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Obviously More Than Just an Inventory Correction (Aug. 2001)
August 6, 2001 |Estimated reading time: 12 minutes
Obviously More Than Just an Inventory Correction
I just returned from three weeks in Europe. My itinerary included a Market Conditions presentation at the EIPC summer conference in Copenhagen. About 150 people attended. The European PCB market is lagging the USA by about three months. Although Europes electronic equipment end market mix is different than North Americas a similar PCB downturn is now well underway. While automotive electronics are holding, the makers of PCBs for telecom and mobile phones have been hit hard. The European cell phone industry is seeing major changes as the major phone makers are outsourcing to CEMs to reduce costs. Much of the production is shifting to lower cost areas, i.e., China. Both Aspocomp (JV with Chin Poon) and AT&S are building new facilities in China to retain their mobile phone PCB market position.
Domestically this second quarter has been extremely difficult. In late 2000 when I began writing about a pending PCB downturn I speculated that the dip would be relatively short lived lasting only until bloated inventories were exhausted. It is now painfully obvious that there are two (not one) key reasons for the current plunge in PCB orders the well-publicized inventory correction throughout the supply chain AND ALSO a substantial downturn in electronic equipment orders.
Per Chart 1 and Chart 2 both semiconductors and printed circuits are down substantially. However the North American PCB book/bill ratio may have bottomed in April and hopefully will soon be showing a mild improvement (beginning in 2H01 and continuing throughout 2002).
While we live in an Electronic Age short term electronic equipment demand has certainly declined (Chart 3). From a peak 3-month growth of +26% in August 2000, equipment order growth on a 3/12 basis was down almost 13% in May 2001. This swing from +26% to 13% growth has depressed PCB orders well beyond any inventory effects. On an actual $ basis (Chart 4) electronic equipment monthly orders (green line) have dropped almost $10 billion/month a 30% decline from their peak in June 2000.
The main culprit for the electronic equipment order decline is of course communications equipment (Chart 5). Monthly orders are down 51% from their June 2000 peak. Communications equipment the darling of 2000 has become the goat of 2001!
This massive equipment order decline coupled with inventory flushing has sent PCB orders into a tailspin. Chart 6 speaks for itself. Year 2001 PCB orders and shipments are down substantially compared to the same months in 2000. Fortunately April may have been the bottom with respect to PCB orders as May showed a modest improvement.
Chart 7 shows the 3-month (3/12 rate of change) growth of electronic equipment. While equipment growth is down it is still apparent the PCB orders have severely overcorrected. This chart still suggests that PCBs should start to see recovering demand in 2H01.
I expect that total PCB $ shipments will be down about 15% in 2001 vs. 2000. I also believe that 2000 volumes were inflated and they cannot be used as a benchmark for a coming recovery. If we can return to CY 1999 PCB demand levels in late 2001 I will consider this a recovery.
2001 has been a painful experience. I hope that I am correct in forecasting modest relief in the second half of this year.
General Business Conditions
After rising slightly in May from a record low in April, the EBN Electronic Buyers' Index set a new low in June, confirming concerns that the market is still struggling to find a bottom. There's growing evidence that Asia and Europe were still declining sharply because they had-or recognized-excess inventories later than in the U.S., said Jim Haughey, EBN's staff economist. This is consistent with a market, on average, still at the bottom of the business cycle. Nicky Lu, CEO of Taiwan's Etron Technology forecast that the global wireless telecom market would begin to recover in the second half of this year as a result of the rollouts of new products by Japan's NTT DoCoMo.
PCB Fabrication
World production of printed wiring boards and flexible circuits reached a record high $42.7 billion in 2000. Japan ranked number one in 2000, producing the most rigid PWBs in the global market with 27%, followed by the United States (25%), Taiwan (11%), China/Hong Kong (9%) and South Korea (5%). The flexible circuit world market in 2000 was led by Japan, accounting for 36% of production. Followed by the United States producing 28%, Taiwan (7%), Thailand (6%) and Germany (4%). World consumption of laminate for rigid PWBs was estimated at 2.9 billion square feet (265 million square meters.)
Matsushita Electronic Components, Zuken and Dynamic Details Inc. (DDI) have agreed to the joint marketing and technology development of ALIVH printed wiring boards for the U.S. market. Matsushita will develop the overseas market and new applications for ALIVH boards. Zuken will broaden its own CAD products in overseas market while DDi will support the next-generation high-density printed wiring boards.
Unicap Electronics Industrial pulled out of merger talks with rival World Wiser Electronics. Unicap said the two sides have agreed to halt the merger due to differences in corporate structures, making the integration difficult in the near term.
PCB exports from Thailand dropped 21.7 percent in the first quarter of this year compared from the previous quarter. The fall in exports is attributed to the economic slowdown in Thailand's biggest export markets, Japan and United States.
Coretec acquired Comelim Circuits Ltd. of Bedfordshire, England, a manufacture PCBs
for the military/aerospace, industrial controls and telecommunications markets.
The Comelim acquisition will fulfill Coretecs strategy of establishing a manufacturing presence in the United Kingdom, allowing better access to our existing and potential client base, said Coretecs CEO Paul Langston.
AT&S (Austria Technologie & Systemtechnik) said it will miss its target of growing by 30 percent in fiscal 2002 as demand is expected to decline.
CMK agreed with Wuxi New Area to establish a $75 million plant for multilayer PCBs for digital electronic products. The plant will produce a monthly capacity of 10,000 square meters of PCB for mobile phones and digital cameras. In October 2000, CMK acquired Satosen Circuit in Dongguan, Guangdong province, China. Satosen Circuit is engaged in the design and manufacture of PCBs used in mobile gear and business apparatus.
Hicks, Muse, Tate & Furst, Viasystems' majority shareholder, has committed additional funds to Viasystems in the form of a $100 million senior unsecured note. This increases Viasystems' liquidity, which the company believes will be sufficient to fund the ongoing plant expansion in China, weather the telecommunications market slowdown and provide adequate operating liquidity.
CMK agreed to set up a joint venture with Marubeni and Matsushita Electric Works to produce PCBs in China. Capitalized at US$45 million and located in Wuxi, Jiangsu Province, the venture will be owned 65% by CMK, 20% by Marubeni and the rest by a Matsushita subsidiary. With a workforce of about 400, the venture will have a monthly output capacity of 10,000 square meters, equivalent to PCBs for 1.5 million cellular phones.
Flexxtech acquired the remaining 20% of North Texas Circuit Board Company through its wholly owned subsidiary, Flexxtech Holdings, Inc.
Nitto Denko will invest about 10 billion yen (US$79.6 million) to build two factories in Jiangsu Province, China. The new plants will be the core of Nitto Denko's Asia strategy.
The first of the new plants, which will make high-density flexible printed circuit boards for mobile phones or LCDs, will begin operations in 2003. The factory, which will have floor space of 6,000 sq. meters and employ 2,000 workers, will cost about 4.5 billion yen. Once that plant is up and running, the company will build another. The combined capacity of the two Chinese factories will rival Nitto Denko's main plant in Mie Prefecture.
Taiwan PCB companies Compeq, Chin-Poon, Unitech Electronics and Gold Circuit reported weak sales in June, although June sales were higher than in May.
Materials
Nan Ya Plastics electronic materials division will invest $1.5 billion in Kunshan, Jiangsu Province, China. In 2002, the company will open a copper clad laminate plant with a capacity of 500,000 sheets/month. In 2004, an epoxy resins plant will be started-up, along with a glass fiber and yarn plant (a 50:50 joint venture with PPG Industries).
A 3.6 M ft2/y PCB plant will also be opened. Nan Ya's electronic materials division reported sales of $860 M in 2000, 26% of total company sales.
Innovex has developed a process for producing high performance, adhesiveless laminate materials in its Maple Plain, MN factory The material has recently completed a successful qualification with a major customer and production volumes have started to ramp up.
MacDermid sold $301.5 million in 10-year senior subordinated notes, in a private placement.
Shipley invested an undisclosed sum in Coviant Inc. in an attempt to further its position in the optoelectronic market. Coviant, based in Philadelphia, Pa., specializes in outsourced manufacturing products and services for fiber attachment, fiber sub-assembly, micro assembly, and full package assembly for optical components.
Sheldahl formed a display products business unit to target applications in organic-light-emitting-diode (OLED) and plastic flat-panel displays. Shipments of OLED displays are projected to grow at a compound annual rate of 187%, from $45 million this year to $3.1 billion by 2005, according to DisplaySearch.
Barco NV will bring part of its graphics unit, ETS, into a joint venture with Mania Technologie AG, to be called Mania-Barco GmbH.
DuPont will invest US$20 million in Taiwan this year to develop electronic material businesses. Yang Bin-nan, plant manager of DuPont Taiwan's Taoyuan plant, said that DuPont is optimistic about the potential market for high-performance electronic materials and microcircuit devices for telecom and optoelectronic applications in Taiwan. The new investment is expected to treble the revenue of the local branch within three years.
PCB Assembly
Celestica is buying Omni Industries Ltd. for $890 million, giving it manufacturing operations in China, Malaysia and other Asian countries. With 9,000 employees, Omni provides PCB assembly and system assembly services, as well as other related supply chain capabilities including plastic injection molding, IC equipment, substrates and distribution.
Marconi completed the first phase of its agreement with Jabil Circuit to outsource part of its communications manufacturing capacity. This completes the transfer to Jabil of manufacturing operations in Liverpool and Coventry, U.K., and Marcianise, Italy.
The second phase involves the transfer of operations in Bedford, Texas, and Offenburg, Germany to be completed by the end of 2001. Marconi will receive $250 million for the transfer of operations, subject to value adjustments. Up to 2,900 Marconi employees will be transferred to Jabil. Jabil signed a 3-year product supply pact to manufacture existing and new products, including PCB assembly and repair services, for Marconi.
3Com announced a CEM relationship with Flextronics for its high-volume server, desktop and mobile connectivity products. 3Com will sell its Marlborough, MA facility and plans to lease space on the campus after the facility is sold. 3Com employees, primarily from 3Coms CommWorks in Mount Prospect, IL will be relocated to the companys Rolling Meadows, IL facility and 3Com plans to sell the Mount Prospect facility. 3Com said it intends to sell a portion of its headquarters campus in Santa Clara, CA. The Singapore facility will transition to become 3Coms Asia-Pacific regional distribution center, and will also include the companys Singapore and South Asia regional sales management, IT, training and customer service and support operations.
Solectron is to close its Port Glasgow, Scotland assembly plant with the loss of 475 jobs. The move followed an announcement that it is looking to cut a further 12,600 staff globally as a result of the continuing downturn in the electronics sector. Solectron had already announced 8200 worldwide job cuts in March.
Solectron completed its acquisition of Singapore Shinei Sangyo Pte Ltd., a privately held manufacturer and designer of enclosures for electronics products. Shine, which will be renamed Shinei International, will be an independently operated subsidiary within Solectrons newly formed Power, Packaging and Cooling unit, and continues to market its services to other companies separately. Financial terms of the deal were not disclosed.
Sanmina will buy Alcatels manufacturing operations in Richardson, Texas. Alcatel Chairman and CEO Serge Tchuruk said that he aims to cut back to one dozen or fewer manufacturing plants by the end of 2002, compared with the roughly 120 it had last year. Many of the factories, or fabs as they are sometimes known in the industry, will be sold to contract manufacturers and at least some will continue to produce products for Alcatel. Others are being sold off with parts of the business. We are going to be a fab-less company pretty soon, Mr. Tchuruk said.
Cell phone makers will provide more than $10 billion of additional business for EMS providers within the next six months. The windfall is under way as anxious cell phone manufacturers-Alcatel, Ericsson, and Motorola-accelerate their outsourcing efforts to gain share and speed time-to-market in an increasingly sluggish business sector.
The severity of the downturn really eliminated the concept of [cell phone makers] having their own facilities, said Michael Marks, chairman and chief executive of Flextronics International Ltd., during the companys earnings call last week. Every [cell phone] company will want to outsource, but theres only three EMS companies-Solectron, Celestica, and Flextronics-that can do the big deals.
Celestica completed its strategic agreement with SAGEM SA, a technology group with a business focus on the communications, automotive and defense industries. As part of this arrangement, Celestica has acquired SAGEM CR s.r.o., a subsidiary of SAGEM SA, which operates in Kladno, Czech Republic. The deal includes a three-year supply agreement worth approximately US$500 million in total revenue over the course of three years.
SCI Systems abandoned its plans to close or sell its plant in Grenoble, France, after negotiations with Dixiel (France) broke down.
Motorola and Flextronics scrapped much of a deal from last year under which Flextronics was to make more than $30 billion of Motorola's products, citing the continued market slowdown.
Semiconductors
Chip sales will achieve 25 percent growth in 2002, recovering from a 12 percent decline this year, according to Semico Research. Semico identifies two key factors pointing to recovery. Firstly, ASPs are expected to rise as demand begins to exceed supply when chip inventories are consumed or written off. Secondly, Semico sees an increase in demand for devices requiring semiconductors.
The SIA is projecting an industry-wide recovery in the second half of this year that will spur growth of 20.5% in 2002 and 25% in 2003. Despite the sales decline brought on by the excess inventory this year, the semiconductor market is still projected to grow from $149 billion dollars in 1999 to $283 billion by 2004, a compound annual growth rate of almost 14%, said Kirk Pond, Fairchild Semiconductor president, CEO and chairman of the board. The industry has a 17% compound annual growth rate for the past 40 years and we expect that to continue for the foreseeable future despite periodic cycles.
In the mid-1980s, the semiconductor industry experienced a similar cycle of extremely strong growth with an inventory correction in the following year. However, the -16.5 percent adjustment in 1985 was more severe than the 14% we are currently experiencing.
Amkor Technology will merge with Sampo Semiconductor and Taiwan Semiconductor Technology in Taiwan.
North American semiconductor equipment-makers recorded a book-to-bill ratio of 0.46 in May. Orders dropped 75% from the $2.78 billion last year.
Personal Note
We have finally completed the house we have been building for the last 18 months and are moving in as I write this article. If you are traveling along the northern coast of California, please visit us at 92 Spindrift Close, The Sea Ranch, CA 95497.
_______________ Walt Custer Custer Consulting Group Phone: 707 785-1777 FAX: 707 785-1988http://www.custerconsulting.com/
E-mail: wcuster@mindspring.com