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Global Picture Improves . . . North America Still Awaits 'Recovery' (Sept 2002)
September 4, 2002 |Estimated reading time: 15 minutes
Global Picture Improves... North America Still Awaits 'Recovery' by Walt Custer September 1st, 2002
The already anemic North American electronic equipment recovery took an unwelcome step backwards in June (Chart 1), as both computer and communications orders dipped versus prior months. Only instruments and defense electronics showed a pick-up. Fortunately, although total equipment orders declined, so did inventories (Chart 2). Looking more closely (Chart 3), we see that the "2000 bubble" drove OEM inventories up primarily for raw materials. It is easy to see why the PCB vendors suffered. Component orders were inflated far beyond the OEMs needs - and then when equipment orders sputtered in late 2000, the "PCB order spigot" was shut off. No surprise - this chart just quantifies what happened.
North American printed wiring board orders have still not recovered for many reasons - floundering OEM demand, price degradation and the "Asian shift. Per Chart 4 rigid PCB bookings hit a 9-year low in June - dashing any hopes for a "V" shaped shipment turnaround in 3Q'02. And although the 3/12 (3-month) PCB and equipment growth rates are improving (Chart 5) these growth comparisons are now versus the trough of 2001. Actual orders remain flat.
As a further dose of unwelcome news, both the Purchasing Managers' PMI and Electronic Buyers News EBI indices retreated in July (Chart 6) signaling further domestic end market slowing ahead. The combination of reduced consumer and business confidence, various accounting scandals, growing instability in the Mideast and a plunging stock market has managed to stifle any short-term recovery hopes.
However, there are some bright spots:
- The weakening US$ will ultimately improve our global competitiveness
- Seasonality is on our side - we are now moving into the traditional fall "busy season."
- Global electronic equipment assembly activity has picked up. Based upon June semiconductor shipments (Chart 7) chip sales jumped both in value and even more dramatically in units. Most of this growth was in Asia but total demand is obviously increasing.
- IT spending plans (Chart 8) for computers and storage devices have improved
Globally, some "recovery" progress is being made. North America just needs to get its share!
General Business Conditions
Challenger, Gray & Christmas said almost one-quarter of the 736,000 Americans who got laid off in the first half of this year were employed by telecom service providers and equipment makers. No single industry has accounted for such a large fraction of US layoffs since the firm began compiling records nine years ago, said CEO John Challenger.
IDC forecasts that based on current economic expectations, worldwide IT spending this year will reach $981 billion, an increase of 3.7% over 2001. While spending on IT hardware will show a full year-on-year decrease of 4% this year, growth of spending on software and services will result in positive growth for the total IT market. "The up tick will become more evident in Q4," said Stephen Minton, Program Director of Worldwide IT Markets research at IDC. "The bottom has already been reached, the green shoots of recovery will begin to emerge gradually during Q3, and Q4 will show strong year-on-year comparisons with 2001." "New projects are likely to remain on hold until 2003," Minton said. "The limited budget burn-off in Q4 will be concentrated on replacing products which have had extended lifecycles during the previous six quarters. This means that the recovery will be uneven at first, not favoring all IT vendors and market sectors at the same pace." In 2003, with gradual economic recovery translating into improved business profits, worldwide IT spending will see growth of 9% to exceed $1 trillion for the first time in the industry's history, a larger total market size than at the height of the dot.com boom in 2000. Spending on hardware products will see a recovery to positive growth of 5%.
The ISM (Purchasing Managers) index of manufacturing activity slowed sharply to 50.5 in July from 56.2 in June with weaker readings for all of the sub-indexes, except for a small rise in the price index and a marginal dip in the import index. EBN's EBI index of electronics manufacturing activity has also declined in the last two months (Chart 6).
Fixed-line telecommunications equipment growth is expected to return next year said Siemens executive Thomas Ganswindt in late July. Siemens sees demand by telephone companies leveling out at EUR42 billion for the next three years. In its best-case scenario, Siemens sees the market growing steadily to EUR57 billion in 2005.
Vietnam will raise its information technology infrastructure up to the level of other advanced Southeast Asian nations by 2005. Priority will also be given to modernizing the country's Internet and telecommunications system, with all cities and provinces linked to an optical fiber network by 2005 to provide high-quality, low-cost public services.
Electronic Equipment
Computers
Worldwide PC shipments totaled 29.9 million units in 2Q'02. "The market undoubtedly saw the effects of inventory overhang from the first quarter, but at the same time we have yet to see any significant return to corporate buying, and in the consumer market buying appears to have fallen back further in some regions," said Charles Smulders, VP of Gartner Dataquest's Computing Platforms Worldwide group. "Economic uncertainty continued to undermine business confidence, which has been further compounded in the United States by the Enron and WorldCom MCI accounting scandals."
Preliminary Worldwide PC Vendor Unit Shipment Estimates for 2Q'02 (Thousands of Units)
2Q'02 Shipments 2Q'02 Mkt Share 2Q'01 Shipments 2Q'01 Mkt Share Growth % HP 4627 15.5 5517 18.3 -16.1 Dell 4459 14.9 3944 13.1 13.1 IBM 1960 6.6 2145 7.1 -8.6 NEC 1045 3.5 1147 3.8 -9.0 Toshiba 896 3.0 849 2.8 5.5 Sony 830 2.8 672 2.2 23.7 Others 16079 53.8 15807 52.5 1.7 Total 29895 100.0 30081 100.0 -0.6
Data include desk-based PCs, mobile PCs and IA32 servers. Hewlett-Packard and Compaq are reported as one company. Source: Gartner Dataquest (July 2002)
Hewlett-Packard will continue to outsource IT products to Taiwanese companies including Quanta Computer, Compal Electronics, Inventec and First International Computer. Last year, Compaq purchased US$9 billion and HP US$5.7 billion worth of goods from Taiwan.
IDC reported that the worldwide handheld market contracted in 2Q'02 as follows:
Worldwide Handheld Device Sales, Second Quarter 2002
Vendor Units (000) Market Share Growth from Q1'02 Palm 845.6 32.4% -33.3% Hewlett-Packard 485.2 18.6% 2.6% Sony 250.0 9.6% 0.0% Handspring 170.6 6.5% -47.0% Hi-Tech Wealth 119.7 4.6% -3.7% Sharp 112.0 4.3% -20.4% Toshiba 100.2 3.8% 546.2% Minren 56.8 2.2% -16.7% Legend 47.7 1.8% 6.1% Other 331.8 12.7% 3.6% Total 2,607.4 100.0% -16.5%
Source: IDC
Mobile Communications
Royal Philips Electronics has teamed up with Bird Corp. in a bid to tap the fast-growing handset market in China. Philips will provide chipset solutions for use in mobile phones to Bird, China's largest cellular phone manufacturer. Their first development project is a GSM clamshell phone targeting the Chinese market.
Servers
Worldwide server shipments totaled 1.08 million in 2Q'02, up 0.5% over 2Q'01.according to Dataquest (Chart 9). "The weak business environment worldwide continues to have a great impact on the server industry," said Shahin Naftchi, senior analyst covering servers for Gartner Dataquest's Computing Platform Worldwide program. "Because of customers' uncertainty of their own business, purchasing high-end servers, changing to a new platform and signing big contracts are still deferred, which elongate the sales cycle. For the time being, customers are focusing on deployments that can yield quick return on investments by purchasing less expensive systems or upgrading their established systems if necessary."
Consumer Electronics
Hon Hai Precision has joined with Sony to jointly develop next-generation video game consoles. Faced with competition from Microsoft's Xbox game consoles, Sony has increased outsourcing and placed more orders for its PlayStation 2 to Hon Hai and Asustek Computer, Taiwan's top computer motherboard maker.
PCB Fabrication
Aspocomp Oyj has been served a summons, in which the receivers of Aspocomp's bankrupt French subsidiary demand that Aspocomp take the responsibility for its subsidiary's debts. Aspocomp's French subsidiary filed for bankruptcy on March 6, 2002. The subsidiary had an operating loss of 23.9 million euro and a turnover of 41.4 million euro for 2001 compared to a turnover of 71 million euro for 2000.
Bill Beckenbaugh - Konarka Technologies, a developer of flexible, polymer and nanoparticle-based photovoltaic technology, appointed Bill president and CEO. He was formerly with Sanmina-SCI and Motorola. Congratulations Bill!
DDi announced its patent filing for its newly developed "Flat-Pad" technology for HDI PCB applications. Unlike traditional laser-formed microvia approaches, DDi's proprietary Flat-Pad technology results in a completely flat BGA component pad surface. This not only supports the current industry thrust toward Via-in-Pad (VIP) design, but also widens the process window for PCB assembly and improves final yield, which is a condition eagerly sought by high-tech customers.
Fujitsu will shift production of PCBs used in computers and telecoms gear from domestic plants to a subsidiary in Vietnam.
India's Foreign Investment Promotion Board approved a proposal by Philips to set up a PCB and EMS facility.
Morris Productions of Australia halted PCB manufacture but will continues to offer PCB design services. Existing customers will use Precision Circuits instead.
Parlex appointed Jonathan Kosheff as Chief Financial Officer and Treasurer. Mr. Kosheff assumes the role held by Robert Rieth who continues as Senior Vice President.
Sanmina-SCI announced the shutdown of its Derry, NH printed circuit facility.
Materials
Chemcut received a $1.13 million loan from Pennsylvania to buy a 105,200-square-foot building on Science Park Road. The company will buy the larger of two buildings on a 34-acre site owned by Atotech USA said Don Houtz, Chemcut co-owner and COO. Chemcut was the equipment division of Atotech until May 1, when Ken Slocumb, former chief operating officer of Restek, and Houtz, Atotech's operations officer, bought the division and restored Chemcut as a stand-alone business. Chemcut had 65 employees when it separated from Atotech.
Enthone, a Cookson Electronics PWB Materials & Chemistry business, obtained a license from Lucent Technologies that grants Enthone global rights to Lucent's tin, tin-alloy, gold, palladium, palladium alloys and rhodium electroplating technologies, processes and patents. The agreement encompasses over thirty patents and over 100 electroplating process chemistries developed by the former Electroplating Chemicals & Services division of Lucent.
Esterline Technologies plans to sell its Automation business segment including Excellon Automation.
Isola Laminate Systems will permanently close its Pendleton, SC manufacturing facility by early 2003. "We will continue to support our customers' needs for single, double-sided and CEM-1, by sourcing volume quantities from our production sites in Europe and Asia," said Denny Ford, President of Isola Laminate Systems. "Specialty and quick-turn orders of these materials will be transitioned to our other US-based manufacturing sites over the next several months," he added.
KEMET Corporation will close one manufacturing facility in Greenwood, SC, and also one of two facilities in Matamoros, Mexico. These actions are part of KEMET's cost saving initiatives over the past year to respond to the prolonged downturn in the electronics industry, and include a reduction of manufacturing and support personnel of approximately 185 employees in the U.S. and approximately 240 in Mexico. This initiative will result in an annualized cost reduction of approximately $10 million.
Rohm and Haas elected Yi Hyon Paik corporate vice president. Dr. Paik is Chairman and CEO of Shipley Far East and President of Shipley Asia - responsible for the performance of the entire Electronic Materials business in Asia.
Shipley's Electronic and Industrial Finishing division obtained a license from Lucent Technologies for various electroplating products, processes and services developed by the former Electroplating Chemicals & Services division of Lucent.
Electronic Manufacturing Services
ASAT is collaborating with IBM on the design and assembly of advanced flip chip substrates and modules. ASAT and IBM will provide substrate design services as well as electrical, mechanical and thermal modeling. IBM will provide SLC substrates manufactured in Yasu, Japan and ASAT will provide the assembly at its Hong Kong facility beginning Q3 of this year.
Celestica will halt production at the former Lucent Columbus, Ohio Works by October 4, 2002. This plant manufactures wireless telecommunication equipment. As part of the restructured deal, Lucent will buy back the 2 million-square-foot plant and bear all related costs. Several hundred people still employed by Lucent at the factory will not be affected, a spokeswoman said.
Celestica's plant in Oklahoma City will lose 500 jobs - half its work force. Workers were told that by the end of the year the plant's PCB assembly jobs will be moved to other Celestica sites, said Steve Delaney, senior VP of Celestica 's U.S. east region. "This impacts a significant number of people, and we regret this. We've investigated a number of alternatives, but in order to be able to achieve the cost reductions our customers had to have, we just needed to make this consolidation," Delaney said.
Evertech Holdings acquired a chip substrate production plant from Celestica Singapore for US$3.8 million. The plant, which can produce 6 million units of 27x27 mm plastic ball grid array substrates a month, is now operating at just 20% of capacity now. The breakeven point is 40%.
Flextronics is transferring its Limerick, Ireland contract manufacturing operations to Cork, a move that will affect some 200 staff. "We're not closing the site, but we're putting the manufacturing with the Cork site," confirmed a spokeswoman for Flextronics. The remaining 150 staff at Limerick will continue their service center role. Flextronics gained the Limerick site through an outsourcing deal with Cabletron two years ago. It produces double sided, surface mount PCBs.
Flextronics completed its acquisition of NatSteel Broadway. This transaction strengthens Flextronics' manufacturing reach in Southern China and enhances Flextronics' complete supply chain offerings with more extensive tool making, plastic molding and electronics manufacturing capabilities.
Flextronics' Danish subsidiary will expand its operations. Denmark's only mobile phone factory is to employ 200 people in order to fulfill its new manufacturing contracts from Siemens.
Jabil Circuit paid $60 million for Alcatel SA's telephone exchange plant in Brest, France. The deal was part of Alcatel's strategy to outsource much of its manufacturing and focus on its core operations - research and development, and marketing and sales. Alcatel entered a 3-year outsourcing agreement with Jabil.
LaBarge was awarded a $1.75 million contract from United Defense's Armament Systems division, Aberdeen, S.D., to produce power supply units for the company's Mk 22 missile canisters, which are used with its shipboard Vertical Launching System.
Siix Corp. of Japan will spend Y1.5 billion to strengthen its EMS business overseas. It will increase the capacity of a PCB assembly line at its plant in Thailand by 50%. The expanded facility, to be equipped with a clean room, will start producing modules for cellular phones having built-in cameras. Siix will also raise by 70% the capacity of its plant in Dongguan, China producing PCBs for use in home electronics. In Slovakia, the firm plans to build a second plant at a local joint venture to produce more PCBs for automobiles and other products for local Japanese-affiliated manufacturers. Construction of the new plant will start this month, with completion slated by the end of this year.
Sanmina-SCI created of a new organization within its EMS Division to focus exclusively on providing medical electronics manufacturing services. It will be headquartered in San Jose, CA and lead by John Hendrick.
Sanmina-SCI announced the closure of its Ayrshire, Scotland plant with the loss of about 500 jobs. The announcement brings to almost 15,000 the number of jobs lost in Scotland's electronics sector in the past 18 months - including more than 630 at Hewlett Packard in Erskine, Renfrewshire, in June.
Sanmina-SCI will move its PC assembly operations in the Netherlands to Eastern Europe by the end of the year to cut costs. About 400 people at the Heerenveen, Netherlands plant will lose their jobs because assembly in Eastern Europe can be done about 25% cheaper, a spokeswoman for Sanmina-SCI I early August. The Heerenveen plant is used to assemble PCs for Hewlett-Packard.
Sanmina-SCI's Augusta, Maine electronics plant will shut down at the end of September, putting 440 employees out of work. The plant, built in 1980, was originally owned by Digital Equipment. In recent years it served as an optic center for Sanmina-SCI, specializing in telephone and transmission supplies.
Sumitomo has set up an EMS subsidiary in Shanghai via wholly owned subsidiary Sumitronics Corp. The new unit is capitalized at 50 million yen, with Sumitomo putting up 80% and a Chinese subsidiary investing 20%. It has no manufacturing capabilities of its own, but will handle procurement of electronic components and distribution of PCBs for client companies. Most of these client firms are expected to be Japanese electric equipment manufacturers with production sites in eastern China.
Sun Capital Partners (Boca Raton, Florida-based turnaround specialist) was the winning bidder for the U.S. assets of ACT Manufacturing in a deal valued at $6.6 million (with an adjustment being determined). The transaction was made through its second fund, which Sun Capital closed in May 2001 on $200 million.
Semiconductors
Quarterly chip sales increased 5.8% to $11.35 billion in the June quarter from $10.73 in the March quarter, the SIA reported. "The semiconductor industry is continuing the recovery that started late last year and we are encouraged by the progress we have made pulling out of the 2001 downturn," stated SIA president, George Scalise. He added, "While computer and computer-related sector demand is lagging, wireless and consumer sectors continue to strengthen. These two leading sectors are stimulating strong sales in Flash, digital signal processors, application specific products, discretes and analog, all of which increased by double digits rates in the June quarter.”
The recovery in the semiconductor market will be gradual; technology innovation continues unabated; and China is expected to play an increasingly important supply and demand role. These views were expressed by senior executives who participated in a panel discussion during the final manufacturing segment of SEMICON West 2002.
According to Dataquest the silicon wafer market contracted 31% in 2001. On a regional basis U.S. and Japan suffered the largest revenue decline of 34% each. Taiwan was down 28%, South Korea down by 26% and Europe down 20%.
North American-based manufacturers of semiconductor equipment posted $1.16 billion in orders in June 2002 (3-month average basis) and a book-to-bill ratio of 1.28, according to SEMI. (Chart 10).
Per the SEMI Capital Equipment Consensus Forecast the industry will sell $22.8 billion of new chip manufacturing, testing and assembly equipment in 2002. The forecast indicates that, as the capital equipment market upturn strengthens, the market will grow 29% in 2003 to reach $29.5 billion; and 23% in 2004 to $36.2 billion. Survey respondents see the cyclic market growth contracting slightly in 2005.
Worldwide wafer fab equipment spending is showing signs of rebounding, and the market is forecast to show growth from 3Q'01 to 3Q'02, according to Dataquest. In 3Q'02 worldwide wafer fab equipment spending is projected to reach $5.2 billion, a 5.3% increase from 3Q'01. While the market will show year-on-year quarterly growth in the second half of this year, Dataquest analysts said the year-end totals will still show an overall spending decline.
DuPont acquired ChemFirst in a cash transaction valued at $408 million. ChemFirst is a global supplier of electronic chemicals and materials to the semiconductor industry and specialty intermediates for polyurethane and other applications. The company had 2001 sales of $278 million, and has approximately 480 employees and primary manufacturing facilities in Pascagoula, Miss.; Baytown, Tex.; Dayton, Ohio; and Hayward, Cal., with operations in Scotland and Japan.
Displays
Planar Systems will close its LCD plant in Lake Mills, Wisconsin, over the next six months, completing the transfer of production to its Asian manufacturing partner.
See you October 7-10 in Cologne, Germany for ECWC9 and EPC 2002.
Visit us at Custer Consulting Group's booth - #4016 in hall number 14.2
Walt Custer Custer Consulting Group Phone: 707 785-1777 FAX: 707 785-1988custerconsulting.comE-mail: wcuster@mindspring.com
This article was originally published in CircuiTree magazine and is reprinted here with permission.