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North American 'Recovery' vs. 'Asian Shift' (Aug. 2002)
August 9, 2002 |Estimated reading time: 17 minutes
North American “Recovery” vs. “Asian Shift” by Walt Custer August 1st, 2002
Sometimes I think I sound (and write) like a broken record: “Business conditions remain poor, but there is light at the end of the tunnel.” Remember the novel Waiting for Godot? Perhaps it’s time for a reality check on my part?
Although the overall U.S. economy is “in recovery,” the electronics sector is lagging badly. Per Chart 1, the “Purchasing Managers Index” has been in growth territory (above 50) since the beginning of 2002, yet the Electronic Buyers News index is well below 50. What’s going on? Why isn’t electronic equipment keeping up?
Looking at the DOC data (revised on a historical basis in mid-June), we see that total U.S. electronic orders are now improving moderately (Chart 2). If examined by product type (Chart 3), all groups are now showing order growth (although computers & communications are far from their inflated 2000 peaks). From this revised data some key trends are obvious:
- Computer orders (red line) began dropping in mid-1999 – well before the general boom of 2000.
- Communications equipment (including Internet infrastructure) equipment overtook computers – also in mid-1999.
Since most personal computers (PCs, notebooks) and peripherals are now made in Asia for cost reasons, the computer order decline that began in mid-1999 makes sense. Replacing the computer sector’s historical dominance, communications and Internet equipment drove the boom of 2000.
The revised DOC historical information on inventories (Chart 4) also reveals key information. Communication equipment inventories saw a HUGE buildup. Many of the PCBs ordered to make Internet gear and fixed telecom equipment actually ended up in the inventory glut. This comes as no surprise, but the magnitude of the buildup is sobering. Fortunately, (Chart 5) the ratio of total inventories vs. orders is now back to reasonable levels – suggesting the inventory growth is over.
A Global Perspective
Now back to the problem at hand – why is the U.S. electronics industry lagging when our overall economy is expanding? The answer lies in global data.
SIA semiconductor shipment data provide a good measure of assembly activity around the world. These data capture total chip shipments to a geographical area – no matter what the source. Effectively, they provide a monthly barometer of electronic equipment production. Per Chart 6, total assembly activity “bottomed” about year-end 2001 and has been generally expanding since. However, the purple line (Asia) is far outgrowing the other areas, including North America.
If Chart 6 is converted to a “100%” bar chart (Chart 7), the magnitude of the shift to SE Asian production becomes very obvious. Beginning in early 2001, there was a dramatic increase in the transfer of electronic equipment production to SE Asia – from North America, Europe and Japan. Effectively SE Asia moved from about 22% to over 30% global market share in only 18 months! The main driver was of course cost. Personal computers, cell phones, Internet gear and automotive electronics in addition to the traditional consumer electronics have all flocked to SE Asia.
What lies ahead? Will this trend continue? Recently, the very strong dollar (Chart 8) has begun to weaken, somewhat tempering the cost issue. However, the cost gap remains very large – especially for wages. Unfortunately, with price-sensitive electronic equipment production shifting to SE Asia, much of the PCB production and CEM activity has followed.
A Word to the OEMs
Obviously we live in a new world. Even if we have exhausted bloated inventories, the fact remains that a significant share of U.S. electronics equipment has gone away – very quickly. In their drive to reduce costs, one wonders whether the U.S. OEMs have started a trend that will result in their ultimate loss of market control. Their short-term drive to reduce costs certainly will have long-term implications. Will there be a backlash? Certainly military and high-security OEMs should worry about their supply chains. What about our high technology, non-military sector? Will our drive to lower cost mean that we lose control over our intellectual property in computers, telecom, high-end instruments, etc.? Will the low-cost manufacturers soon become competitors to the domestic OEMs?
PCB Outlook
Looking at the North American PCB industry, any hope of a recovery to 2001 total revenues looks bleak for 2002. Per Chart 9, monthly revenue (black and blue lines) would have to ramp dramatically to ensure that 2002 equaled 2001. I still believe the second half of 2002 will be much improved, but I don’t think we can close the gap. Although all sectors are growing (Chart 10), we have a long way to go.
The overall domestic PCB market is much smaller, but substantial capacity has also been removed. Welcome to the new reality!
General Business Conditions
Electronics represented the poorest performer in the U.S. economy when it came to operating profits in the first quarter, according to the Department of Commerce. Although the aggregate electronics industry loss narrowed slightly from the last quarter of 2001, it was larger than the losses in motor vehicles, industrial machinery, transportation services and oil, each of these also a very cyclical industry. The electronics industry lost $10.9 billion at a seasonally adjusted annual rate in Q1, a small improvement from the $13.3 billion loss the previous quarter.
Global revenue of EMS companies will fall $4.5 billion in 2002 due to the deep slump in demand for telecom and network gear, said IDC. It forecast that the EMS industry would resume more gradual growth in 2003, reaching $122.5 billion in annual revenue by 2006, up from $103 billion in 2000.
According to the Industrial Economics and Knowledge Center, Taiwan’s PCB industry is expected to see 2002 production rise by 7.7% to NT$140 billion from NT$129 billion last year, with communications PCBs, IC substrates and LCD-use boards being the driving forces for the growth. Affected by lowered-than-expected demand in 2001, the production of the communications-use PCBs dropped 25% to NT$14.28 billion from NT$17.8 billion in 2000. The overall output of mobile phone PCBs decreased to 125 million units from 130 million units in 2000. This year, the total turnout is estimated to be able to reach 160 million units.
Electronic Equipment
Computers
Nikkei Market Access forecasts worldwide notebook computer production to grow 19.4% to 28.7 million units in 2002. It expects Taiwan’s shipments to grow 42.4% to 17.3 million notebooks, accounting for 60.1% of the global total (Chart 11).
Toshiba dethroned Dell Computer as the biggest seller of notebook PCs in the first quarter of this year, thanks to huge gains in the Japanese market.
First Quarter Notebook Computer Sales
World Share %
US Share %
Toshiba
14.4
13.6
Dell
13.2
25.2
Compaq
10.4
11.7
Sony
8.9
10.3
IBM
8.4
9.7
Other
44.7
29.5
Total
100.0
100.0
Source: IDC
Mobile Communications
Flextronics is reportedly planning to make and sell its own line of generic cell phones. Its in-house program called PhoneOne will offer price-conscious OEMs a low-cost manufacturing alternative enabled by Flextronics‘ Asian factory base and its design and engineering services.
Telecom
The CEO of Siemens AG said in early July that he did not expect any significant pick up in telecoms infrastructure investment before the end of 2003. “I do think investment by the telecoms operators will pick up. But it may last some time until we see a clear revival, perhaps 18 months or even longer,” he said in an interview with business daily Handelsblatt. “In mobile telephones, there will only be slight growth this year, if there is any at all. I expect (global industry handset) sales of slightly more than 400 million units,” he said.
Cisco Systems CEO John Chambers said he sees a revival in telecommunications industry spending next year, led by a rebound in the U.S. economy. The commercial marketplace will come back first, Chambers said, that will be followed by the enterprise, and two to six months after that the service providers will bounce back.
Consumer Electronics
Nintendo said it aims to sell 50 million GameCube game consoles globally by March 2005. It still has a long way to go, however, to catch Sony’s PlayStation 2, the dominant home video game platform worldwide with more than 30 million units shipped since its debut in March 2000.
Annual worldwide sales of digital TV set-top boxes will reach 148 million units in 2008, according to the Strategy Analytics Broadband Device Strategies service. After a difficult 2001, when the market was affected by declining European demand, the analysts now predict a significant upturn during 2002. The past year has been a tough one for the set-top box industry. Worldwide sales in 2001 rose by 22% to 33.4 million units, but steep price declines meant revenues rose by only 2%.
PCB Fabrication
DDi announced plans to shut its Dallas and Moorpark assembly plants and cut 300 jobs, or 13% of its work force. “We’re trying to control costs,” said Tim Donnelly, DDi’s vice president and chief counsel. “We’re encouraged by what we’re seeing.”
Eltek, Israel completed its previously announced purchase of a 76% interest in Kubatronik Leiterplatten GmbH, a manufacturer of high-end prototype PCBs based in Geislingen, Germany.
IBM is selling its Endicott, New York microelectronics manufacturing operations (including its PCB fab) to an investor group - preserving about 2,000 of the approximately 4,000 local jobs at the unit. The buyers will purchase the 4 million sq. ft. IBM owns in Endicott and then operate the microelectronics manufacturing division and lease back the buildings that house other IBM units. The newly formed company is called Endicott Interconnect Technology.
Intel has reportedly been actively adding to its long list of Pentium 4 flip chip II IC substrate suppliers. Currently, Intel’s principal P4 FC II suppliers include Compeq Manufacturing, Nan Ya Printed Circuit Board, Ibiden, Shinko and the newly joined and verified Samsung Electro-Mechanics. Recently Intel has reportedly begun talks with Phoenix Precision Technology (PPT), an affiliate of Siliconware Precision Industries Ltd (SPIL), and ASE Material, an affiliate of Advanced Semiconductor Engineering (ASE).
Kalex Printed Board, a subsidiary of Viasystems Group, is considering building a new PCB plant in the Pearl River Delta, which would expand its monthly output by 30 million yuan. Its factory in Zhongshan city makes PCBs for motor vehicles and telecommunications. One of the reasons for the heavy demand is that orders are being transferred to the Zhongshan plant from the group’s manufacturing facilities in Europe. Kalex Printed Board director James Liu said the company was considering building a new factory at the end of this year or early next year. The facility would produce more than 100,000 PCBs a month.
Nan Ya Technologies signed a 5-year deal with Dell Computer to provide an estimated $3 billion in components. Nan Ya will supply DRAM chips as well as printed circuit boards to Dell.
China Development Industrial Bank bought a 5% stake in Nan Ya PCB for T$1.86 billion (US$55 million).
Pentex-Schweizer Circuits’ wholly-owned subsidiary in Wuxi, China signed a memorandum of understanding to increase its investment in its existing plant by US$30 million. This MOU with the Wuxi government will help expand PCB production capacity.
Philips Electronics will close its PCB facility in Apeldoorn, Netherlands. Philips has been long interested in selling the Apeldoorn plant. The company called off a takeover with Belgian automation technology group Integrated Production and Test Engineering (IPTE) on May 14, 2002.
Philips, Netherlands is setting up a manufacturing plant for PCBs and other components in India
The PCB manufacturing business of Philips India will be transferred into this subsidiary in line with the global restructuring of the Dutch consumer electronics group. It expects around half of its business to come from contract manufacturing in the next three years. The PCB business of Philips consumer electronics is currently 100% captive.
German PCB manufacturer STP Electronische Systeme placed an insolvency request and seeks a financially strong partner. The business concern of the enterprise with 823 coworkers can be continued in opinion of the management.
World Wiser Electric, an affiliate under United Microelectronics Group, has delayed the construction of its new PCB plant in Beijing until the first quarter of 2003 due to “the land problem”. World Wiser had planned to begin in the first quarter of 2002, in cooperation with Hon Hai Precision.
PCB Materials & Process Equipment
Asahi Kasei will market a new type of glass fabric for use as a core material in substrates for printed circuit boards. The MS Cloth is much flatter than existing glass-fabric products, which the company says will lead to improved laser processing. Existing glass cloth has openings of 200-300 microns between threads, and areas where lengthwise threads are crossed with fiber are thicker, creating considerable unevenness that can result in holes being put in the wrong area of a substrate. Asahi Kasei’s model features evenly distributed glass fiber, as openings between its fibers are small. The cost of fiber will be about 30% higher than existing products, but the company expects demand from customers seeking higher quality.
Cookson Electronics Assembly Materials has established its first wholly-owned plant in Shenzhen, China. The company has invested US$6 million in the 11,000 sq meter factory, claimed to be the first chemical plant of its kind in China. The Shenzhen plant’s facilities include solder paste manufacturing, chemical mixing and solder metal mixing. The plant is also capable of producing ultra-fine pitch printing solder plate, which enables electronics manufacturers to produce smaller chips and products.
Nippon Paint says it has developed a method for producing electronic circuitry with line widths of 2-10 microns, or less than half the width of its conventional counterpart, using existing machines to manufacture printed circuit boards. Using a photosensitive insulating plastic material, the circuit is made by copperizing the fine grooves created when the plastic is decomposed in alkali developer.
Park Electrochemical sold its Dielectric Polymers subsidiary to Adhesive Applications of Easthampton, Massachusetts, a newly formed corporation that will be partially owned by Lawrence Kuntz, who has been the President of DPI since March 1985. DPI is a manufacturer of specialty adhesive tapes and films for a variety of applications in the electronics, automotive, aerospace and graphic arts industries located in Holyoke, Massachusetts. For the fiscal year ended March 3, 2002, DPI had net sales of approximately $7.6 million.
Taiwan Kong King, a PCB industry equipment provider, applied on 18 June 2002 to list on “Emerging Stock”. The company forecasts pre-tax profits of T$106m for 2002 and operating revenues of T$457m.
Electronic Manufacturing Services
Sun ACT Acquisition Corp., an affiliate of Sun Capital Partners, was the winning bidder for the U.S. assets of ACT Manufacturing. After the transaction closes, the U.S. business will be a separate operating entity providing value-added electronics manufacturing services to OEMs in the networking and telecommunications, high-end computer and industrial and medical equipment markets.
Benchmark Electronics will acquire the stock of ACT Manufacturing Thailand Public Company Limited (Thailand) and ACT Manufacturing UK Ltd. (UK).
Elcoteq Network named Douglas Brenner as president of its Americas unit. Brenner will also be a senior vice president and a member of the management team of the Finnish contract electronics manufacturer.
Flextronics is acquiring BlueLabs AB, a Swedish engineering services company with experience in the telecommunications and automotive industries.
Flextronics cut just 300 full-time jobs in Hungary due to the relocation of Microsoft’s XBox production from Hungary to China, instead of the expected 1,000. Flextronics has reassigned 700 employees within the company and won’t rehire 500 contracted laborers.
Flextronics will close its 132,000 sq. ft. plant in Longmont, Colo., where it builds telecommunication, storage, and medical equipment. As it shifts high-volume production to lower-cost regions, including Brazil, China, Eastern Europe, and Mexico, it plans to close additional manufacturing sites in the United States, a spokesperson said.
Finland’s second largest telecom operator Elisa Communications will sell its network installation business to Flextronics for 37.2 million euros ($37.01 million).
Hana Microelectronics, the Taiwanese electronic parts maker, said the shift of some of its manufacturing lines from Thailand to China would eventually cost some of its 4,500 Thai employees their jobs. Hana plans to relocate some of its PCB assembly manufacturing from Lamphun and also shift the production of some of its radio frequency identification devices - which are used for building-access control and animal identification - to Shanghai.
Japanese electronic parts maker Kaga Electronics has set up a wholly-owned EMS subsidiary in Thailand called Kaga Electronics Thailand.
MSL will acquire the Lexmark Electronics business unit from Lexmark International. Lexmark Electronics, Reynosa, Mexico is a provider of PCB assemblies for electronic business machines.
SMTC, which makes motherboards for Dell Computer’s servers, is moving motherboard production from Austin, Texas to its plant in Chihuahua, Mexico. As computer prices continue to fall, manufacturers have increasingly farmed out work to plants in Mexico, where wages are much lower than in the United States.
Solectron acquired Magnetic Data Technologies, a global provider of after-sales services for the communications, computer and electronic storage markets. The acquisition is part of the company’s strategy to expand its after-sales service presence in commodity segments, such as PCB assemblies, liquid crystal displays and hard-disk drives.
Sanmina-SCI completed the asset purchase of Alcatel’s manufacturing facility in Toledo, Spain.
Semiconductors
In early June the Semiconductor Industry Association (SIA) released its 2002 mid-year forecast, outlining the view that an industry-wide recovery is now under way. Semiconductor sales are expected to increase by 3.1% in 2002, with the growth rate accelerating to 23.2% in 2003 and 20.9% in 2004. “Last year was the most difficult and challenging year in the history of the semiconductor industry,” said Dwight W. Decker, chairman and CEO of Conexant Systems. “So far this year, we have seen a significant decline in excess inventory and manufacturing capacity, and the industry has resumed modest sequential growth, indicating that we are in the initial stages of a recovery. Our expectation is that the recovery will gain momentum in the second half of the year and continue with strong growth through 2003 and 2004.” The SIA forecast that the Americas will decline 4% to $35 billion in 2002, and then grow 24% to $43 billion in 2003, 22% to $52 billion in 2004, and then decline 3% in 2005 to $51 billion.
Worldwide sales of semiconductors totaled $11.37 billion in May, a 2.8% increase from the $11.07 billion level reached in April, with broad-based growth in all product sectors except for computation, the SIA reported. “Continued steady growth across the industry is exhibited in May chip sales and, as announced in our forecast last month, we expect the industry to close the second quarter with growth of 4.7%,” stated SIA president, George Scalise. He added, “While the computation sector is down, all other sectors including wireless and consumer continue to thrive. This increase drove the sales of such products as Flash, digital signal processors, application specific products and analog.” The migration of semiconductor customers to contract manufacturing continues with the Asia/Pacific market, especially China, the beneficiary. In May, sales to Asia/Pacific increased 4.8% from April and now represent 37% of the market.
Due to a major slump in semiconductor chip demand, the worldwide silicon wafer market revenue in 2001 totaled $5.4 billion, a 31% decline from 2000 revenue of $7.8 billion, according to Dataquest. “Clearly, 2001 was a severe year for the silicon wafer industry. Such a dreary double-digit decline in million square inches demand had not been seen since 1985,” said Takashi Ogawa, principal analyst of Gartner Dataquest’s semiconductor manufacturing research group. “At the same time, however, the year marked the burgeoning of the 300mm wafer market, which showed significant presence for the first time. In fact, if it weren’t for commercial shipments of the premium price product, the entire wafer market would have sunk more deeply due to the across-the-board declines in demand and price for standard products.”
The North American-based manufacturers of semiconductor equipment posted $1.08 billion in orders in May 2002 (three-month average basis) and a book-to-bill ratio of 1.26, according to SEMI. “For the second month in a row, bookings have shown positive year-over-year growth and, for the first time since March 2001, average bookings have reached above the billion-dollar mark,” said Stanley Myers, president and CEO of SEMI. “Recent forecasts showing expectations of low, single-digit growth for the chip market in 2002, suggest we will see continued sequential improvement in semiconductor capital spending with a more robust market anticipated in late 2002 or early 2003.”
VLSI Research raised its growth forecast for the worldwide semiconductor equipment market in 2002, but the business will remain in negative territory as compared to 2001. It projected that the worldwide chip-equipment business will increase from US$36.9 billion in terms of sales in 2002, to US$100.3 billion by 2007, a CAGR of 22%. The semiconductor-equipment market “is getting better,” due to a slight rebound in the overall IC business, said Aida Jebens, who tracks the market for VLSI Research. “We are saying that 2002 will be a recovery year,” she said. The front-end fab equipment segment is expected to jump from US$21.7 billion in 2002, to US$59.2 billion by 2007, a 22.2% growth rate, according to VSLI Research. Meanwhile, the IC test market is projected to increase from US$8.0 billion in 2002, to US$24 billion by 2007, a 24.5% growth rate. The assembly-equipment market is expected to jump 28.4%, from US$2.43 billion in 2002, to US$8.5 billion in 2007. And the spare part and service arena is projected to increase from US$4.7 billion in 2002, to US$8.6 billion by 2007, a 28.4% growth rate.
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.