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Some 'Fearless Forecasts' and Why Book/Bill Data Do Not Tell the Whole Story (May 2002)
May 8, 2002 |Estimated reading time: 15 minutes
Some “Fearless Forecasts” and Why Book/Bill Data Do Not Tell the Whole Story
by Walt Custer
May 1st, 2002
In my April column I highlighted the many signs of a coming recovery. Based upon various leading indicators I predicted a gradual business improvement through the early summer and then accelerating growth later this year and into 2003. I still believe this “forecast” however the short-term supportive information became a bit less compelling in the last few weeks. Let’s look at what the numbers say.
Chart 1 shows the 3-month semiconductor book/bill data for the USA. Everything looks quite encouraging based upon this chart. The 3-month value of 1.1 is the highest since July 2000 (the peak of our last boom), the 1-month B/B reached 1.16 and the apparent trend is sharply upwards. However book/bill data can be a bit misleading. Looking at actual orders and shipments (Chart 2) it is clear what really happened both shipments and orders dropped! Since the book/bill is a ratio and because shipments fell below orders the book/bill increased when orders dropped.
Looking at US electronic equipment data, Chart 3 appears to portray a rebound in both equipment and PCB orders. And the electronic equipment book/bill (Chart 4), although below 1.0, is obviously improving. However looking Chart 5 we see that actual equipment orders and shipments (Chart 5) are quite flat. No robust recovery yet!
Printed Circuits tell a similar story. Chart 6 shows that the 3-month average book/bill for rigid PCBs bottomed in April 2001 and has been recovering nicely in recent months. With the 3-month B/B reaching 1.02 in February we appeared to have cause for celebration. However looking at the actual $ index data (Chart 7), we see that recent orders have dropped, driving the 1-month book/bill to 0.9 in February. No big PCB recovery yet!
What does this all mean? Here are my thoughts:
- The first half 2002 recovery will not be robust. Electronic equipment orders are just not increasing fast enough.
- The general economy is recovering faster than the electronics sector. Chart 8 shows a stronger improvement in the overall Purchasing Managers Index versus the Electronic Buyers News EBI index.
- Although electronic equipment growth is modest, the ratio of OEM inventories/orders (Chart 9) has dropped back to reasonable levels. Excess stock levels will not impede a recovery.
- Growth rates will soon improve substantially when comparing a month in 2002 to the same month a year earlier. Don’t interpret this a robust expansion. Over the last year our monthly benchmark has been a strong month in 2000. Soon we will be comparing each month in 2002 to a much weaker month in 2001, effectively driving up the 2002 growth rates.
- Don’t use the book/bill ratios as the only gauge of recovery. They can be very misleading. Look at the actual order and shipment trends.
- We are in our traditionally slow season. Even in good times spring brings a slowing - usually followed by recovery in late summer and fall.
Last month’s prediction still holds - modest growth until summer and then noticeable improvement for the following 18 months. My neck is “on the line.”
General Business Conditions
February electronic component orders were up by more than 30% compared to February 2001, according the Electronic Components, Assemblies & Materials Association (ECA). The 12-month index average was also positive for the second consecutive month. “Reports from most sectors in the economy indicate recovery has begun,” says Bob Willis, ECA president. “It’s still early in the recovery cycle to predict when and how much, but the data at the beginning of this quarter indicates that around mid-summer revenue growth will reach manufacturers.”
According to IDC, worldwide Internet traffic will increase 93-fold from 2000 to 2005. Internet traffic will surpass voice traffic in 2002 and will amount to more than eight times voice traffic by 2005.IDC estimates that Internet users worldwide generated 24,432 terabits per day of traffic at the end of 2000 the information equivalent to all the data contained in the Library of Congress 305 times over.
Manufacturing Market Insider released its annual MMI Top 50 ranking of the world’s largest EMS providers. Ranking was based on 2001 sales. Companies in the MMI Top 50 combined for an estimated $77.9 billion in sales last year. Despite last year’s downturn in end markets, Top 50 sales showed only a mild decline in 2001. Sales of 49 Top 50 companies decreased 6.5% on the average. “If some outsourcing hadn’t occurred in 2001, the decline would have been worse,” said John Tuck, publisher of Manufacturing Market Insider.
Electronic Equipment
Computers
Personal computer manufacturers are raising prices or altering products in order to adapt to the rising cost of memory and flat panel display modules.
Q4’01 notebook PC shipments rose 11% (Y/Y) to a new record high of 6.9 million units, nearly 500K units higher than the previous high established in Q300 according to DisplaySearch. Q4’01 Branded Notebook PC Market Share based on TFT LCD Procurement were: Dell 14.0%, Compaq 12.1%, Toshiba 12.1%, IBM 10.2%, Sony 7.9%, Fujitsu 6.9%, HP 5.6%, NEC 5.4%, Apple 3.8%, Acer 3.1%, Gateway 2.3%, Sharp 1.9% and Others 14.6%.
Communications
Dataquest reported that global mobile phones sales dipped below 400 million units in 2001, the first decline in the history of the industry. Nokia had 36.9% market share in the fourth quarter, up from 33.4 in the third quarter as a new line-up of fancier models caught on with the Christmas shopping crowds.
After a tough year in 2001, the cellular phone industry is expected to rebound and grow 14% in 2002, according to the Strategis Group. The market research firm believes the market will rebound and that worldwide handset shipments will jump from 394 million units in 2001 to 458 million in 2002, a growth rate of 14%.
A study of 18 communications equipment makers by Booz Allen Hamilton reveals imminent problems resulting from the long-term supply contracts signed two years ago. Manufacturers feared shortages of components, and signed long-term agreements guaranteeing they would receive a certain percentage of output from individual suppliers. Accounting rules do not require those vague commitments to be recorded as inventory on a company’s balance sheet, says Steve Nied, co-author of the study and a principal in Booz Allen Hamilton’s technology operations group. “It’s pretty fuzzy.” In total, $5 billion or more in write-offs could be generated at those companies this year, rivaling the $5.4 billion in inventory charges in 2001.
OEMs who could face more write-offs in 2002 due to off-balance-sheet liabilities:
Company 2001 write-offs ($US or as noted)
Cisco Systems
$2,200 million
Nortel Networks
$1,100 million
Motorola
$933 million
Alcatel
$923 million euros
Lucent
$679 million
JDS Uniphase
$571 million
Telllabs
$169 million
Ciena
$51 million
EMC
NA
Sun Microsystems
0
PCB Fabrication
Aspocomp said its French unit (former Philips, Evreux) would file for bankruptcy due to weak telecoms demand, with costs of up to 30 million euros ($26 million) seen from the move. “Radical improvement of the market situation can not be seen,” Aspocomp said in a statement.
Compeq Manufacturing Chairman Charles Wu, has urged the members of the Taiwan Printed Circuit Association to stop plans for further PCB capacity expansion in China, lest the rate of oversupply should go even higher. At the moment, PCB supply exceeds demand by 20-30%. About one-third of Taiwan’s PCB production capacity is now located in China, and more will be added in 2002.
Gul Technologies issued S$30 million ($16.43 million) in redeemable convertible bonds to expand its China operations. Gul’s 70%-owned unit GulTech International would increase the production output of its Suzhou plant to 400,000 square feet per month from 250,000 square feet. ‘Our ongoing expansion in Suzhou is in line with GulTech’s strategy to enhance global competitiveness by significantly increasing PCB production in China,’ said GulTech president and chief executive Jerry Rodrigues.
Ruwel’s PCB plant in Bayonne, France was put into receivership with a six-month observation period on March 11, 2002. The company blamed competition from Asian firms and weakness within the components market.
Unimicron Technology of Taiwan has purchased control of Chinese PCB maker Kunshan Circuittech Electronics that was previously owned by Huan Hsin Holdings. Kunshan has a capacity of 400,000 (2-sided to 16 layers) sq. ft. per month.
Materials
Aspocomp and handset component maker Perlos formed an equally owned R&D company. The firm, Asperation Oy, will focus on research and development of integrated components for the telecommunications and electronics industry, with products expected within the first year of operations.
Circuit Foil America, Quebec, Canada started copper foil production in March. The CFA facility will be ramped up to capacity cautiously while the specialty foils will continue to be provided out of Circuit Foil Luxembourg, the European headquarter plant. The phase-in of the supply by this new domestic plant will be accompanied by a necessary capacity adjustment in Europe.
Isola AG formed an industry alliance with Taconic Advanced Dielectric Division, a manufacturer of fluoropolymer laminates. Together the companies will develop and produce substrate materials for high-speed, digital printed circuitry applications. “With the growing demand for circuitry that operates at higher speeds and with increased signal performance, the opportunities for the material suppliers to design, develop and produce these materials is moving quickly. Isola and Taconic are joining forces to bring these types of materials to the market faster,” said Denny Ford, President of Isola Laminate Systems.
GIL Technologies has moved into China. “GIL is pleased to open its Shenzhen office to address the strong demand for our products in China and throughout the western Pacific Rim,” said John Gardner, VP of global sales and marketing for GIL Technologies. “Our company continues to uncover opportunities in this region, and we view this sales office as a first step in establishing ongoing business for our low loss, high frequency laminates in the Asian market.”
Nippon Mining & Metals and Mitsui Mining & Smelting plan to combine their copper operations this autumn, according to the Nihon Keizai Shimbun. The union will fully integrate everything from the procurement of copper ore to distribution.
Teradyne Connection Systems and Taconic signed a joint agreement to manufacture and market Taconic’s TacPreg material for large format PWB applications. The material will be manufactured at Teradyne’s facility in La Verne, California and Taconic’s plants in Petersburgh, New York, and Mullingar, Ireland.
Westwind Air Bearings opened its first spindle service centers in China - in Suzhou near Shanghai and in Guandong.
Electronic Manufacturing Services
Alcatel will outsource the European manufacturing of its PBX and IP-based PCX communication systems to Jabil Circuit. Alcatel will transfer its Brest, France manufacturing facility to Jabil as part of a 3-year outsourcing agreement.
ATI Technologies is reportedly outsourcing its graphics card production to Taiwan’s Asustek.
Celestica commenced its previously announced 5-year strategic manufacturing agreement with NEC. Celestica will assume supply chain management, sub-assembly, final assembly and testing for a broad range of NEC’s optical backbone and broadband access equipment. As part of the agreement, Celestica has acquired certain of NEC’s advanced manufacturing operations in Miyagi and Yamanashi, Japan.
Elcoteq Network signed a 2-year partnership agreement with Guangzhou Thinker Technology. Elcoteq will manufacture PCB assemblies at its plant in Dongguan in southern China for a Gunagzhou Thinker Technology product that connects telephone and data communications networks.
Flextronics Network Services and 3G Infrastructure Services AB (3GIS), commonly owned by Vodafone, Hi3G Access AB and Orange, agreed that Flextronics will provide engineering services in 3GIS’ Swedish nationwide UMTS rollout.
Flextronics now offers global reverse logistics, repair and refurbishment of electronic products to provide OEMs with more value-added services. This move allows Flextronics to “provide our customers such as Motorola and Hewlett-Packard with a complete array of post-manufacturing solutions,” said CEO Michael Marks.
Flextronics Photonics will transfer certain elements of its optical component manufacturing technology to Newport Corporation, and Newport will develop next-generation assembly automation systems to commercialize this proven process technology. By acquiring Flextronics’ direct fiber coupling and solder attachment processes, Newport will be able to develop a standardized platform for automating key fiber-optics packaging processes that have been Telcordia qualified for numerous applications.
Jabil Circuit formed a manufacturing partnership with Valeo including a 3-year supply agreement. Jabil acquires Valeo’s manufacturing operations in Meung-sur-Loire, France and Wemding Germany. Valeo also transfers electronics manufacturing production from its Switches & Detection Systems operation in Fort Worth, Texas and its Valeo Electrical Systems, Juarez, Mexico facility to Jabil’s Automotive Group in Chihuahua, Mexico. Jabil will manufacture automotive electronics for Valeo, including body controllers, sensor and switch assemblies, vehicle access and immobilizing, lighting, climate control, wiper and cooling systems. The combined annual revenues anticipated under the supply agreement are estimated to be $300 million.
Sanmina-SCI has been selected by CIENA, a global provider of intelligent optical networking systems and software, to manage electronic assembly-related New Product Introduction services for CIENA’s long-haul, and metropolitan transport and switching products. Sanmina-SCI will create a NPI center close to CIENA’s Linthicum, Maryland facility to provide electronic assembly services. As part of the agreement, Sanmina-SCI will hire a number of CIENA employees and lease manufacturing space from CIENA.
Sanmina-SCI completed its asset purchase of Alcatel’s manufacturing facility in Gunzenhausen, Germany. This is the first phase of Sanmina-SCI’s planned acquisition of Alcatel’s manufacturing facilities in Cherbourg, France, Gunzenhausen, Germany and Toledo, Spain.
Sanmina-SCI and Nordic contract manufacturer Note will collaborate on production. Sanmina-SCI will fulfill high volume orders for international customers while Note will produce smaller volumes for local customers. To us, the agreement with Note is a good way of focusing on the Nordic market,” said Nicklas Olsson, marketing and sales manager at Sanmina-SCI.
Sanmina-SCI and Umachines, a developer of MEMS optical networking modules, entered into a Technology Licensing and Manufacturing Services Agreement. Umachines will license to Sanmina-SCI certain technology for building quality MEMS and other optical networking modules. Sanmina-SCI will provide engineering and contract manufacturing support for Umachines’ full line of optical switches, variable optical attenuators and other optical networking modules.
SMTC Corp. will shut its Cork, Ireland facility through a voluntary liquidation, but the company will continue to serve customers in Europe through its Donegal, Ireland operation. “Our 2001 restructuring initiative has kept us focused on continually looking for ways to improve our operating efficiencies,” said Paul Walker, president and CEO.
Solectron has been selected as the primary provider of electronic manufacturing services for Pace Micro Technology’s global product range. Pace Micro Technology is a developer of digital set-top boxes and home gateways to broadcasters, cable operators and telecommunications companies that provide digital television and related interactive services.
Solectron will provide manufacturing services for Juniper Networks’ G10 Cable Modem Termination System. Cable operators use the G10 CMTS to manage and terminate thousands of simultaneous cable modem data sessions over the last mile of a broadband cable infrastructure.
Solectron reached a 3-year, $2 billion agreement to produce optical networking equipment for Lucent Technologies. Solectron will purchase Lucent’s equipment and inventory related to the optical product lines for $125 million. The company will not acquire buildings or property under the agreement. A-Plus Manufacturing, a Solectron company, will lease space in Lucent’s Merrimack Valley facility in North Andover, Mass., to accommodate initial production.
Solectron has begun producing built-to-order servers, workstations and storage products for NEC. It also conducts final testing and offers demand forecasting for the Japanese market. The two companies announced a supply and service agreement last October under which NEC transferred these services from its Ibaraki prefecture plant north of Tokyo to the Solectron’s Milipitas, CA facility.
Viasystems has retained Rothschild Inc. to assist in evaluating several recapitalization alternatives in an effort to reduce debt and strengthen the Company’s balance sheet. The goal is the conversion of approximately $600 million debt to equity.
Semiconductors
Worldwide sales of semiconductors totaled $10.01 billion in January, essentially unchanged over last month, as sales growth in the Asia-Pacific region and the Americas compensated for a dip in Europe and Japan, the SIA reported. “Strong consumer spending for mobile phones, DVD’s, and digital cameras continued to move chip sales slightly upward,” stated SIA president, George Scalise. “Although business investment has yet to pick up, consumer confidence and inventory replenishing continue to rise, driving the early stages of the overall recovery. Flat to slow growth of semiconductor sales in the first quarter of this year is in line with expectations. Our forecast calls for the second quarter to be slightly stronger with accelerating growth in the second half of 2002.”
The semiconductor equipment market fell 41% globally to $28 billion in 2001. “The industry suffered its worst annual decline last year as end electronics markets and capital spending collapsed,” said Stanley Myers, president and CEO of SEMI. “The magnitude of the downturn was amplified in that it followed the single greatest growth year on record in our industry,” Myers said. There is some positive news, however. “The good news is the apparent bottoming of the cycle as order trends have leveled and show slight improvement in the fourth quarter,” he said.
2000-2001 Semiconductor Capital Equipment Market by World Region (Dollars in U.S. Millions; Percentage Year-over-Year)
Region 2000 $M 2001 $M % Change
North America
12,927
8,183
-36.6
Europe
6,442
3,822
-40.1
Japan
9,197
7,595
-17.4
Korea
3,873
2,194
-43.8
Taiwan
9,320
3,217
-65.4
Rest of World
5,939
3.053
-48.3
Total Regions
47,680
28,065
-41.1
The North America-based manufacturers of semiconductor equipment posted $712 million in orders in February 2002 (three-month average basis) and a book-to-bill ratio of 0.87, according to SEMI. “Although the prevailing consensus is that 2002 will be a challenging year, the picture has brightened with recent announcements by some chipmakers of possible upward revisions in capital spending and the incremental acceleration of bookings over the last three months,” said Stanley Myers, president and CEO of SEMI.
Other
W. L. Gore joined charter members EMCORE and Picolight in the manufacture and supply of connectorized 12-channel parallel optical modules operating at up to 2.7 Gigabits per second per channel for an aggregate 32 Gbps of backplane bandwidth.
The total market for applications based on switchable materials (ferroelectrics, electrochromics, and materials used for optical switching) in 2001 was estimated at $400 million, and could conceivably increase to over $13 billion in 2006, according to Business Communications. It said that the current market for optical switches may grow from $18 million at present to $50 million in 2006 (an AAGR of 22.7%), but the potential market for materials that would achieve a technological breakthrough is much larger.
In Closing
See you at the IPC Technology Market Research Council (TMRC) Spring Conference at the Hotel Inter-Continental, Chicago, IL on May 14-15, 2002.
Walt Custer Custer Consulting Group Phone: 707 785-1777 FAX: 707 785-1988custerconsulting.com
E-mail: wcuster@mindspring.com
This article was originally published in CircuiTree magazine and is reprinted here with permission.