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Singapore and the USA - Both Face Challenges (Oct. 2002)
October 5, 2002 |Estimated reading time: 19 minutes
Singapore and the USA - Both Face Challenges by Walt Custer October 1st, 2002
I am writing this month's column from my hotel room overlooking Hong Kong harbor - between speaking engagements at the IPC Asia PCB Conference in Singapore and the 2002 South China PCB Conference in Hong Kong. Globally everyone agrees that we are in an electronics recession. However Asia is generally in better shape than N America or Europe. In this sharp downturn SE Asia has partially compensated - by gaining substantial market share. Per chart 1 Asia's share of total semiconductor consumption (a measure of assembly activity) has risen from 20% to 37% in only 18 months. More and more OEM and EMS companies are building their products in China and other lower cost, high production capacity countries.
However SE Asia has its own challenges. Exports have dropped, personal computer and telecom demand has flattened and the major EMS and OEM companies are wielding their huge buying power to drive down their costs. Companies such as Dell and Hewlett-Packard are applying aggressive price pressure. And due to substantial overcapacity many suppliers are giving in and margins are being squeezed hard.
Thoughts on Singapore
A comparison of the USA and Singapore does not appear to yield many similarities:
USA Singapore Area (sq meters) 9,629,091 648 Population (2001) 276.1 million 4.3 GDP (2000) $9,963 billion $110 Electronic Equipment Production (2001) $417 billion $20 billion Rigid & Flex PCB Production (2001) $7,177 million $374 million Position Consumer Exporter
Singapore has always depended upon electronic exports for its economic health. The present combination of reduced demand from the USA (due to our recession) and the gradual erosion of its electronic assembly business (to China due to cost) have raised large concerns. Singapore is reassessing its situation. It realizes that to survive it must move up the economic food chain. Since Singapore is no longer the "low-cost producer" it must make products with higher value-added content. This concept was a main thread of the IPC Asia PCB Conference in early September.
U.S. Situation
In the USA our situation has not changed dramatically. I still don't see any solid signs of recovery. Per chart 2 electronic equipment orders increased slightly in July but basically they have been flat all year. Chart 3 (which compares 3-month growth rates of PCBs and electronic equipment) looks encouraging but is actually quite misleading. A value greater than 1.0 signifies growth. Based upon this chart we are still not recovering from last year's chasm - we are just sinking less. Per chart 4 depicts the sobering truth. PCB shipments "fell off a cliff" post-2000 and so far are showing no sign of recovery. And when we do begin growing we will have a long climb..
Chart 5 shows annual and 3-month growth rates for key segments of the domestic electronics industry. 3-Month growth "leads" annual growth therefore the right hand column indicates the trends. Based upon this data, only rigid laminate, military electronics, instruments and process equipment are showing any growth (compare to last year). However since all 3-month growth rates currently exceed annual growth rates we can expect that we will be in a general growth mode soon - probably by year end. However our landscape has changed dramatically. Another domestic boom similar to 2000 is not imminent.
Singapore and the USA are not that different in some respects. Both countries have some re-engineering and rethinking to do.
General Business Conditions
Intel CEO Craig Barrett said in late August that no signs of recovery in the global electronics industry are in sight as corporations are not yet seen making any additional investments. "If you can tell me when corporations will start investing, I can give you a date on when the recovery will be," Barrett said. He also said that demand for personal computers and the semiconductors used in them may not rebound during the holiday season this year.
According to IDC, IT spending in W. Europe will grow by 4.4% in 2002 compared to 3.4% in 2001. It will rise to 6.2% in 2003 but the return of healthy levels of growth seen in 2000 is not expected until 2004. "With the first half of 2002 complete and no significant improvement in business conditions apparent, the chances of a near-term rebound in IT spending in W. Europe are slim," said Vicky Hawksworth, senior analyst at IDC.
U.S. electronic component orders remained flat in July according to Electronic Components, Assemblies & Materials Association (ECA). While some companies report growth, others see little or no improvement entering the second half of the year. Bob Willis, ECA president, characterizes the trend as "positive stability."
IBM is expected bring its Taiwan procurement levels to about US$5 billion in 2003 from US$3 billion in 2002.
Seiko Epson is expected to double its procurement in Taiwan to NT$20 billion in 2003. In 2001, Seiko Epson procured NT$6 billion worth of Taiwan products, including notebook and desktop PCs, motherboards, TFT-LCD panels and logic/memory chips, for domestic Japanese consumption.
China's top 100 electronics manufacturers reported output of RMB 214 billion (US$25.8 billion) in the first half of this year, up 6.1% year on year. Exports of these companies increased by 22% year on year to RMB 48.6 billion (US$5.87 billion)..
Electronic Equipment
Computers
Worldwide PDA end-user revenue in 2Q'02 totaled $902 million, up 1.5% from 2Q'01 said Dataquest (Chart 6).
Taiwan's Market Intelligence Center estimated that local motherboard makers will ship 85.9 million boards this year, up by 6.6% from 2001.The forecasted value will be US$5.647 billion, down 0.7% due to declining average selling price from US$66 to US$64 a piece.
Hewlett Packard and Dell reportedly asked their notebook computer suppliers to trim prices by 5%. Taiwanese contract suppliers are expected to seek discounts from their parts suppliers to meet the requests of the two computer firms.
Mobile Communications
Global mobile phone sales in the second quarter rose 0.8% from the same period of 2001, according to Dataquest (Chart 7 & 8). It said the industry has "reached a point of stability and is positioned for stronger growth." It reiterated its forecast that world-wide sales to end users in 2002 will reach 420 million units.
Ericsson CEO Kurt Hellstroem warned that he won't continue funding his mobile phone JV with Sony unless he sees imminent success. Within the "next couple of quarters we must see real acceptance" of the handsets that Sony Ericsson Mobile Communications is about to launch. Otherwise, he said, Ericsson won't "throw money" at the loss-making venture, formed just a year ago.
Nokia may buy mobile phones for the first time from Taiwan suppliers because it needs to cut production costs, the ChinaTimes said. Nokia officials were reported to meet with six Taiwan mobile phone makers including Benq, Compal Electronics and Quanta Computer at the end of August.
Beijing Capitel Nokia Mobile Telecommunications, in which Nokia has a 50% stake, is starting production. Nearby parts factories include those of Ibiden and Sanyo Electric. Some 15 companies are expected to build production facilities on the 50-hectare site by next year. Nokia places orders with each parts plant every morning for parts needed that day. The parts will be delivered via special corridors linking the facilities. BNMT is expected to have an annual output capacity of more than 10 million units.
Consumer adoption of Bluetooth wireless technology will be driven by hands-free use of mobile phones in cars, not by PCs and cordless keyboards, according to a UBS Warburg. DaimlerChrysler will start offering a Bluetooth hands-free kit in 4Q'02.
Texas Instruments plans to combine all four basic mobile phone functions onto one chip by 2004 said CEO Thomas Engibous. Other companies with a stated a goal of developing a single chip for wireless phones include Intel, Motorola and Qualcomm.
Telecom
Alcatel is selling its R&D facility in Raleigh, N.C. as it reduces its U.S. workforce. Over the past 18 months, Alcatel has cut its staff total in Raleigh to 400 from 1,500.
LM Ericsson's CEO said in mid-August that he expects the recession in the telecommunications market to flatten out in 2003 but added there were no clear signs of a turnaround. Kurt Hellstroem said spending by operators cannot fall much more. "We're not alone in thinking that this market will come back again," Hellstroem said. "Somewhere there is a bottom and we're close to it."
Servers
The worldwide server provider router market (carrier-class routers capable of providing multigigabit bandwidth in support of high-speed WAN interfaces) totaled $494 billion in 2Q'02, down 7% from 1Q'02 according to Dataquest. "The SPR market decline is due to the slowdown in telecom spending and the fact that service providers still have excess capacity in their networks which will last them at least two more quarters," said Jennifer Liscom, principal analyst for Gartner Dataquest's worldwide telecommunications and networking group. "SPR sales are indirectly driven by the increase in demand for higher speed Internet access."
Other
Royal Philips Electronics and Robert Bosch announced a preliminary agreement regarding the sale of Philips' business unit Communication, Security & Imaging (CSI). Philips CSI employs 1300 people, all of whom will transfer to Bosch. CSI is profitable with sales of over EUR 300 million in 2001.
PCB Fabrication
Endicott Interconnect Technologies employees' wages and vacation time will remain at current levels when the company takes over the operation of the Endicott microelectronics unit from IBM later this year. Endicott Interconnect executives made the announcement in early August during the first in a series of 11 meetings with the 2,000 workers involved in the transfer.
ITN Technology agreed to purchase Carolina Circuits from Solectron - acquiring its 350,000 SF Greenville facility and equipment and offering employment to all of the approximately 140 Carolina Circuits employees. Eiran Ben-Dashan, president of the Taiwan-based Asia ITN, said Carolina Circuits will be the "interface for us" with U.S. and, perhaps, European companies, from the earliest stages of product design. Asia ITN currently does circuit-board engineering, production control, sales and logistics, but has no manufacturing facilities of its own, he said. Instead, it subcontracts production to companies in Taiwan and on the Chinese mainland. ITN products are sold in N. America through ITN's direct sales force with headquarters in Chicago, IL.
Sheldahl completed the sale of substantially all of its continuing business assets to Northfield Acquisition Co., a new company owned by Sheldahl's three largest shareholders, Ampersand Ventures, Molex Incorporated and Morgenthaler Partners. Northfield Acquisition will retain the Sheldahl brand name and will continue to operate the company's Northfield facility. Sheldahl's remaining operations in Longmont, Colorado will be relocated to Northfield and the Longmont plant will be closed.
Viasystems Group is proceeding with a voluntary prepackaged Chapter 11 bankruptcy - targeting the filing targeted for late September and consummation of the restructuring by mid-November. Once done, Viasystems' overall debt will be reduced from $1.1 billion to $380 million, and interest payments reduced by $70 million annually. The company will have a remaining cash balance of $80 million and a new revolving facility of up to $62 million. The company's present common stock, options and warrants will be canceled out, causing Hicks Muse's $450 million common stock investment in Viasystems to be wiped out. However, HMFT will receive new securities for the roughly $150 million it has invested in senior and subordinated debt of Viasystems.
Honeywell expects to generate incremental pretax savings of around $800 million in 2002 as a result of "certain repositioning actions". In the second quarter ended June 30, it recognized a $99 million repositioning charge for the shutdown of two manufacturing plants and related workforce reductions in its Advanced Circuits business. The repositioning charge also included workforce reductions in Honeywell 's Automation and Control Solutions unit and in its UOP process technology joint venture and costs associated with shutting down a product line in its Specialty Materials segment.
Teradyne is ceasing production at its San Diego PCB facility (formerly Herco) and laying off 125 people. "The depth of the recent downturn has been unprecedented," said Richard Schneider, president of Teradyne's Connection Systems Division. "Unfortunately, we are not seeing a significant recovery in the second half of 2002 that will enable us to support the San Diego capacity. Our focus now will be on executing a flawless transition of work to our Nashua plant, supporting our customers, and providing outplacement services for all affected employees.
Sanmina-SCI shut down its Derry, NH PCB production facility laying off about 450 workers. This closing follows its Hudson innerlayer facility shutdown in September 2001. These two plants employed 1,399 people when Hadco was purchased by Sanmina in April 2000.
Elec & Eltek Group held a grand ceremony on August 29 to celebrate the 30th anniversary of its establishment. Founded in Hong Kong, Elec & Eltek has established a dozen plants in Guangzhou, Kaiping, Shenzhen and Nanjing.
Toppan Printing and NEC formed a joint venture which will take over their PCB operations. NEC Toppan Circuit Solutions Inc., will be established on Oct. 1 with capital of Y1 billion. The new entity is expected to have annual sales of about Y35 billion, and about 2,100 group employees. Toppan Printing will take a 55% stake in the joint venture, with NEC holding the remainder.
Fujitsu plans to spin off its PCB business in October, setting up a subsidiary in Nagano to focus on research and development. According to reports, the company will be shutting down its PCB plants in Akashi, Hyogo Prefecture, and Kanuma, Tochigi Prefecture, terminating domestic PCB production by the end of this month. All production capacity will be transferred to its new factory in Vietnam.
Taiwan's PCB industry's production in 1H'02 totaled about $1.7 billion, up by 2% from 1H'01 per Industrial Technology Intelligence Services. Champion Wang, director said the growth came from PCBs used in motherboards, notebook computers and mobile telephones. ITIS estimates that Taiwan's PCB overall production this year will increase by 8.5% from 2001, reaching $4.17 million.
China is forecast to unseat Taiwan as the world's third-largest supplier of PCBs this year, with output estimated to top US$4.2 billion, according to Taiwan's Ministry of Economic Affairs.
Shanghai's PCB production is expected to grow rapidly as the province's latest industrial park becomes fully operational in 2003. In 2001 Shanghai's board production was $1.32 billion - almost a third of the total output in mainland China. China's CPCA PCB trade organization, expects 20 to 30% growth this year - with Shanghai's total PCB output reaching $1.72 billion.
Korea's Electronic Times reported that poor 1H'02 business conditions pushed small and medium-sized S. Korean PCB makers to target higher value-added products and move single-layer PCB production equipment to China.
Samsung Electro-Mechanics said in late August it had agreed to sell $500 million of BGA circuit boards to Intel by 2005. Samsung Electro-Mechanics will spend 170 billion won ($143.8 million) by next July to expand its production capacity for these boards to 7.5 million units per year from 2.5 million currently.
Norrköping Printed Circuit Board filed for bankruptcy with 171 people losing their jobs. The factory was founded in 1974 by Ericsson and was one of Sweden's largest PCB manufacturers. Viasystems bought the company in 1998 from Ericsson and then sold it in a management buyout in August 2001.
Materials & Process Equipment
Park Electrochemical elected Teresa Truppi president of New England Laminates, Newburgh, NY. Ms. Truppi succeeds John Jongebloed in that capacity and will report to Brian Shore, Park's President and CEO. Mr. Jongebloed also serves as Senior VP, Global Logistics of Park Electrochemical and will continue to serve in that capacity and report to Brian Shore.
Park Electrochemical elected Gary Watson Senior VP in charge of its Asian Business Unit. Michael Hehl, who had been VP in charge of the company's Asian Business Unit, will continue in the company's employ as Executive Director of Corporate Development.
Cookson Electronics Equipment, formerly Speedline Technologies, has completed relocating the Camalot manufacturing facility from Haverhill, MA to the company's corporate headquarters.
Shipley will acquire the technology, equipment, intellectual property and remaining workforce of Haleos, Inc. of Blacksburg, Virginia. Haleos creates fiber optic components for a number of end uses, including optoelectronics device components. Shipley will pay $3.1 million for the assets.
Kenneth Ng has been appointed Vice President of Sales, Polyclad Laminates - Asia by Cookson Electronics PWB Materials & Chemistry, Londonderry, New Hampshire. Mr. Ng is responsible for Polyclad Laminates' sales and technical service organization throughout Asia.
W. L. Gore & Associates will sell its fiber optic business. "We are refocusing Gore's electronic components business on high-performance electrical interconnects and materials, our core technology," said Russell Shaller, general manager of Gore Photonics.
Isola Laminate Systems realigned its America's business structure to promote greater efficiency and flexibility. Included is the relocation of its N. American headquarters from La Crosse, Wisconsin to Chandler, Arizona.
Since China began levying a 100% import tax on dry film for PCBs in May, Chinese board makers have gradually switched to liquid photoresist for innerlayers, boosting the market for related application equipment. Chinese PCB makers are lobbying hard to get the huge dry film tariff reduced.
Electronic Manufacturing Services
Technology Forecasters' revised mid-year forecast reflects a slower growth of the EMS industry than previously announced, with global revenues now forecasted to grow to $201.6 billion by 2005 from an estimated $104.1 billion in 2002.
Less than a year after Celestica bought Lucent's Columbus, Ohio manufacturing plant, Lucent is buying back the plant and covering Celestica's costs to cease operations there. Celestica bought the plant from Lucent last summer as part of a five-year, $10 billion outsourcing agreement. It paid Lucent $570 million, which included the plant purchase, the lease of a second plant in Oklahoma City and inventory and operating assets at both plants.
Elcoteq Network agreed to sell its plant in Wraclow, Poland, to a privately owned French company for an undisclosed price. Elcoteq said the buyer didn't want to be identified. The plant will be sold to the French company's Polish subsidiary.
Flextronics will consolidate its Dallas-area operations in Plano Texas. In doing so, Flextronics will close its Richardson, Irving and Garland plants and move 750 employees into three buildings in Plano.
InFocus plans to outsource about 80% (up from 65%) of its total production to Flextronics by the beginning of next year, said Peter Krogh, InFocus senior VP and general manager for non-U.S. operations.
Flextronics International is closing its Toronto-area plant as part of a major cost restructuring plan that will result in nearly 200 layoffs. The plant is co-owned with Xerox Canada. "[The closure] is a joint decision between Flextronics and Xerox," said Barbara Blough, senior marketing manager of the Americas for Flextronics. "It's a result of the continued economic downtrend and a continuation of our strategy of decreasing capacity in high-cost regions."
Casio Computer expects to outsource $2 billion in orders over the next four years to Flextronics. As part of the agreement Flextronics will buy a Casio production facility in Shah Alam, Malaysia, and equipment from Casio's factory in Kluang, Johor, Malaysia. In addition, Casio sold to Flextronics a manufacturing operation in Japan, which will serve as Flextronics site for repair, logistics, and distribution services, as well as a launching pad for new products.
Jabil Circuit and Royal Philips Electronics agreed for the majority of Philips Contract Manufacturing Services division to be sold and business transferred to Jabil. The acquisition includes nine manufacturing plants and a minimum EUR 4 billion, four-year product supply agreement. Jabil will take over manufacturing operations on three continents, including sites in Brazil, China, Hungary, India, Poland and Singapore and three other sites in Europe. The proposed agreement contemplates Jabil employment for current Philips management from each location and for approximately 5000 manufacturing employees, including over 150 product development and design engineers. Jabil will provide design and engineering services; new product introduction (NPI), prototype and test services; procurement, PCB assembly and final assembly and integration for a wide range of Philips consumer products, including consumer televisions and DVD's, storage and display products audio systems and set top boxes.
Quantum out-sourced manufacturing of its tape drives to Jabil Circuit and also bought privately held Benchmark Storage Innovations to bolster its low-end tape business.
PCB Technologies is constructing facilities in China through its subsidiary, PCB Suzhou Technologies. Company CTO David Kishon told The Jerusalem Post that the move is also due to less expensive labor in the Far East. PCB Technologies, which focuses on producing multilayer and rigid or rigid-flex boards with microvia ability, employs 370 staff in its bare-board manufacturing and board assembly operations. The firm, which mainly provides EMS services to system manufacturers in Israel and the US, posted revenues of more than $27 million in 2001.
Plexus opened a second design center in Scotland. Its new Livingston operation is an expansion of its design center in Melrose, Scotland.
Sanmina-SCI and Siemens will not proceed with Sanmina-SCI's previously announced acquisition of Siemens Information and Communication Networks (IC Networks) Group's final system assembly and test operations in Lake Mary, Florida as well as two European-based operations.
Dell Computer is reported to have shifted all its graphic chip orders to Taiwan producers including Asustec Computer, Micro-Star International and Hon Hai Precision Industry. Sanmina-SCI was reported to be a previous supplier.
Solectron appointed Wesley Chen as VP and Managing Director of Solectron China Electronic Manufacturing and Test Solutions Group (EMTSG). Chen succeeds Kent Chen, former president of Solectron China EMTSG, who recently retired. In his new role Chen will have overall responsibilities for Solectron's manufacturing sites in Suzhou and Shanghai. Chen will report to Joe Tang, Senior VP of Solectron Asia Operations.
Suntron is consolidating manufacturing capabilities by closing its facilities in Ottawa, KS and Fremont, CA. "Given current market conditions and our ongoing evaluation of demand forecasts with customers, we believe these consolidations are difficult, but necessary decisions," said James Bass, Suntron president and CEO.
Viasystems France announced the closure of its plant in Deville-les-Rouen, northern France. It had bought the production site from Lucent Technologies in October 2000.
Wistron, the manufacturing arm of Acer joins Flextronics as the second manufacturing partner for Microsoft's Xbox. Microsoft said it is "extremely pleased" with Flextronics' performance and the Wistron facility in Zhongshan, China will handle incremental volume at this time.
Privately-held Israeli CEM Zicon is opening its U.S. headquarters in Boca Raton, FL with plans to create 250 jobs over three years. The company, started by Zvi Cohen in 1985 with $200, has grown by designing, engineering and assembling PCBs used in computers, phones, medical devices and power equipment. It now employs about 250 in Israel.
Semiconductors
Global chip sales reached $11.7 billion in July, a 2.9% increase over the June level of $11.4 billion. "The July data, and the year-on-year increase, confirm that a moderate but sustainable recovery continues, putting us on track for 7-9% sequential growth in the third quarter," said SIA President George Scalise. "Growth continues to be most robust in the digital consumer market, including DVDs, video games and digital cameras, as reflected in increased demand for standard cells, consumer ASP's, optoelectronics and flash memory chips in the month.”
N. American-based manufacturers of semiconductor equipment posted $1.15 billion in orders in July 2002 (three-month average basis) and a book-to-bill ratio of 1.16, according to SEMI. "The July bookings data likely reflects renewed questions about the robustness of the economic recovery and the prospects for the consumption of electronic goods," said Dan Tracy, Ph.D., director of industry research and statistics for SEMI. "The data is consistent with recent announcements of reduced capital spending plans by some global chipmakers and supports the consensus of industry analysts projecting market recovery in 2003."
SEMI reported worldwide semiconductor manufacturing equipment billings of US$4.66 billion in 2Q'02, down 34% from 2Q'01 but up 15% from 1Q'02 (Chart 9).
Hitachi Chemical, Sumitomo Bakelite and JSR set up a consortium to develop materials for next-generation semiconductors. The consortium plans to spend 20 billion yen on the joint development, half of which will be subsidized by the government under the fiscal 2003 budget.
In closing
See you October 8-10 at ECWC9 and EPC 2002 in Cologne, Germany. Visit us in Booth 4016, Hall 14.2.
Walt CusterCuster Consulting GroupPhone: 707 785-1777FAX: 707 785-1988custerconsulting.comE-mail: wcuster@mindspring.com
This article was originally published in CircuiTree magazine and is reprinted here with permission.