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Quadruple Whammy: Inventories, Economy, Equipment Orders & September 11 (Nov. 2001)
November 5, 2001 |Estimated reading time: 12 minutes
"Last month's column entitled "Worst is Almost Over; Many Signs of Recovery on the Horizon" was written a week before the terrorist attacks. While I forecast the beginnings of a slow and modest recovery at that time, the horrible events of September 11 require a reanalysis." Quadruple Whammy: Inventories, Economy, Equipment Orders & September 11 by Walt Custer November 1, 2001
Last month’s column entitled “Worst is Almost Over ; Many Signs of Recovery on the Horizon” was written a week before the terrorist attacks. While I forecast the beginnings of a slow and modest recovery at that time, the horrible events of September 11 require a reanalysis.
There are four factors key to business improvement – the depletion of the excess inventories, economic stability, a rebound in electronic equipment orders and the impact of our fight against terrorism. Because much of my normal analyses are based upon trends in historical economic, electronic equipment and component orders, making predictions now without post-September 11 data is difficult. However here is how I see it:
Inventories
We have make progress in working down finished goods and component orders throughout the supply chain. Per Chart 1, the ratio of electronic equipment inventories compared to orders peaked in June 2001 and declined in both July and August. We appear to have finally “turned the corner” regarding bloated inventories.
Economic Stability
Short term it would appear that we are headed into a global economic recession. This decline was already in progress prior to September 11 but the terrorist attacks certainly made it worse. The length and depth of this recession depends on both global peace efforts and the Fed’s economic stimulus packages. Bush is pumping the U.S. economy with spending programs and the Greenspan has dropped interest rates to their lowest levels in years. Eventually these actions will pay off. Under normal conditions the rate reductions, which started in January, would bring a turnaround about 18 months later (mid-2002). However September 11 certainly complicated our economic analysis. Historically (Chart 2) the stock market has initially dropped and then recovered within six months of a catastrophe. PCB shipments do follow stock market performance (Chart 3). Historical comparisons are difficult now however because we were already in very difficult times prior to the terrorist attacks and this current “war” is unlike anything we have fought before.
Electronic Equipment Orders
The equipment data through August showed that we were in a trough. While (Chart 4) electronic equipment growth had plunged to it’s lowest growth level on record (minus 29.6% on a 3/12 basis in August), this comparison is based upon June-July-August 2001 vs. June-July-August 2000 data. Last year’s equipment orders were inflated. If we look at actual equipment orders and shipments (Chart 5) we see that they are obviously well below 2000 levels (explaining the –30% growth) but that orders bottomed in June 2001 and were flat through this summer. Shipments (which trailed orders) were still declining in August – hence the horrible 3Q’01 financial reports.
Looking at equipment orders by end market (Chart 6) we see that instruments & controls and military electronics have been flat, computers have declined and communication equipment improved in July/August. Summed together we saw no growth (or decline) in pre-September 11 equipment orders.
What can we expect this fall and winter? Some electronic equipment orders will soften and others will surge. Chart 7 lists some post-September 11 growth opportunities. Many of these applications (especially when security or defense related) will favor domestic PCB suppliers.
PCB Outlook
August PCB-related orders were terrible (Chart 8) and I don’t expect that the September data will be any better. Although the August rigid PCB book-to-bill ratio improved on a 3-month basis (Chart 9) the 1-month book/bill dropped. Looking at the actual data (on a $ index basis) Chart 10 shows the magnitude in the drop in PCB orders and shipments. Compare this to the monthly equipment data in Chart 5. PCBs declined much more due to inventory/supply chain effects. And the actual situation is worse as the IPC data does not fully reflect the plant shutdowns (Viasystems Richmond, Multek Austin, etc).
How will the year end? Dr Hayao Nakahara kindly provided his estimate of PCB declines by geographic area (Chart 11). Naka gave me this data in early October based upon his world travels. Not a pretty picture!
Short Term Indicators
Since it will take a few months to re-establish a historic baseline of economic, electronic equipment and component data following September 11, we must use short-term indicators as a source for guidance. The Purchasing Managers’ and Electronic Buyers News indices (Chart 12), which survey very recent order patterns, are useful.
Forecasting the recovery has become more difficult. But, it will surely come. As present it’s just hard to say precisely when!
Electronic Equipment
Mobile Communications
Cellular and wireless phone sales surged in the days following the September 11 terrorist attack on New York and Washington as people scrambled to protect family and friends in the event of another emergency. "Now everyone wants their wives and kids to have cell phones for security reasons," stated Thomas Lee, a managing director at J.P. Morgan Chase & Co.
As the world pursues terrorist networks in remote regions, demand is growing for hand-held satellite phones. Soldiers and intelligence agents, reporters following the news and businesses building emergency communications networks are all potential users. "We have been inundated with requests," said D. D'Ambrosio, executive VP of Iridium Satellite LLC, which last year bought a 66-satellite network from the failed Motorola spin-off, Iridium.
Servers & Infrastructure
According to IDC, worldwide server factory revenues declined 16% from $14.4 billion in 2Q’00 to $12.1 billion in 2Q’01. "Even though we knew that the server market would be affected by the economic situation, we did not expect a decline of this magnitude," said Vernon Turner, IDC's VP of Global Enterprise Server Solutions. "This is the biggest decline that the server market has experienced over the past five years."
Regional revenue declines were:
$% Growth 2Q’01 vs. 2Q’00
United States
-25
Western Europe
-8
Japan
-20
Asia/Pacific
-3
Canada
-13
Rest of World
-11
The top five vendors in the worldwide revenue share were:
Market Share %
IBM
26.0
Sun Microsystems
16.5
Compaq
16.1
Hewlett-Packard
14.0
Dell
7.0
Networking gear makers will sharpen their focus on developing products with beefed up security and availability features that can meet both physical and online threats to the world's Internet infrastructure. Service providers and enterprises in Asia are expected to demand the security-enhanced routers, switches and hubs to support the metropolitan area networks (MANs) and data storage facilities being built around the region, according to Foundry Networks.
RHK said the North American DSL market decreased 6% to $729 million in the first half of this year from $778 million during the same period a year ago. Alcatel once again captured the top spot with a 49% market share in the first half of 2001, up from 47% last year, followed by Lucent Technologies' 19% share, up from 13%. Cisco Systems remained unchanged with a 15%.
Consumer Electronics
According to Strategy Analytics, 46 million homes worldwide will be watching digital TV delivered over their phone lines by 2008. The report also predicts that the annual sales of DSL DTV set-top boxes will grow from 1 million units next year to 10.7 million units by 2008.
Japan's largest electronics maker, Hitachi, will spin off its consumer electronic products and industrial equipment businesses next April as two new companies
Other
Alcoa Fujikura and Robert Bosch formed a strategic alliance to jointly design, develop and market completely integrated electronics and electrical distribution systems.
France's Genesys has seen a surge of 40% in demand for its teleconferencing services since the September 11 attacks.
AsIs forecasts major growth for smart card ID security systems. According to its report, a single multi-application smart card is now capable of holding up to 64 MB of data, which can be used to fulfill the identification, commerce, transportation, and social services requirements of users.
PCB Fabrication
Sanmina “mothballed” its Hudson interlayer plant and shut down “Treasure Lane” the smaller of its two Derry facilities with layoffs totaling about 265.
ShengYi Electronics of China will add a high volume, high technology PCB factory. The total investment will be US$180 million of which US$60 million will be used in the first period. The main product of the factory will 8-20 layer PCBs. The annual turnover will be 700 million RMB and the production value is expected to become 5 billion RMB by 2006.
M~Wave was named to Deloitte & Touche's "Fast 50" Program, a ranking of the 50 fastest growing technology companies in the Chicago area. Rankings were based on five-year revenue growth, from 1996-2000.
Viasystems North and South Tyneside, blaming a global downturn in the electronics market, went into receivership and closed in September.
CuTronics, once a major Baltimore-based PCB maker, has been restarted by its original founder Walter Johnston. The new CuTronics quickturn facility is in Clearwater, FL. Welcome back Walt.
Invotec, a new UK PCB company was formed after buying Viasystems Blackburn, Tamworth and Telford facilities. Derrick Bumpteed leads the management team.
Mainland China-Tripod Technology will invest another $10 million by year-end in its new PCB plant in Xishan, Jiangsu province. The plant will manufacture 2-sided and 4-layer PCBs starting third quarter of next year, with a monthly capacity of 420,000 square feet. The company is also scheduled to increase its monthly capacity for 6-layer and 8-layer PCBs to 1.68 million square feet from 750,000 square feet at its factory in Taiwan at the end of this year. Tripod revenue target this year is $122 million, up by 29 percent, from last year.
AT&S AG closed its plant in Augsburg, Germany. The expected pretax costs of the closure will be up to EUR16 million.
Parlex Corporation and Gul Technologies Singapore will jointly invest in Parlex's sales and manufacturing operations in Asia.
Materials
ACD Technologies has been created by the merger of three Italian PCB industry equipment suppliers: I.S., CEDAL and PLURITEC. ACD (the partner's respective surname initials) will operate through three distinct "divisions" all maintaining their current trademarks. Umberto Aiassa, Bruno Ceraso & Andrea Doria will jointly manage the new company.
Quantum Performance Group reported that the 2001 global dry film photoresist volume is expected to decrease 27% to 4 billion square feet from year 2000’s 5.4 billion square feet.
Oki Electric Industry developed an optical-based interconnect technology for the chips on PCB. A thin sheet of quartz glass is attached to the underside of the board, and data is transmitted between chips as optical signals that reflect off the glass. In theory, the new technology can provide 2,000 wires per centimeter. Oki Electric aims to have a practical version of the technology ready as early as 2006.
PCB Assembly
Jabil Circuit signed a three-year manufacturing agreement with Intel, to assume production of certain peripheral products. As part of the agreement, Jabil will purchase a facility in Penang, Malaysia acquired by Intel as part of its acquisition of Xircom.
SCI Systems expanded its supply relationship with Nortel Networks in a deal that will generate $400 million revenues in the first year. SCI acquired all of Nortel Networks remaining in-house PCB assembly operations, including all new product introduction activities. The multiyear deal also extends SCI's existing master supply agreement with Nortel, which covers a broad range of PCB assembly manufacturing services. "With this agreement, it is Nortel Networks' intent to no longer manufacture PCBAs," said Richard Lowe, Nortel's VP of global customer and product operations.
Sanmina is purchasing of assets of E-M-Solutions, a privately held international electronic enclosure manufacturer. These assets include certain manufacturing operations in the United States as well as the stock of E-M-Solutions' subsidiaries incorporated in Mexico and Northern Ireland.
Solectron acquired customer relationship management firm Stream International in a move aimed to expand Solectron's services business. Stream's revenues in fiscal year 2000 were $323 million.
"This transaction expands Solectron's presence in customer relationship management services, a sector we have specifically targeted for growth," said Bill Mitchell, executive vice president and president for Solectron Global Services.
Flextronics will take over the manufacture of Hewlett-Packard's large-format printers in Singapore. As part of the move, Flextronics will provide employment to HP's 250 production staff and will operate independently within the HP-owned facility.
SCI Systems will acquire IBM's Design and Product/Test Engineering and Electronic Manufacturing Services (EMS) operations based in Yasu, Japan. The first-year revenue of the multi-year agreement is estimated by SCI to be in excess of $700 million.
C-MAC will supply Nortel Networks with systems integration, configuration and testing of DMS circuit-switching products, as well as related supply chain services. These operations are currently performed in-house at Nortel Networks facilities in Research Triangle Park, NC and Monkstown, N. Ireland. They will be transferred to C-MAC's operations in Creedmoor, NC and Carrickfergus, Northern Ireland.
Flextronics acquired Instrumentation Engineering, Inc., a systems test equipment developer and manufacturer.
Semiconductors
The North American semiconductor equipment industry posted an August book-to-bill ratio of 0.61. "The numbers indicate that the leveling in the decline of orders and shipments seen in the past several months continued through August," said Stanley T. Myers, president and CEO of SEMI. "The effects of recent current events and wavering consumer confidence and spending, however, could further exacerbate the already tenuous situation in regards to chip demand and capacity."
Other
Mitsubishi Chemical set up a JV with Mitsubishi Corp to produce fullerenes (aka buckyballs). Buckyballs are hollow, soccer ball-shaped configurations of carbon atoms that researchers hope to use in a wide variety of applications including medicine and electronics.
Fuel cells could now replace batteries as the technology of choice to power portable electronic devices within five years. Dr Chris Dyer, a fuel cell analyst who until recently worked for Motorola, told the Grove Fuel Cell Symposium in London that lithium ion batteries are reaching a limit to their power density. The next generation of high-bandwidth mobile devices will require significantly greater power densities and fuel cells are the only technology that can provide it.
Reed Electronics Research said the global capacitor market was valued at $15.2bn last year. Driven by growth in the communications industry, in particular mobile phones, demand for tantalum and multilayer ceramic chip capacitors outstripped supply for most of the year leading to higher prices, extended lead times and product allocation. Demand from other markets including computing, automotive and industrial and the digitization of consumer electronics helped put additional pressure on prices and lead times. In value terms, the global capacitor market will decline by around 6% in 2001, with the possibility of a steeper fall if the outlook for the global economy and the principal end-use markets deteriorate further in the final months of the year.
After years of R&D, foundry startup FlexICs will soon begin shipping samples of the world's first semiconductors fabricated on six-inch plastic substrates.
_______________ Walt Custer Custer Consulting Group Phone: 707 785-1777 FAX: 707 785-1988http://www.custerconsulting.com/
E-mail: wcuster@mindspring.com
This article was originally published in CircuiTree magazine and is reprinted here with permission.