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A "Wait & See" Recovery (Feb 2002)
February 4, 2002 |Estimated reading time: 13 minutes
A “Wait & See” Recovery
by Walt Custer
February 1st, 2002
Although the worst appears behind us, our “recovery” is moving very slowly. Most of the world is in a recession (Chart 1). The USA is in the middle of the pack with China leading and Japan trailing world growth.
After a strong jump in U.S. electronic equipment orders in October (recouping the September drop), November returned to lackluster growth. Per Chart 2 November electronic equipment orders increased only 1.3% versus October. By category (Chart 3) computers and instruments improved, communications equipment held even and strangely military electronics appear to have declined. Since I assume the USA is aggressively ordering replacement weapons, perhaps this DOC data is incomplete? I wonder if current military electronics orders are being reported (or perhaps for security reasons they are not tabulated in the DOC data)? I have to believe that military spending is up, yet the DOC data does not reflect an increase.
Electronic equipment inventories compared to both sales and orders (Chart 4) held steady at October levels. These inventories are a combination of finished goods, work-in-progress & raw materials at the OEM level. They do not capture any manufacturing being done by EMS providers for the OEMs. Here lies a problem. Although OEMs are reducing stock, reportedly many of the EMS companies still have excessive inventories. Hence, PCB orders are currently stalled.
Looking at N American PCB shipments (Chart 5), 2001 will be down about 35% versus 2000 due to both lower demand and the many domestic factory shutdowns. Since most of the N American PCB capacity was either shuttered or shifted to Asia in mid to later 2001, my calculation of the “shutdown” portion of the 2001-drop was prorated to reflect the timing of the closures.
What about 2002 PCB growth? Unfortunately we are entering 2002 at the bottom of the business cycle trough, so total 2002 may be flat versus 2001 - with a poor beginning and a much better finish.
Looking at leading indicators (Chart 6) the December Purchasing Managers Index had a nice jump versus the prior month but the corresponding Electronic Buyers News index dropped about 4 points versus November. This suggests that our overall domestic economy is improving faster than the electronics sector.
Although electronic equipment orders (Chart 7) are no longer dropping, it appears that October and November growth only offset the September 11 induced drop. The recovery is slow.
Returning to this month’s column’s title, I believe we can expect a “wait & see” recovery. The EMS companies need to flush inventories further, electronic equipment orders must show a stronger increase and then management must be convinced of a true recovery before robust new orders trickle down to the PCB level. Fortunately the overall economy appears to be improving so an electronic industry recovery must eventually follow. It appears that the first half of 2002 will remain painful and a significant improvement will be delayed until 2H’02. Hang in there!
General Business Conditions
The U.S. Purchasing Managers Index of business activity rose in December for a second straight month to a better-than-expected 48.2, up from 44.5 in November.
After rising in November to its highest level in almost a year, the Electronics Buyers' News Index (Chart 6) fell four points in December, driven down by falling orders and lower production rates. The EBI's decline to 34, from 37.8 in November, indicates that electronics purchasing executives still have concerns about when and how strongly the market will pick up later in 2002.
According to IDC Corp the global IT market will begin to rebound in mid-2002 or sooner, with IT spending rising 4 - 6% in the U.S., 6 - 7% in W. Europe and 10 -12% in the Asia/Pacific region.
Although EMS providers have burned off some of their surplus inventory, levels are still abnormally high. The sector was carrying $9.6 billion in inventory in December, a reduction from the nearly $12 billion EMS companies possessed at the beginning of 2001, said Jerry Labowitz, an analyst at Merrill Lynch.
China's factory production rose 7.9% in November, the slowest pace in 10 months, a sign that falling world demand for phone equipment and televisions is starting to weigh on the world's best-performing major economy.
Xerox plans to set up an independent company for its Palo Alto Research Center. Partners are being sought for the company, which will begin operations as a wholly owned subsidiary.
Electronic Equipment
Computers
U.S. personal computer sales improved in December as holiday shoppers took advantage of low prices, but sales to businesses failed to reappear, Merrill Lynch analyst Steven Fortuna said in early January. "The December quarter showed some upside surprise on the consumer side, however the more important corporate side remained weak and really failed to show any signs of improvement," Fortuna said. "We believe corporate will remain weak for the first half of '02," he added.
Taiwan made US$12.1 billion worth of notebooks in 2001. Nearly a quarter of Taiwan's notebook computer production will move to China by the end of 2002, the government-funded Market Intelligence Center said.
Taiwan emerged as the world's fourth-largest manufacturer of information hardware in 2001, according a forecast by the Market Information Center [MIC] under the Institute for Information Industry. Taiwan's information hardware production registered - 9.2% growth in 2001, mainly because of sluggish consumer confidence in the wake of the Sept. 11 terrorist attacks. The MIC predicted that the production value of Taiwan's information hardware will increase by 9.4% to US$46.7 billion in 2002, which it said is still lower than the peak level posted in 2000.
Home-use PCs in Japan will be assessed extra charges around the middle of fiscal 2003, when buyers will be expected to pay several thousand yen in recycling fees along with their
PC purchases.
Taiwan’s desktop computer makers share of global production is forecast to be 25% in 2002, up 1% from 2001. Almost half of Taiwan's desktop computer manufacturing is conducted in China, where labor and land costs are less. Taiwan's computer networking industry will account for 50% of global production of WAN and LAN technology this year.
Mobile Communications
"Today there are more mobile phones in use in the world than wireline connections. By the middle of next year, the global number of mobile phone users will exceed 1 billion people. By the year 2006, 1.5 billion people will be using mobile services. That's one out of every four people on the earth." Jorma Ollila, chairman and CEO, Nokia (Comdex 2001)
Ericsson's investment in China is expected to reach US$5.1 billion by the end of 2005, double the present figure, according to Ericsson China President Jan Malm. He said that to promote the localization of the Ericsson products in China, the company intends to triple its annual exports from China to US$4.5 billion, while making efforts to invest more in research and developing human resources. "China is the biggest and most important market for Ericsson in the world," noted Malm. "China, a central supplier for Ericsson's global chain, provides products and services for Ericsson's worldwide customers."
IBM will gain sales as more cars and trucks connect to wireless data networks and act like rolling Web appliances. Researchers initially predicted a rapid boom in the use of location devices; chips and software to route data to and from vehicles-a field called telematics that lets cars and drivers interact with the Internet and the outside world. The outlook now is less buoyant. Still, telematics is growing, and the business strategy has shifted in IBM's favor. "Their solution is the right way to go: thin client," said Jonathan Lawrence, a former financial analyst who is president of the consulting firm Crystal Mountain Group.
Taiwan's mobile phone makers estimate their shipments will double in 2002 to more than 42 million phones, on the expectation that deliveries by international players will pick up sharply.
The FCC granted Boeing permission to offer high-speed Internet connections so passengers can use the Web, watch television or check e-mail while flying over the United States. However the future of Boeing's Connexion service remains unclear. In November Boeing's three partners in the venture (American, Delta and United Airlines) suspended plans to introduce Connexion by mid-2002, citing the effects of the Sept. 11 terrorist attacks.
Philips Electronics sold its GSM handset production unit in Le Mans, France, to European Telecom (Slough, UK), mobile phone distributor, for Euro 500,000.
Telecom
NEC will sell two telecoms equipment factories to Celestica. The sale will involve 1,200 employees from two NEC plants in Miyagi and Yamanashi prefectures.
Servers & Infrastructure
The N. American switching and routing market decreased 14% in 3Q’01 to $841 million from $981 million in the second quarter, according to RHK. "Although we predict a similar decrease in (the fourth quarter), we expect to see a return to positive growth in 2002," RHK analyst Kelly Dougherty said. Routers generated 53% of the N. American switching and routing market in the third quarter, RHK said.
Cisco Systems affirmed in mid-December that business conditions had stabilized and said Asia would contribute an increasing share to group revenues in the next few years. "We see things have stabilized and are a lot better than the months from February to July where they were falling very significantly around the world and in Asia," Gary Jackson, Cisco's VP of Asia, told Reuters in an interview.
Instruments & Controls
Agilent Technologies will eliminate 530 jobs in Eastern Washington as it closes down its Liberty Lake (Spokane) PCB assembly plant in the next nine to 15 months.
Consumer Electronics
LG Philips Displays has opened a $245 million manufacturing plant in Gomez Palacio, Mexico with an expected annual capacity of about 4.5 million color picture tubes. The factory will begin producing large screen 29-inch flat-square CPTs in one production line with an annual capacity of 1 million units. Future plans involve additional real flat lines for the production of large size CPTs (29-inch real flat cybertube) and jumbo size picture tubes like the 36-inch real flat cybertube wide screen CPTs.
Office Equipment
Xerox has completed the sale of its office equipment manufacturing plants in Penang, Malaysia, Aguascalientes, Mexico, and Toronto, ON, to Flextronics for US$ 118 million, plus the assumption of specific liabilities.
PCB Fabrication
The former UK Viasystems PCB factory in South Shields (S. Tyneside) has been saved from closure by a management buy-out, safeguarding 800 jobs. The new operation is called Circatex, and will continue to produce multilayer PCBs for the telecoms, automotive, IT and consumer markets. Employees will be made 30% shareholders in the venture.
AT&S' Supervisory Board Chairman Dr. H. Androsch and CEO W. Dörflinger personally became major shareholders of paysafeCard.com, an Austrian card company, which provides a special credit card for payments on the internet.
DDi will oversee the operations of the Center for Advanced Printed Circuit Board Design and Manufacturing Technology. The Center will be funded and supported in collaboration with Virginia Commonwealth University and the University of Virginia and the other industry sponsors, DuPont, Panasonic and Zuken. "Our participation in this important endeavor exemplifies DDi's leadership in the design and manufacture of complex, technologically advanced PCBs," said CEO Bruce McMaster.
Elec & Eltek (Guangzhou) Electronic will have its total investment increased to US$118.1 million from US$63.5 million.
Honeywell Electronic Materials will begin construction of a packaging components manufacturing facility in Thailand. The facility will supply the Asia Pacific region with a complete array of next generation thermal and electrical interconnect solutions for IC packages.
Sanmina-SCI ‘s Tech Center East in Ward Hill, Massachusetts has completed certification assessment by the Defense Supply Center, Columbus, meeting all the requirements necessary to obtain MIL-PRF-31032 certification. DSCC is the largest supplier of weapon systems spare parts and end items to the Department of Defense. This award is the highest level of military qualification available for PCB manufacturing.
Scotland’s Signum Circuits was saved by a management buyout. Former chief executive Guido Crolla and ex-finance director Ian Durham, who retain their same roles, led the MBO team. Receiver Blair Nimmo, of KPMG Corporate Recovery, said Signum was a sound business with an excellent reputation in the marketplace. He added: "It is now well placed to respond to any recovery in the telecoms market."
Coretec’s Toronto based facilities have been recommended for QS 9000 registration - a comprehensive international standard for the automotive industry. Official notification was made by SGS International Certification Services Canada Inc., based on an audit concluded on December 20, 2001.
Due to an ongoing Beijing water shortage, Ibiden Electronics reportedly halted its PCB operations in the Xingwang (International) Industrial Park. Other EMS and PCB manufacturers may also be affected. The Xingwang (International) Industrial Park, where Nokia is located, has attracted a number of component manufacturers. World Wiser Electronics, Foxconn Electronics (Hon Hai Precision Industry) and Chin-Poon Industrial have all targeted this area. Industry sources said that Ibiden's pull out should not have a large impact on Nokia's PCB supply, as it also orders boards from Compeq and China Circuit Technology (Shantou). Also Aspocomp has formed a JV with Chin-Poon to produce PCBs in Suzhou, and AT&S will build new factory in Shanghai's Songjiang area.
PNE PCB Berhad of Malaysia will set up a wholly-owned subsidiary in China to manufacture PCBs. Executive chairman Tan Kong Heng expects the new factory to start operations before 3Q’02.
Materials
Gould Electronics named Joseph Huss president and CEO. He succeeds C. David Ferguson, who retired following 38 years of service to Gould and predecessor companies, and will continue in a consulting capacity with the company.
Legend Holdings is in talks with laminates and copper foil maker Kingboard Chemical Holdings Ltd to sell its only circuit board factory for an undisclosed amount. The factory is in the southern city of Huiyang in China.
PCB Assembly
Solectron will close its Everett manufacturing assembly plant in April, idling 324 workers.
ACT Manufacturing filed a petition for reorganization under Chapter 11. The Company's overseas operations are unaffected by the filing.
Flextronics acquired 91% of The Orbiant Group from Swedish telecommunications maker Telia for approximately $100 million.
Sanmina-SCI closed its Blanchardstown, Ireland assembly plant in Dublin with the loss of up to 130 jobs. All activities will now be transferred by March of this year to Sanmina-SCI's larger Fermoy site in County Cork.
Semiconductors
Worldwide semiconductor sales fell by a third in 2001, the industry's worst, and many chipmakers will find recovery difficult, Gartner Dataquest said.
Korea's semiconductor equipment makers are rushing to the fast-growing LCD gear market to offset the downturn in the chip sector worldwide.
Intel expects its microprocessors to have one billion transistors by 2007, up from 42 million in the current Pentium 4, said Gerry Marcyk, director of components research at Intel's development facility. While process technology generally moves forward in two-year cycles - with shifts to 90-nanometer lithography design rules expected in 2003, to 65 nm in 2005, then to 45 nm in 2007 - packaging will have to hustle to keep up the pace, Marcyk said. Intel will move from its plastic bumped organic land grid array package to a bumpless package with built-up layers. By embedding a die inside the package and getting rid of the bumps, the package thins down to the thinness of a dime. A thinner package allows faster speeds and halves the number of copper layers in the package, he said.
Hynix Semiconductor announced a 30% increase in contract DRAM prices in early January.
Falling memory prices last year nearly toppled Hynix.
Displays
Candescent Technologies has abandoned plans to manufacture Field Emission Display (FED) flat panel displays, and will attempt to license its technology instead. According to the prospectus filed last year, Candescent needed to raise about $800 million in order to build a manufacturing plant and get its panels into full production by 2003.
See you at IPC Printed Circuit Expo. Stop by our booth and say hello.
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.