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2003 Wrap Up . . . Little to Cheer About (Mar 2003)
March 25, 2003 |Estimated reading time: 15 minutes
2003 Wrap Up . . . Little to Cheer About By Walt Custer March 1, 2003
Business conditions remain tough – due to both low volumes and devastating pricing. Electronic equipment orders are flat (Chart 1). Slightly improving computer orders are being offset by continually degrading telecom and Internet infrastructure demand (Chart 2). We remain at the trough of this unprecedented business cycle – made worse by a shift in N. American electronics manufacturing to Asia.
Fortunately, excess inventories have now been flushed at most levels of the supply chain. Per Chart 3 raw material and component suppliers experienced amplified declines at the beginning of the downturn because their customers kept operating (at lower levels) while depleting (rather than replenishing) their inventories. Chart 4 shows examples of these supply chain effects when comparing 2001 to 2000. Each lower level of the chain saw larger declines. However comparing 2002 to 2001 (Chart 5) we see some signs of recovery – especially for semiconductors.
When electronic equipment orders finally recover, the component and raw material suppliers will see even greater growth due to inventory replenishment. Unfortunately this recovery does not appear imminent – especially in these times of cautious spending made worse by Mid-East uncertainties. IT spending is not yet showing much sign of life.
Chart 6 shows the impact of the post-2000 downturn on the N. American PCB industry. N. American total rigid and flex circuit production dropped from $10.9 billion in 2000 to $7.7 billion in 2001 and then $6.1 billion in 2002. For 2002 I estimated $5.2 billion of rigid PCBs and $0.9 billion of flex using the IPC’s 2001 benchmark data and the growth rates for 2002. Viewed on a quarterly basis (Chart 7), following a massive PCB $ shipment downturn in 2001, the rate of decline has now slowed in N America. However per Chart 8 monthly orders (green bars) deteriorated in December. No signs of improvement yet! And with the recent shutdown of Toppan in San Diego and Sanmina-SCI’s capacity reductions we will be lucky to break even in 2003.
Chart 9 shows annual (12/12) and 3-month (3/12) growth rates for year end 2002. As an example rigid PCB $ shipments were down 24.9% (100.0 -75.1) for 2002 vs. 2001. On a 3/12 basis (Oct-Dec 2002) was down 7.5% vs. (Oct-Dec 2001). Only medical, measurement & process control equipment and military electronics (Search & Navigation) finished up. Obviously one “survival” strategy is to focus on the better-growing end markets.
Times are tough. Watch the monthly data for signs of recovery. It will occur sector by sector.
General Business Conditions
The Electronics Buyers’ Index rose less than half a point in January, to 37.1 from 36.8 in December. Economists and electronics purchasing executives cited the possibility of war in the Middle East as a major distraction that has further worsened the problems posed by reluctance at many companies to increase their IT budgets.
The Conference Board reported its Consumer Confidence Index fell to 79 in January from 80.7 in December. “Overall readings continue to reflect the country’s lackluster economic activity,” said Lynn Franco, director of the Conference Board’s Consumer Research Center.
The 2002 worldwide production value of Taiwan’s information-technology hardware industry is expected to have grown 11.9% from the previous year to about US$47.85 billion, but single-digit gains are likely to ensue for the coming five years as unit prices fall, according to the Industrial Technology Information Services office under the Ministry of Economic Affairs.
Electronic Equipment
Computers
The PC market returned to positive growth in 2002, as worldwide PC shipments totaled 132.4 million units, a 2.7% increase from 2001 (Chart 10).
Mobile Communications
Strategy Analytics estimates that 50% of the mobile phones shipped in 2008 will be made in China, up from 27% in 2002. Manufacturers have been migrating production to China from higher-cost regions such as W. Europe, N. America, Japan, S. Korea and Taiwan.
“3G phones are a non-event this year,” Flextronics CEO Michael Marks said in late January. “The phones that people are making are physically large, they’re battery hogs, and the interoperability you need isn’t there yet.” Marks added that “3G will definitely happen,” but probably not until 2004 or 2005. The 3G handset orders Flextronics is receiving from its customers are so small, Marks said, that “you can’t even see them.” Nevertheless, mobile phones in general are one area that’s booming this year, he said, thanks to demand for features like color screens.
Nokia expects the number of mobile phone users worldwide to double to two billion by 2010; Chairman Jorma Ollila told telecoms congress. “I mentioned earlier that we have already surpassed the one billion mark in terms of the number of mobile subscribers worldwide,” Ollila said. The markets with the fastest growth rates were China, Brazil and Russia, Ollila said.
Fixed Communications
The fixed-line telecommunications equipment market may not recover from its current downturn for another 18 to 24 months, Siemens CEO Heinrich von Pierer said. “A year ago I said that (a recovery in the fixed-line telecom market) can take 18 to 24 months. Today I still have to say that.” He said a recovery will come with business volumes down by at least 40%.
Servers & Internet Infrastructure
Cisco Systems filed a lawsuit against Huawei Technologies, one of the biggest ($2.4 billion sales) telecom equipment providers in China, alleging that the company has copied, misappropriated and infringed on Cisco’s intellectual property in its rival line of low-cost networking routers. This is the first intellectual property lawsuit Cisco has filed.
The worldwide Router Market is projected to decline in 2003 for the third straight year before returning to growth in 2004. The Router Market is forecasted to decline a modest 2% in 2003 to $6.2 B, and then to expand at an average annual rate of 6% through 2007. According to Shin Umeda of Dell’Oro Group, “Service providers will allocate larger portions of their equipment budgets to products that help deliver new services to their customers, and high-end Routers represent that type of product. We also believe that, starting in 2004, service providers will begin to replace older systems with higher performance products, fueling demand for high-end Routers.”
Worldwide server shipments totaled 4.6 million units in 2002, a 4.2% increase from 2001, according to Dataquest. “The performance of the worldwide server market continues the growth pattern which began in the first quarter of 2002, suggesting that server shipments for the worldwide market may be stabilizing, but not showing signs of dramatic growth due to continued economic pressure in a number of regions,” said Dataquest’s Shahin Naftchi
Ericsson’s CEO Kurt Hellstroem is trying to persuade customers to let his company manage their networks after sales at the world’s largest maker of cellular equipment dropped by half in the past two years. Lucent Technologies, Nortel Networks and Alcatel are doing the same. “This is becoming a bit of a trend among suppliers,” said Henrik Tell of Oehman Kapitalfoervaltning. “The question is how much revenue they can get from it.”
Consumer Electronics
Nokia launched its first combined phone and games console, the N-Gage. It has a color screen, and will run on the Nokia Series 60 platform and the Symbian operating system.
Microsoft has asked its Xbox suppliers to make “applicable adjustments” to its orders. Focus Enhancements said it was told by Microsoft not to expect purchases of Focus Enhancements’ FS454 chips for the Xbox in the first half of the year.
PCB Fabrication
AT&S acquired a 77% stake in the PCB business of AIK Electronics Austria. The remaining 23% was taken by a local holding company. In the next fiscal year 2003/2004 this transaction is expected to generate revenues of around EUR14 million while not affecting net income.
Cheshire Circuits, UK acquired Cranford Circuits leading to the formation of Cheshire Cranford (CC) Electronics Europe. Managing Director of Cheshire Circuits, David Maitland became Managing Director of CC Electronics Europe.
CMK appointed Takahiro Nakayama COO effective April 1, 2003. Its current COO Eiji Watanabe was made vice president. CMK formed a JV in Guangdong province with Taiwan’s Pou Chen to produce and sell PCBs on the global market. The JV, CMK Global Brands Manufacture Ltd, will have a capital of $10 million and will be owned 51% by Pou Chen.
Endicott Interconnect Technologies was chosen by Digital Innovations as its partner in the launch of the Neuros MP3 Digital Audio Computer.
GSPK Circuits, UK is opening a sales and supply chain support office in Shanghai, China. It believes that they can offer the skill and expertise available from the Far East with the added benefit of local contact.
Kingboard Chemical Holdings raised its stake in Elec & Eltek International to 20% from 19%. The laminate manufacturer now holds 2.35 million shares in the PCB maker, compared with 2.23 million previously.
M~Wave appointed Bob O’Connell as Chief Operating Officer. “This is a great step forward for M~Wave, as Mr. O’Connell brings over 23 years of experience running multi-million dollar printed circuit operations,” indicated CEO Joe Turek.
PNE PCB Bhd is relying on its China operations to enhance the group’s turnover once global demand for PCBs returns to the upward trend. Its executive managing director Jonathan Tan Kong Guan said the plant in Dongguan City, Guandong Province, would begin commercial production in April. “Both the Chinese and Malaysian operations will complement each other and help the group to remain competitive in the global PCB market.” Tan said the plant would produce about 100,000 sq ft of PCBs in the first year, rising to 300,000 sq ft in the third year.
Sumitomo Metal Mining, Sumitomo Bakelite and Sumitomo Heavy Industries announced the development of a PWB for high-performance semiconductors. Designed for devices that use high-performance semiconductors, like video-capable cellular phones, the new board features an evenly distributed surface layer of copper that provides contacts even inside small drilled holes.
Teradyne Connection Systems and Kaparel Corporation formed a supply partnership for high-performance circuits. Teradyne will provide Kaparel with open standard PCBs for their backplane designs. The two companies will also participate in a technology exchange that will improve PCB design for use with open standards, such as PICMG 3.0.
Toppan Printing will shut down its San Diego plant at the end of March. Production at the U.S. factory will be transferred to NEC Toppan Circuit Solutions’ two Japanese plants, in Niigata and Toyama prefectures, as well as a Philippine plant. These three plants are expected to supply PCBs to the U.S. market. NEC Toppan Circuit Solutions, a JV between Toppan and NEC, will set up a sales branch in the U.S.
TTM Technologies acquired Honeywell’s Advanced Circuits operation (ACI) for approximately $1 million, including fees and expenses. “The combination nearly doubles our revenues, provides very high technology capacity, and gives us access to additional blue-chip clients, creating opportunities to cross sell our capabilities,” said CEO Kent Alder.
Materials
Circuit Foil Luxembourg closed operations in its European plant n° 1, cutting production capacity by 450 t/month of copper foil. Circuit Foil will continue to serve its customers worldwide from its plants in Luxembourg and Canada. In this severe industry downturn the overall electrodeposited copper foil consumption for Europe and N. America dropped to only 2,000 metric tons per month.
Cookson Group sold its precision products business for £50m. It was sold in two parts, with the electrical contacts, contact assemblies and engineered plastic components side bringing £47.6m from The Jordan Company, a US private equity firm. Sterngold Dental, the dental products side, sold for £2.4m in a management buy-out.
Ed Kelley was appointed OEM Marketing Manager, Polyclad Laminates by Cookson Electronics PWB Materials & Chemistry, Londonderry, NH. Ed has global responsibilities for OEM marketing and Equipment Manufacturing marketing. Prior to joining Polyclad, Ed worked for Sanmina-SCI in Derry, NH as Senior Engineering Manager.
Electro Scientific Industries transferred its mechanical drilling service and parts business to Excellon. This includes factory authorized spare parts inventory, field service knowledge, schematics and parts lists necessary for Excellon to support the installed base service requirements of ESI’s mechanical drilling systems, including the “Dynamotion” brand.
GIL Technologies is actively seeking to license its laminate and manufacturing process technology. “Our laminate materials have industry-leading properties; very low loss, exceptional thermal stability, world-class thickness tolerance, and availability in roll form, that enable the next generation of devices to be produced at considerable cost savings over competitive technologies”, according to Scott Lane, VP Technology. GIL ceased all manufacturing operations effective February 1st 2003.
Jiangxi Copper, China’s largest copper producer, agreed with Yates Foil U.S.A. to establish an electrolytic copper foil JV in Nanchang, Jiangxi Province. With an investment of RMB 578 million ($69.81 million), the new venture, to be located in the Nanchang High and New Technology Park, will have an annual capacity of 6,000 tons of electrolytic copper foils. It is expected to start production in the middle of 2004. Once operational, it will significantly reduce China’s heavy reliance on imports for high-end electrolytic copper foils.
Nippon Mining Holdings will close three of its four “Gould Electronics” copper foil plants in the U.S. The closures will be completed by September 2003 resulting in the elimination of 200 positions. The company’s only remaining domestic copper foil plant will be its facility in Arizona that produces electrolytic copper foil.
Rohm and Haas elected Gary Calabrese VP of the company and Chief Technology Officer. As CTO, Dr. Calabrese will work with the company’s Executive Council and business leaders to identify new areas of technology investment. He will retain oversight for the company’s Electronic Materials research organization, and will also lead a corporate technology development laboratory focused on creating new product families for Rohm and Haas.
Vantico Group agreed to a debt for equity swap to substantially reduce its overall indebtedness. Vantico will also receive an equity injection of CHF75 million for operational purposes, with a further commitment of up to CHF75 million if required. MatlinPatterson Global Opportunities Partners will become the majority shareholder in Vantico.
Electronic Manufacturing Services
Elcoteq Network will manufacture Sumitomo Metal Micro Devices’ LCD controller modules at its plant in Dongguan, China.
Flextronics will the industrial park in Sarvar (west Hungary) to become one of its European logistics centers, chairman of Flextronics Europa Humphrey Porter said.
Flextronics split the roles of chairman and CEO to comply with corporate governance best practice. Michael Marks, chairman and CEO since 1994, will relinquish the chairmanship. Richard Sharp, former chairman and CEO of Circuit City will become non-executive chairman.
Jabil Circuit acquired some operations of Quantum, Penang, Malaysia, for about $16.4 million in cash. Quantum will outsource its current tape drive manufacturing to Jabil.
By the end of 2003 Jabil expects 70% of its manufacturing will be in low-cost countries compared to 30% in the U.S. and W. Europe. Three years ago, according to CEO Tim Main, the ratio was just the opposite. Main defended Jabil’s strategy as not only standard in his industry but necessary for survival. “If we don’t move the business, our customers will.”
Manufacturers’ Services Ltd. will collaborate with GlaxoSmithKline for next generation medical devices in Western Europe. MSL will provide GlaxoSmithKline with automation services such as line design and clinical trial support and full volume manufacturing.
MSL and Videoton entered into a strategic alliance. Videoton, a private company headquartered in Szekesfehervar, Hungary, is Central Europe’s largest EMS company.
MSL will make PCBAs for Seachange’s digital video server systems. MSL will supply PCBAs from its Lowell, MA plant.
MSL, Athlone, Ireland was awarded EN46000 medical certification, enhancing its ability to target the rapidly growing medical segment of the EMS industry.
Next Level Communications selected Plexus as its primary provider of Electronic Manufacturing Services. Plexus will manufacture, and assist in engineering and design of the company’s network access equipment.
Sanmina-SCI said it has become the first EMS company in the world to achieve ISO 9001:2000 and TL 9000 Release 3.0 certification for its 14 communications focused enclosure facilities.
IBM relocated part of its desktop PC manufacturing activities from Shenzhen, China to Penang, Malaysia where Sanmina-SCI will produce IBM’s NetVista desktop PCs. The deal is an extension of a global 3-year, US$5 billion outsourcing agreement signed in 2002.
Sanmina-SCI announced that the U.S. Food and Drug Administration’s recommended approval of its medical facility in San Jose, California, to manufacture the NovaSure™ System’s Radio Frequency Controller.
Solectron will perform new product introduction, PCB design and other supply chain services for SkyBitz’s global satellite asset tracking devices.
IPWireless signed a manufacturing agreement with Solectron under which the latter will provide PCB assembly, new product introduction, fulfillment and complete product assembly services at its plant in Dunfermline, UK.
Solectron signed a manufacturing and supply agreement with Hewlett-Packard worth $1.4 billion over five years. Solectron will produce through its facilities in Puerto Rico PCBs and memory modules for H-P’s servers.
Solectron Centum Electronics, Bangalore, India, a subsidiary of Solectron, made an initial investment in the EMS business and will be in production by April 2003. It is the largest manufacturer of frequency controlled products and hybrid microcircuits in India. Its products are exported as well as sold in the domestic market.
Solectron bought Italian call center and technical support provider Ce.Mar Srl to expand customer service in Europe.
Solectron received a payment of about $48 million from Lucent Technologies over a canceled supply agreement between the two companies. In late October 2002, Solectron agreed to unwind the $2 billion, 3-year contract to supply optical-networking equipment to Lucent by the end of November. According to their agreement, Lucent was to repurchase the equipment and unused inventory from its optical product lines that Solectron acquired in May for about $99 million. Solectron said the companies decided to unwind the agreement as a result of significant changes in the marketplace and decreased demand.
Viasystems’ companies completed recapitalization and emerged from their pre-packaged bankruptcy process. This financial recapitalization leaves Viasystems with less than $400 million of long-term debt and improved free cash flow through the elimination of $70 million in annual interest charges.
Semiconductors
Global semiconductor sales reached $12.5 billion in December 2002, bringing total revenue for the year to $140.7 billion, a 1.3% increase from 2001’s $138.9 billion. “The recovery that began in the final quarter of 2001 continued throughout 2002, producing 1.3% growth in this turnaround year,” stated SIA President George Scalise. “This is remarkable performance, in the face of lackluster demand in the Information Technology market. We expect further improvement across broad product sectors, positioning the industry for 19.8% growth in 2003, increasing revenues to $169.3 billion.”
N. American semiconductor equipment makers posted $839 million in orders in December and a book-to-bill ratio of 0.98, according to SEMI. “The increased bookings level suggests further capital equipment market stabilization. While the bookings figure is well below the peak levels in 2002, the bookings and billings figures are nearing parity, which is seen as a positive trend,” said Stanley Myers, president and CEO of SEMI. “Growth in the semiconductor capital equipment business is anticipated to be on the order of 10 to 20% in 2003 on a worldwide basis.”
Upcoming Trade Shows
Visit Custer Consulting Group’s booth #1115 at IPC Printed Circuits Expo March 25-27 in Long Beach, CA and also booth #357 at
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.