Walt Custer's 2016 Business Outlook
What’s going to be the next boom in the electronics industry? Is it self-driving cars, the Internet of Things, drones, or something else that’s still completely off the radar? At productronica, I sat down with Walt Custer of Custer Consulting Group, who offered his forecast for 2016. Included in our discussion were his view of China’s current impact on the market, as well as some keen insights on a few key players and important sectors in the electronics industry.
Barry Matties: Walt, let’s begin by you giving our readers a little context about what Custer Consulting Group does.
Walt Custer: Well, we consider ourselves market analysts. We try and figure out the global supply chain. It's highly cyclical, we all know that, so we try to understand the relationship between electronic equipment, the economy, electronic components, materials, and their growth cycles—how big they are, when they're going to peak, and when they’re going to hit their valleys. So that's sort of our thing. We track the entire electronic supply chain.
Matties: And this is under the Custer Consulting Group. You've been doing this now for 12 years or so?
Custer: Oh, longer than that. Before this life, I was vice president of marketing and sales for Morton Electronic Materials, which sold materials to the printed wiring board and semiconductor industries. That business was cyclical and we couldn't figure out why. So I started studying it, trying to understand why our business demand was fluctuating. When Morton International was bought out by Rohm and Haas, I got a golden handshake and "retired." That lasted about two weeks—until I founded Custer Consulting Group. I had been doing this as kind of a hobby for our customers and I said, "Hey, I can still do it but I'm going to try to sell it." And that was in 1999. Our corporation is 16 years old. I guess if you make 16 years at least it's something.
Matties: That's great. In all those years studying the markets, what's been the greatest surprise that you've come across?
Custer: I guess the boom and bust cycle, and maybe the dot com bust of 2001 that no one saw coming. We saw it I think three months before other people did because I remember going to an IPC meeting and telling people that inventories were building and orders were slowing. And everybody said, “Don't tell me that, we're fine.” And then two or three months later it imploded because everybody had built huge inventories for a perceived ongoing boom in datacom, telecom and computers, which just didn't materialize as fast as people thought. The dot com bubble was followed by major outsourcing to China. With it went much of North America’s and Europe’s volume electronics production. The financial crisis of 2007–08 was the next major crash. We recovered from that. But lately, I would say the surprise is that growth is so modest.
Matties: What do you think has had the greatest impact on the modest growth you are seeing? Do you attribute it to China’s slowing growth?
Custer: I think the biggest impact is less robust demand for consumer-driven electronic equipment. In particular, through the 2000 decade, we were in the personal computer and communication equipment ages. When iPads/media tablets came along in 2010 they dug into the personal computer sales. As PC growth slowed media tablets took up the slack. That kept ‘computer’ growth going but then newer smartphones cannibalized many of the functions of PCs, media tablets and point & shoot cameras.
I use this graphic in my presentation that shows all the electronic equipment a guy of 15 years ago owned—all kinds of audio/video equipment and phones and everything. Now it's all in one iPhone. Smartphones went like gangbusters but now their growth is slowing.
I think the concern now is what will the next high volume consumer product be? Without high-volume consumer electronics, our business cycle will be stuck in single digit growth. So we're in a little bit of trough right now waiting for the next big thing. People are talking about self-driving cars, the Internet of Things, drones, robots and whatever, but none of them have materialized in volume yet. So is China at fault? No, I wouldn't say China is at fault. It's one of the symptoms of the lack of a huge driving market at the moment.
Matties: You mentioned a lot of things: automotive, IoT, etc. If you were a betting man, where would you put your money on the next big thing?
Custer: First of all, I wouldn't bet on any of them for 2016 in any measurable way. They're just not evolving that fast. The Internet of Things has a lot happening, but it won’t generate imminent, large volumes like we felt from smartphones or media tablets. The same goes for self-driving cars. Automotive automation obviously is happening, but it's not going to happen overnight. Not everybody is going to have a self-driving car in 2016.
The global economies are a little weak. Overlay economic softness with the fact that there's no about-to-mature technology that will be the next growth driver, and I think 2016 is going to be a year of very modest growth. Probably somewhere between 2017–2019 we’ll start to see some of the things we've talked about really starting to contribute some volumes. But I don't see them happening in 2016.
Matties: So you are thinking that 2016 is going to be kind of a flat year?
Custer: Yeah, a couple percent of growth, unless something comes out of the woodwork that I don't know about. But I don't see economic recovery in a big fashion. I mean China's still in a contraction mode, although Europe is growing.
Matties: Is that primarily driven by the automotive sector?
Custer: Somewhat, but it’s also due to a relatively weak Euro so their exports are cheaper. But overall I'm looking at 2016 as a modest growth year.
One of the things we do that is kind of interesting is study how we calculate growth rates. Typically, when you see data you see growth consolidated in U.S. dollars. When the dollar is strong and the other currencies around the world are weak, if you take the weak currencies and consolidate them into dollars, you get less.
So for example, third-quarter electronic equipment growth worldwide was down about 4.2% in U.S. dollars when calculated at fluctuating exchange rates, but it was up 3% at constant 2014 exchange. And denominated in Euros, it was up 10%.
When someone starts talking about growth rates, you have to see how they were calculated. Were they at a fixed exchange or a fluctuating exchange? As another example, semiconductor shipments to Europe are up 10% in Euros but down 10% in dollars—a huge difference.
If you're living in Europe and everything is growing at 10% in Euros, that's not so bad. But if you look at the SIA data, which is all in U.S. dollars, it shows Europe down 10%. That's because they're showing it in dollars and not in Euros.
Matties: So in 2016, could wearables be the next big thing? It seems like there's so much in consumer electronics for consumers to buy that are at a reasonable price point at the moment.
Custer: Yeah, but they're not as big in dollars as things like the media tablets or the smartphones. I agree that Fitbits and smartwatches and such are definitely growth drivers. But are they the growth driver with the magnitude to offset the decline in some of the other areas that are slowing down? That's why I'm being conservative about '16. You can think of all these coming things, but if you start to quantify them, they're not as big as some of the things that are slowing down.
Matties: The other thing that I've noticed is the life cycle of electronics products have changed. You mentioned the tablet life is now about four years.
Custer: And that's kind of disappointing to tablet vendors. They'd like it to be every year or two.
Matties: I'm using an iPad 2 and I'm looking at the iPad 4 and that’s two or three generations of difference, but I still don't see the need to change.
Custer: If you just use your present iPad to get email, read the news, etc., you don’t need a new one.
Matties: It’s hard to justify spending another $1,000 on an iPad, or whatever it is.
Custer: And that's what's hurting them. At the same time there are knock-offs coming. It was interesting, if you look at Apple's financials, we think of them as Apple Computer, but about 65% of their sales are the iPhone. And they're getting really good prices for it.
Matties: Unbelievable prices!
Custer: If you read Apple's financial reports, they disclose both units and dollars. So you can calculate the selling price of an iPhone, and I think it's around $600. Most of their competitors are at half that. So here they've got 60% of their sales in a premium priced product, which kind of indicates that they're vulnerable, because the Chinese are running hard to get knock-offs. And so far, Apple has been able to keep a glow on the iPhone to warrant really premium prices. But if they can't justify premium pricing when it's 60–65% of their sales, it's going to be tough. They need another product—the iCar or the iSomething. I don't think the iWatch is taking off as fast as they had hoped. So I'm watching Apple in the next year to see what their next generation of products is going to be.
Matties: When I look at Apple, certainly after Steve Jobs passed, it just starts to feel like a “me too” company. They wanted to go larger, and now they have the bigger phone. Then in 2014 they dropped one model to $99 and made the older version of the iPhone the free option.
Custer: Yeah, I think if they go the cheap phone road, they're strangling themselves because that's where all the rest of their competition is. They successfully carved out a nice niche at really premium prices. That's driven their sales.
Matties: So when you do your analysis, do you look at specific companies like that?
Custer: Oh yeah. I don't know if you've ever seen a product we have that we call Business Outlook, which is about 1,300 charts. We track the economy and electronic equipment by sector, and we track a whole bunch of companies. That's how we get our growth rates by equipment sector. For example, we add up all the computer companies’ revenues, net income and inventories on a quarterly basis from their financial reports. I haven't added up how many there are, but it's close to a thousand companies that we track every quarter just to analyze what the industry is doing by sector.
Matties: Are these reports part of the package that you sell to your customers?
Custer: Yes, they get a PowerPoint with charts and all the data they then can use in their own business plan. We also have a lot of time series. Things like leading indicators that companies can use to compare their business performance to their competitors and customers.
Matties: And if someone's interested in taking part in that service, they can just go to your website?
Custer: Yeah, or just send me an email. I'm speaking every day here at productronica, as well. I was going to offer to send a copy of the charts to anyone who reads this and wants an example of the talk. If they send an email to email@example.com, I'll send them the whole presentation, and I can tell them how to get it on an ongoing basis if they’d like.
Matties: Is there anything that we haven't talked about that we should share with the industry?
Custer: You mean the dirty side [laughs]? No, I'm just looking at this as a modest growth year. I think China's going to come out of it this year, but it's still negative. The U.S. is growing very modestly. Europe is still hanging in there. I guess beyond what we have discussed, the thing that worries me a lot is geo-political unrest. That could screw things up big time. But other than that, equipment demand is holding; it's just not expanding very rapidly.
Matties: You know, I go to a lot of these shows like the display show in Santa Clara and I see all these great products, like the TV screens and all of that. It just seems like there's so many opportunities for people to spend money on electronics these days.
Custer: Yes, and they're doing it. I mean the ultra-HD (4K) TVs certainly are something that is interesting. I don't have one but they look really nice.
Matties: They do. Walt, thank you so much for spending time with us and giving an update on what you’re seeing.
Custer: Thank you, Barry.