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The Road Ahead: Generally Flat with Some Curves and Potholes (Jan 2003)
January 7, 2003 |Estimated reading time: 16 minutes
The Road Ahead: Generally Flat with Some Curves and Potholes by Walt Custer January 1, 2003
After three months of successive order growth, North American rigid PCB orders dipped in October (Chart 1). It appears that there just wasn’t enough end-market demand to sustain a recovery.
Electronic equipment orders, which have been generally flat for the last year, trended downward slightly in the last few months (Chart 2). Separating Chart 2 into its components, we see that orders by sector (Chart 3) have been very volatile lately. Computers (red) are generally recovering and instruments (magenta) show continuous (but modest) growth. However, orders for communications (including Internet), equipment (green) and military electronics (blue) have fluctuated wildly with no clear upward trends yet. Any PCB recovery will be tentative until we see some consistent increases in electronic equipment orders.
Since we know that much of the 2001/2002 downturn was due to severe inventory excesses, Chart 4 is encouraging. It would appear that inventory levels for all equipment sectors are now quite low suggesting that once end market optimism rebounds that industry growth will be accelerated by inventory replenishment.
Chart 5 also provides some comfort to North American and European PCB fabricators and assemblers. Based upon semiconductor consumption, it would appear that the “Asian shift” has recently moderated. In fact, Southeast Asia’s global share of “consumed” semiconductors actually declined in October.
We must keep in mind that the relative growth of SE Asian electronic equipment assembly has two key causes:
- A deliberate shift of manufacturing from the Americas, Europe and Japan to “low cost” SE Asia (in particular China)
- Regional differences in equipment product mix. North America and Europe, which were highly dependent upon communications and Internet equipment, saw much larger market declines than SE Asia (which was more dependent upon personal computers and consumer electronics). America’s and Europe’s key end markets declined a disproportionate amount.
Don’t confuse this temporary (but severe and prolonged) equipment-mix-driven downturn with the concurrent permanent geographical shift in manufacturing. Two distinctly different market dynamics caused the 2000/2001 changes in Chart 5.
As we head into 2003 it would appear that any hopes for a broad “recovery” have been pushed out until late 2003 at best. However select OEMs (and their end markets) have shrugged off the post-2000 recession and grown even in this downturn. Pick your target customers wisely!
General Business Conditions
Electronics Buyers News’ EBI Index slipped again in November to its lowest level since last December. However a 7% jump in the EBI Leading Index suggests steady improvement in the next few months. The next industry upswing may be initially driven by the need to replenish diminished inventories.
November’s CIO Magazine Tech Poll (Chart 6) reported that the majority of CIO panelists believe we will see a pick-up in IT spending before or by the end of 2003. “These results give us some hope the worst of the IT spending slump may be behind us by the second half of 2003,” said George Elling of Deutsche Bank Securities. Despite weak profits and declines in spending, CIOs are more optimistic about IT spending because of replacement needs, such as computer hardware, security and infrastructure software.
Insufficient capacity at machine shops may limit high-tech growth in the next upturn. Due to many recent shutdowns, enough capacity has been lost to cause problems as semiconductor equipment suppliers tried to ramp up tool production. Some 500 domestic machine shops have closed in the past year, according to Matthew Coffey, president of the National Tool and Machining Association. Compounding the potential ramp problem, some surviving machine shops that have served high-tech equipment suppliers for decades are now focusing on aerospace, medical and military business. Having been caught off guard by the extent and depth of the current industry downturn - after adding capacity to meet the booming demand in 2000 - the machine shop industry is feeling forsaken as the industry turns to offshore manufacturing, namely in China.
Distribution sales in the UK plunged by over 25% in 2002 as the components sector remains under the cloud of recession, according to the industry association AFDEC, which represents many of the 450 UK-based component distributors. However, according to Gary Kibblewhite, chairman of AFDEC, these gloomy statistics are likely to represent the bottom of the current two-year recession in the industry. “We do not believe that trading conditions will get worse in 2003, compared that is [sic] to what is happening right now,” said Kibblewhite. “All signs are that recovery is starting to take place, the decline in average daily sales has slowed and book-to-bill ratios are trending upwards again,” added Kibblewhite.
Electronic Equipment
Computers
World shipments of personal computers were forecast by Dataquest to increase by 1.5% in 4Q’02 from a year earlier, less than the holiday season’s typical gain. Consumer concern about a war with Iraq and its effects on the U.S. economy, as well as increasing interest in other devices, such as DVD players, gaming consoles and digital cameras, are expected to curtail PC sales. About 35.1 million PCs are expected to be shipped worldwide this quarter, bringing the 2002 total to about 127.3 million units, a 1.8% increase from 2001. Shipments are expected to rise by 7% in 2003.
Communications
France’s Alcatel and Sweden’s Ericsson said in mid November they had started to see signs of improvement in the telecom industry. “We see a lot of signs of stabilization,” said Ericsson’s CFO Sten Fornell. Serge Tchuruk, CEO of Alcatel said, “Asia and emerging markets might see some recovery (in 2003).” Especially in China, wireless carriers had continued to sign up new subscribers at a rapid pace, and operators would run out of excess capacity and build additional network capacity “sooner rather than later”, Tchuruk said.
After two years of plunging sales, 2003 may finally offer Europe’s telecommunications equipment makers a glimmer of hope. Some of their key customers in the wireless sector are facing regulatory deadlines for rolling out 3G, services - making further delays in capital expenditure increasingly difficult. More crucially, the arrival for Christmas of mobile handsets with e-mail and fast Web-browsing capabilities is starting to challenge the long-held view that 3G is a non-starter.
Mobile phone sales worldwide (Chart 7) in 3Q’02 rose 7.8% from the same period of 2001, signaling that the industry’s rebound is well under way, according to Dataquest (Chart 8). Mobile sales to end-users in the quarter totaled 104.3 million units.
Cisco Systems remained the world’s largest maker of telecommunications equipment for the third straight quarter and increased its market share for the fifth consecutive period, said Synergy Research.
Servers & Infrastructure
World workstation shipments (Chart 9) totaled 367,710 units in 3Q’02, a 6.5% increase from 3Q’01 and up 1.8% from 2Q’02. “The third quarter shipments bring us nowhere near the record year 2000 shipments, but any sign of growth is a welcome change,” said Dataquest’s Pia Rieppo. “Given that this is only the second consecutive quarter of modest growth, we’re hesitant to say the workstation market is completely out of the woods. The economy is still under performing, IT executives are reserved in their purchasing and there are still no new compelling technologies in the workstation market.”
World wireless LAN hardware revenue totaled $436 million in 3Q’02, according to Infonetics Research. “The strongest WLAN growth in the next couple of years will come from the service provider public access hotspot market,” said Infonetics Research’s Richard Webb.
PCB Fabrication
The IPC honored Ron Underwood with its 2002 IPC Raymond E. Pritchard Hall of Fame Award at the 2002 IPC Annual Meeting in New Orleans, La. Based on exceptional lifetime achievement, the Raymond E. Pritchard Hall of Fame Award is IPC’s highest level of recognition. It recognizes members who make extraordinary contributions to IPC and the electronic interconnection industry. Congratulations Ron!
AIK Electronics Austria filed for bankruptcy. AIK’s assets were 14.6 million euros and its liabilities 16.2 million euros. AIK was formed in 1979 as a supplier of PCBs for the Vienna-based Philips Video Recorder plant and in 1992 it joined the Philips Group under the name Philips Leiterplatten Austria. In 1999 the company became part of German copper clad laminate supplier AIK Group.
AT&S, Austria announced that its 145 million euro manufacturing facility in China will soon start production. The company is also working hard on technology partnerships. It is cooperating on R&D with the University of Shanghai, and it has recently bought a 10% stake in Adcon, a Vienna-based design house.
CMK and Casio Computer will jointly develop technology to incorporate semiconductors within printed wiring boards. The companies aim to develop the new type of PWB in 2003 and begin mass production. Casio and CMK plan to partially hollow out boards to accommodate packaged semiconductors. Casio Computer will use the chip-equipped boards in its own digital equipment. The developers will also consider sales to outside companies.
DDi Europe acquired value-added PCB reseller, Kamtronics for an undisclosed sum. Kamtronics will be merged into one of DDi’s European subsidiaries, DDi International.
Electropac agreed with Printed Circuit Corp to combine PCC’s business base into Electropac’s manufacturing operations in New Hampshire and Canada. PCC agreed to transfer key intellectual property, customer and engineering data, and certain personnel and assets to the New Hampshire company.
Endicott Interconnect Technologies completed the acquisition of IBM’s Endicott facility and the Microelectronic manufacturing operations located there. EIT, a private company formed through a partnership of local investors purchased the location and manufacturing operation for $65M. The company will receive the backing of New York State through tax incentives and plans to retain the jobs of about 2000 employees. In addition, IBM has committed to lease back 1.4 million square feet of the campus for 10 years to house approximately 2000 workers involved in the ongoing IBM operations at the site. The remaining unutilized real estate, which includes office and lab space, will be made available for lease.
M~Wave announced that Microelectronic Modules, New Berlin, WI, signed a 3-year Supply Chain Management agreement with M~Wave utilizing its Virtual Manufacturing business unit.
M-FLEX celebrated a groundbreaking event for its upcoming new second manufacturing facility located in Suzhou, China. Upon completion M-FLEX will have approximately 500,000 sq. ft. in China to support high volume low cost production.
Nitto Denko is building a mobile phone PCB factory in Suzhou, China at a cost of more than 10 billion yen. Products from the factory will be exported worldwide.
Parlex’s UK subsidiary Poly-Flex Circuits signed a Manufacturing and Supply Agreement to provide blood glucose sensors for use in Hypoguard Limited’s new generation of blood glucose monitors. Hypoguard Limited is a subsidiary of Medisys PLC.
Philips acquired 99% of PCB India. PCB India will become a wholly-owned subsidiary of Koninklijke Philips Electronics. PCB India makes PCBs and the move to make it a 100 percent subsidiary is in keeping with Philip’s plans to offer EMS as an outsourced facility to local and global firms.
Sanmina-SCI confirmed in early November that its 292,000 sq. ft. Owego, NY plant is not among the facilities it will consider closing as the company seeks to cut back PCB production in the face of a worldwide electronics slowdown. Sanmina-SCI has seven PCB plants in North America: three in California, two in Massachusetts, one in Arizona and the one in Owego.
Sanmina-SCI’s 170 person, 60,000 sq. ft. Watsonville, CA Tech Center was to be shut down December 31, 2002.
TTM Technologies, Redmond, WA will close its PCB plant in Burlington, WA, consolidating that operation into its Redmond plant. The closure will generate an annual cost savings of $3 million, starting in first-quarter 2003, the company said. It will create a one-time charge of between $3.3 million and $3.8 million this quarter.
Tyco Electronics said it plans to replicate the recent agreement under which it manufactures components at a Flextronics facility in China with other leading EMS providers in a bid to better service customers moving manufacturing plants to the region.
Unitech Printed Circuit Board, Taiwan reportedly supplied one million mobile phone PCBs in 2002 to Haier, China’s largest home electronics vendor. Unitech landed PCB orders from Haier in the 3Q’02 and has seen its monthly shipments rise from 200,000 units to 600,000 units. The company also makes mobile phone PCBs for Ningbo Bird, another Chinese mobile phone vendor, shipping 200,000 units a month.
Materials & Process Equipment
C Sun and Ampoc Far East, two Taiwanese producers/distributors of PCB manufacturing equipment, have had their profitability rely on LCD production equipment. C Sun has extended its production from equipment used in dry manufacturing process of PCBs to manufacturing equipment for STN-LCDs (super twisted nematic-LCDs) and other optoelectronic products. In comparison, Ampoc distributes PCB, TFT-LCD (thin film transistor-LCD), and IC manufacturing equipment.
Electro Scientific Industries received a multi-system order for Model 5430 UV Laser Microvia Drilling Systems from Samsung Electro-Mechanics.
Hitachi Chemical will start production of dry film photoresist in Dongguan China, in April 2003.
Polyclad Laminates will invest over $6,000,000 to expand laminate and prepreg manufacturing at the company’s Elk Grove, California facility. As part of the expansion, manufacturing at the Polyclad Laminates Santa Ana, CA facility at 2720 S. Main Street will be transitioned to the Elk Grove operation over a nine-month period.
Sanmina-SCI licensed LG Electronics to manufacture PCBs using Sanmina-SCI’s patented Buried Capacitance technology.
ShinMaywa Industries has developed a “dry” method of plating copper films for the wiring patterns on printed circuit boards. The method, called the copper dry ion plating process, fills trenches in the board with copper ions shot from a filtered arc deposition gun developed with the help of a professor from the Toyohashi University of Technology.
Sumitomo Metal Mining has developed a fine copper powder consisting of smooth-surfaced particles averaging 1-2 microns in diameter that resist oxidation. The powder contains nearly spherical particles that have less surface area than those with irregular surfaces, reducing their ability to bond with elements like oxygen.
Electronic Manufacturing Services
Bull received a request from the trade unions of ACT Manufacturing, Angers, France to contribute an extra 10 million euros to that company’s job-rescue plan. Bull has already agreed to provide the firm with 2 million euros’ worth of aid.
Elcoteq Network signed an agreement with LGP Telecom Holding of Sweden concerning manufacturing of base station products for LGP in Elcoteq’s plants in Tallinn, Estonia and Dongguan, China.
ARM Holdings granted Flextronics Semiconductor rights to license its RISC processor cores directly to Flextronics’ chip customers. In addition, Flextronics will assume all service and support responsibilities for the ARM-based designs.
Flextronics is designing and manufacturing a wrist-worn PDA for Fossil Inc. “Our strategic relationship will allow Fossil to leverage Flextronics’ design capabilities and global manufacturing infrastructure,” said Ron Snyder, president of Flextronics Design.
Fujitsu Network Communications announced that Fujitsu Transaction Solutions has chosen it to begin building Automated Teller Machines at its plant in Richardson, Texas. Fujitsu is one of the few equipment vendors that continues to manufacture the majority of its telecommunications products in-house and will now begin offering its manufacturing capabilities to companies that choose to outsource their manufacturing.
Hon Hai Precision Industries reportedly will expand its plant in the Beijing Economic Development Special Zone targeting Nokia as a customer.
Jabil Circuit and Shinwa have reportedly approached IBM to take over some of the employees to be laid off from IBM’s Szekesfehervar, Hungary plant. Jabil Circuit’s Tiszaujvaros and Shinwa’s Miskolc plants (both in northeastern Hungary) plan to hire 1000 new employees combined next year.
Jabil Circuit finalized portions of its 4 billion euro, 4-year agreement with Royal Philips Electronics. The completed portion of the acquisition includes six manufacturing plants. Jabil expects the transfer of the remaining three sites by the end of January 2003 and to accomplish the full transfer of sites and business by the end of its fiscal year in August 2003. Jabil said the acquisition cost was approximately $210 million and it used its existing cash to fund the purchase. Jabil will provide design and engineering services; new product introduction, prototype and test services; procurement, PCB assembly and final assembly and integration of a wide range of Philips consumer products including televisions, videocassette recorders; speakers, audio, projection and digital transmission systems; broadband networks, set top boxes and monitors.
Jabil Circuit said it paid $75 million to acquire most of the assets and business of Lucent Technologies of Shanghai Ltd. - a joint venture among Lucent Technologies, Shanghai Optical Communications Development., Shanghai Posts & Telecommunications Equipment, and Shanghai Jiu Shi.
Nam Tai Electronics received new orders to produce color LCD modules for mobile phones. “Mobile phones with color displays is the global trend,” said Tadao Murakami, Chairman of Nam Tai. “It is anticipated that more and more leading mobile phone manufacturers will switch from monochrome displays to color displays in 2003.
Pemstar was awarded a Supplier Performance Award from Ciena, a provider of intelligent optical networking systems and software.
Sanmina-SCI will cut almost 30% of its staff in Finland due to persistently weak demand. An official said the company would shut its plant in Tikkakoski in central Finland, cutting 300 jobs.
Sanmina-SCI may delay some layoffs at its Augusta, Maine electronics assembly plant. Company officials said the plant probably will remain open through February or March, depending on the workload, with 100 people or fewer.
Solectron and PerComm have signed a manufacturing agreement under which Solectron will provide new product introduction, PCB assembly and complete product assembly for the OmniData two-way telemetry data modem and follow-on products for PerComm.
Venture said Agilent Technologies agreed to transfer manufacturing operations in Spokane, Washington to Venture’s plants elsewhere in the U.S. and in Southeast Asia. Venture is not acquiring Agilent’s factories as previously considered because it is cheaper to manufacture electronics at its plants in Malaysia. Venture said it will provide Agilent with PCB assemblies that Agilent currently makes in Spokane. Agilent’s Liberty Lake, Washington PCB assembly operations will be shut down and about 300 jobs will be eliminated over the next year. The Liberty Lake site is the last of 16 PCB assembly plants once operated by Agilent and its corporate predecessor, Hewlett-Packard.
Venture completed the acquisition of a Malaysian business from Iomega. As a result Venture will make Iomega zip drives for five years on an exclusive basis, from the Penang, Malaysia plant. Venture has also been granted non-exclusive rights to make zip cartridges and certain other products and services for the same period.
Viasystems will manufacture 61,000 Hop-On CDMA 800 MHz disposable/recyclable cell phones. The order is the initial phase of a volume manufacturing and low-cost component sourcing agreement between the two companies for production in China.
XeTel received bankruptcy court approval to sell its assets to pay off its creditors. Under the arrangement, XeTel will transfer some customers, inventory and fixed assets to Celestica Acquisition Corp. in a deal worth $1.3 million to $1.5 million. Celestica will also assume some liabilities and will hire key customer service and manufacturing employees.
Semiconductors
Global semiconductor sales reached $12.5 billion in October 2002, a 1.8% sequential increase from the $12.3 billion in September 2002 and a 20% increase from the $10.4 billion total recorded in October 2001. “If there are any doubts remaining about the strength of the global chip industry, a healthy recovery continues as we move into the fourth quarter,” stated SIA President George Scalise.
The world semiconductor market is forecast to post double-digit growth in 2003 with revenue totaling $171.8 billion, a 12.1% increase from 2002 estimates, according to Dataquest. In 2001, worldwide semiconductor revenue totaled $152.5 billion, a 32% decline from 2000. In 2002, the market began to see signs of recovery, as revenue was projected to reach $153.3 billion, a 0.5% increase from 2001.
North America-based manufacturers of semiconductor equipment posted $766 million in orders in October 2002 (three-month average basis) and a book-to-bill ratio of 0.73, according to SEMI. “While there are indications that capacity has been added throughout the current downturn at leading-edge fabs, broader-based capacity expansion has been on hold,” said Stanley Myers, president and CEO of SEMI. “This trend will continue into 2003 until semiconductor manufacturers have stronger signals regarding the outlook for chip demand.”
SEMI reported worldwide semiconductor manufacturing equipment billings of US$5.7 billion in 3Q’02 (Chart 10). SEMI also reported worldwide equipment orders of $4.96 billion in 3Q’02, up 43% vs. 3Q’01 and 26% below 2Q’02 orders.
Happy New Year
Walt Custer Custer Consulting Group Phone: 707 785-1777 FAX: 707 785-1988custerconsulting.com
E-mail: walt@custerconsulting.com
This article was originally published in CircuiTree magazine and is reprinted here with permission.