,'' he said in late March.
NEC will spin off some of its IT equipment-related factories to streamline operations. "Discussions are being held to create an independent manufacturing company that can take orders from other companies but still work with NEC's manufacturing divisions," an NEC spokesman said. The Nihon Keizai Shimbun said NEC will turn about five to seven of its factories into EMS units and sell or consolidate another five.
Canon, the world's leading maker of copiers, chose Vietnam over the Philippines as its regional production site mainly due to better tax incentives (a 10-year income tax holiday).
Electronic Equipment Computers
Dell and Samsung Electronics formed a strategic, multibillion-dollar technology and R&D agreement. Terms of the $16 billion dollar global agreement call for Samsung to ensure supply of memory components, liquid-crystal displays, monitors and optical disk drives to Dell. The companies will also collaborate on research and development efforts.
Dell Computer will increase its parts' orders from Taiwan by as much as a third, as it seeks to cut costs because of slowing global demand for PCs. Dell, which agreed to buy $16 billion in parts from Korea's Samsung Electronics, plans to order up to $6 billion worth of electronic components from Taiwan this year, up from $4.5 million in 1999, said Robert Shanks, vice president of international procurement at Dell. "There's a generic computer migration to low-cost regions," Shanks said. Taiwan companies that supply notebook computers, servers and monitors to Dell include Quanta Computer, Acer and Hon Hai Precision Industry. Dell's move follows similar decisions by Compaq and Hewlett-Packard to cut staff at home and shift production to countries offering lower manufacturing costs. NEC will also buy $10 billion of computer parts from Taiwan makers in the next five years, as it focuses more on higher- margin business.
Personal computer manufacturers are preparing for an intense battle for market share in 2001, as some PC vendors reduce profit margin gains to increase market penetration, according to Dataquest. "We anticipate a price war in the United States in 2001, as direct vendors, Dell and Gateway, endeavor to gain market share from Compaq, Hewlett-Packard and IBM," said Martin Reynolds, group vice president and research fellow for Gartner. "The direct vendors will lower margins to do this, which will cause others to give serious thought about how they run their PC business. The price erosion will make other regions of the world buy more PCs, so the global vendors might also choose to shift their share from the United States to maintain profitability. U.S. national vendors do not have that choice."
Worldwide PC shipments (excluding PC servers) are expected to total 144.5 million units in 2001, an increase of 10.7% over 2000 shipments.
Worldwide PC Unit Shipments Forecast Estimates (Millions of Units)
2000 2001 2002 2003 2004 2005 Unit Shipments 130.4 144.5 165.5 179.7 197.2 212.9 Growth % 13.6 10.7 14.5 8.6 9.7 7.9 Note: Data includes desk-based PCs and mobile PCs only and excludes PC servers. Source: Gartner Dataquest (March 2001)
Workstation vendors are faced with the challenge of competing in a much more saturated market, and, as a result, worldwide workstation revenue in 2000 declined 13% from 1999, totaling $8.6 billion in 2000.
Worldwide Workstation Vendor Revenue Estimates for 2000 (Millions of Dollars)
Company 2000 Revenue 2000 Mkt Share % 1999 Revenue 1999 Mkt Share % Growth % HP 2,024 23.5 2,244 22.8 -10.0 Sun 1,939 22.5 2,632 26.7 -26.3 Dell 1,459 16.9 1,032 10.5 41.3 Compaq 948 11.0 953 9.7 -0.6 IBM 938 10.9 1,347 13.7 -30.4 Others 1,314 15.2 1,648 16.7 -20.3 Source: Gartner Dataquest (March 2001)
Maxtor completed its merger with Quantum HDD, to become the world's largest hard disk drive manufacturer based on annual combined unit shipments. Combined revenues from Maxtor and Quantum HDD were approximately $6 billion in 2000.
Communications
Nokia lowered its estimate of the number of mobile phone units that will be sold worldwide this year to between 450 million and 500 million units down from its estimate in January of 500 million to 550 million units.
Ericsson is still very strong in its key networks systems business and will fix the loss-making handset unit, CEO Kurt Hellstrom said in mid-March. "I am really optimistic about the whole of Ericsson. We have problems with the mobile phones, but we are going to solve them," he said.
Nortel Networks gained the top spot in revenue terms among global telecommunications equipment manufacturers in 2000.
Top Eight Worldwide Telecommunications Equipment Manufacturers' Estimates for 2000 (Billions of Dollars)
Company 2000 Revenue 1999 Revenue Growth % Based on Revenue Local Currency Revenue Growth % Nortel 29.8 21.0 41.6 41.6 Ericsson 27.7 24.0 15.4 28.1 Nokia 27.2 20.1 35.4 57.0 Lucent 25.8 33.8 -23.5 -23.5 Cisco 23.9 15.0 59.3 59.3 Siemens 22.8 20.0 14.5 32.5 Motorola 22.8 19.7 15.3 15.3 Alcatel 21.6 17.1 26.6 46.8 Top 8 Total 201.7 170.7 18.2 - Gartner Dataquest (March 2001)
Microsoft dropped Bluetooth support in Windows XP, citing frustration at the speed at which the platform is developing. "The hardware has developed more slowly than we initially anticipated," said Mike Fole, Microsoft's wireless architect head. "There's no stable hardware to test on." Bluetooth has also faced other hurdles, such as conflicts with military radio frequencies in France, Spain and Japan (now mostly resolved) and concerns over whether it would be safe to take along on airplane flights.
Servers & Infrastructure
Cisco Systems opened its new manufacturing plant in Penang. The company said it will make its Catalyst family of switches, wireless networking equipment and digital subscriber line cable modems, among other products, at the site.
The worldwide server industry had revenue of $53.8 billion in 2000, an increase of 11% over 1999 revenue, according to Dataquest.
Worldwide Vendor Revenue Estimates for 2000 (Billions of Dollars)
Company 2000 Revenue 2000 Mkt Share % 1999 Revenue 1999 Mkt Share % % IBM 13,736 25.5 13,728 28.3 0.1 Sun 9,711 18.1 6,793 14.0 43.0 Compaq 8,599 16.0 6,767 14.0 27.1 HP 7,157 13.3 6,975 14.4 2.6 Dell 3,436 6.4 1,955 4.1 72.9 Others 11,122 20.7 12,198 25.2 -8.8 Total Mkt 53,761 100.0 48,448 100.0 11.0
U.S. Server Vendor Revenue Estimates for 2000 (Billions of Dollars)
Company 2000 Revenue 2000 Mkt Share % 1999 Revenue 1999 Mkt Share % % Sun 4,785 23.5 3,304 18.7 44.8 IBM 4,692 23.1 5,205 29.4 -10.0 Compaq 3,894 19.2 2,829 16.0 37.6 Dell 2,351 11.6 1,306 7.4 80.0 HP 2,196 10.8 2,497 14.1 -12.0 Others 2,413 11.9 2,563 14.5 -5.8 Total Mkt 20,330 100.0 17,704 100.0 14.8 Consumer Electronics
Toshiba stopped making cathode-ray tube televisions in Japan in March and moved production of digital sets and other TVs to China to reduce manufacturing costs. Its Saitama factory, which made 500,000 TVs a year, will now specialize in liquid crystal displays and digital TVs.
Microsoft said its Xbox video game console is on target for a fall release. "We are still right on track to deliver hardware and software for a launch in fall of 2001," said Microsoft's director of games marketing, John O'Rourke.
Other
A joint venture formed by seven Japanese electric companies and lead by Sharp, has completed construction of a consumer electronics recycling plant in Osaka. Other partners include Sony, Sanyo Electric, and Hitachi Ltd.
PCB Fabrication
Northrop Grumman approved a $30 million expansion project for Litton Interconnect Technologies, Springfield, MO. The project will nearly double Litton's PCB operations, which currently occupy a 225,000 square foot manufacturing plant, and will create up to 400 new jobs in the next four to five years. The facility will be operational 15 months from the start of construction.
Teradyne's backlog of unfilled orders from its connection-systems business (backplanes) more than tripled to $534 million at the end of 2000 from $175 million at the end of 1999, while its overall backlog rose 41% to $1.38 billion, according to the company's annual report. The backlog of its semiconductor test system business segment rose just 6% to $742 million from $700 million a year earlier.
Taiwanese PCB makers World Wiser Electronics and UniMicron Technology are merging. World Wiser will be the surviving entity.
Malaysian PCB manufacturer PNE PCB will build a new PCB plant in China's Suzhou region, in the third quarter of this year. The project is a joint venture between PNE and Hong Kong's Brite Plus International (BPI), which owns Brite Plus Electronics (Dong Guan) Ltd. PNE entered into the RM14.55 million JV agreement with BPI last September. Of the RM14.55 million, RM4.36 million is to be used to upgrade BPI's Dong Guan plant and to introduce value-added, high-end products such as carbon PCBs and silver through-hole PCBs. Carbon PCBs are normally used in remote controls, calculators and keyboards, while silver through-hole PCBs are used in facsimile machines, multimedia equipment, CD-ROMs and high-end audio-visual equipment.
Greater China Sci-Tech Holdings signed a memorandum of understanding with Pioneer Technology Engineering to acquire a certain interest in the latter's printed circuit board business. Pioneer Technology is a Taiwan based company, which currently owns over 50 patents worldwide in relation to its PCB innovations. In 2000, it recorded a net profit of NT$460 million and turnover of NT$1.40 billion. Greater China Sci-Tech was formerly known as Pam & Frank International Holdings Ltd.
Materials
Lien Hwa Industrial Corp., an affiliate of Union Petrochemical Corp., this year will invest US$10 million in mainland China to produce copper clad laminates and other electronic materials. Lien Hwa has earmarked US$7.9 million for a joint venture with Shipley and Rexam of the U.S. to make dry film photoresist in mainland China.
Kaneka will invest Yen 7.5 billion to double capacity for polyimide film (from 600 to 1200 tonnes/y) at its Otsu City site. The work should be completed by Aug 2001. Kaneka also has 200 tonnes/year of polyimide film capacity at Texas- based Kaneka High-Tech Materials.
PCB Assembly
SCI Systems will acquire Nokia Networks' manufacturing businesses in Haukipudas, Finland and in Camberley, UK. SCI will continue manufacturing units for mobile communications base stations and narrowband products for Nokia Networks. The personnel, altogether approximately 1,250 employees, will transfer to SCI. This move can be seen as further evidence of large telecoms equipment makers outsourcing production to cut costs as a time of worsening economic conditions and tougher competition.
Kimball International opened its new 40,000 square foot microelectronics facility in Valencia, California. The facility will support wafer and die processing, design and manufacturing of standard and custom monolithic devices, multichip modules, chip-on-board and surface mount assemblies.
MCMS will open a new operation in Xiamen, China within the next 3 to 6 months. The operation will provide board level assembly services and will expand MCMS' presence in Asia.
Pemstar opened two new engineering facilities, one in Yokohama, Japan and the other in Austin, Texas.
Gigabyte Technology, Taiwan's second-largest maker of computer circuit boards, will spend $39.8 million to expand its facilities in China as part of its efforts to lower production costs. "The risk of not going to China is simple--you will get crushed by others with lower production costs," said Liu Juming, head of research at Asia Pacific Securities. Gigabyte, which supplies Fujitsu and NEC in Japan as well as IBM and Compaq Computer in the United States, said there's no cap on how much it will invest in the mainland. "There's no fixed amount," said Gigabyte spokesman Peng Nei-chuen. "We'll look at our China plans step by step."
Solectron closed its Suwanee, GA plant, laying off 750 full-time employees and 325 temporary workers. "Unfortunately, we cannot ignore changing market conditions," said George Moore, head of Solectron's Americas division.
Viasystems and Metawave Communications, a global provider of smart antenna solutions that increase voice and data capacity for wireless carriers, have entered into an exclusive, 5-year supply agreement whereby Metawave will outsource substantially all of its manufacturing operations to Viasystems . The agreement includes the sale of certain manufacturing assets and inventory to Viasystems.
Semiconductors
Worldwide sales of semiconductors were $15.49 billion in February 2001, an increase of 5.8% over $14.64 billion a year ago but 6.9% below the January 2001 level of $16.63 billion. "The industry is continuing to experience lower sales due to an inventory overhang and macroeconomic factors," stated George Scalise, SIA president.
The North American-based manufacturers of semiconductor equipment posted $1.8 billion in orders in February 2001 and a book-to-bill ratio of 0.77, according to the March 2001
North American Semiconductor Equipment ($M)
Shipments Bookings Book-to-Bill September 2000 2,475.9 2,887.6 1.17 October 2000 2,573.8 2993.1 1.16 November 2000 2,422.3 2,707.3 1.12 December 2000 2,389.4 2,372.3 0.99 January 2001 rev 2,329.1 1,874.4 0.80 February 2001 prelim 2,353.2 1,803.1 0.77 Coming Events
See you at the IPC TMRC meeting May 22 & 23, 2001 at the Drake Hotel in Chicago. I will "stick my neck out" in my presentation "When Will the Down-turn End?" I will be also speaking at the EIPC Summer Conference in Copenhagen on June 18, 2001. My topic will be "Business Outlook, Global Electronics Industry."
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.