Business Outlook: Global Electronics Industry
World Economy
The last twelve months were difficult for the global electronics industry. Fortunately the worst appears to be behind us as most of the world is now in the recovery phase of the 2008/2009 recession.
Real global GDP (Chart 1) growth peaked in 2Q’07 at 4% but became negative by mid 2008. China significantly outperformed the world. Based upon recent industrial production growth (Chart 2), key Asian countries were again expanding by mid-2009 but Japan, Europe and N. America remained in recession. Looking forward to 2010 and 2011, all regions are expected to have emerged from recession with China growing at or near double-digit rates (Chart 3).
Based upon a recent global “Purchasing Managers’ Index” (Chart 4), the world returned to an expansionary phase in August 2009.
Electronic Equipment
In 2008 approximately US$ 1.7 trillion of electronic equipment was produced globally (Chart 5). Thanks to Ed Henderson www.hendersonventures.com for this data. Based upon regional 3/12 growth rates (recent 3 months vs. same 3 months a year earlier), mid-summer 2009 electronic equipment production growth rates were +3% in Taiwan/China, -29% in Japan, -20% in Europe and -5% in the USA (Chart 6). All regions appear to have reached low points in this business cycles but actual electronic equipment production expansion (3/12 >1.0) is thus far only occurring in SE Asia.
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Using composite sales, net income and inventory data for 61 large, global OEM companies representing over 50% of the world’s electronic equipment product (Chart 7 ), end market revenues declined 13% in 2Q’09 vs. 2Q’08. Quarterly world electronic equipment sales are traditionally seasonal with a consumer electronics driven peak in the fourth quarter however 4Q’08 was negatively impacted by the low consumer and business spending.
(Chart 8) provides world electronic equipment growth by quarter, clearly showing the 2001/2 and also the first portion of the 2008/9 recessions. It is likely that actual global end market growth will not become positive until early 2010.
Fortunately inventories throughout the world electronic food chain (OEMs, EMS companies, semiconductor manufacturers and electronic component distributors) are now much better controlled compared to the post 2000 recession (Chart 9). With low inventory levels the duration of this recession will be much shorter compared to the post-2000 downturn.
Growth by Electronics Segment
(Chart 10) shows 2Q’09/2Q’08 growth for various segments of the world electronic food chain. Only military and medical electronic equipment and the Taiwan listed ODMs (Original Design Manufacturers) saw an increase in 2Q’09 sales. Process equipment suppliers (SEMI and PCB) declined the most. When end market demand slows, suppliers postpone equipment purchases until they are sure the recession has almost ended.
China/Taiwan Outgrows the World
Based upon China’s “Purchasing Managers Index” (Chart 11), its economy began to decline in September 2008 but returned to growth in May 2009. Compare this China chart to world performance (Chart 4) earlier. SE Asia is clearly leading the current recovery.
Using composite monthly sales (Chart 12) of 101 Taiwan-listed OEMs (many with manufacturing in China), the strong holiday seasonality is quite apparent (red circles). Also obvious is the sharp downturn in late 2008 and the less than robust recovery in 2009. Lower consumer and business demand, especially by China/Taiwan’s export customers had a significant negative impact. 3/12 Growth for this 101-company composite was +36% in mid-2007, went negative in late 2008 and then only became positive again in June 2009 (Chart 13).
Key Consumer “Volume” End Markets
World mobile phone unit shipments had their first 4Q decline since 2001 (Chart 14). Personal computer shipments exhibited a similar 2009 downturn (Chart 15). PCs are projected to decline 2% in 2009 compared to 2008 but then grow 13% next year (Chart 16). Computer motherboards responded accordingly (Chart 17). Recent optimism for a quicker-than-expected global economic recovery and also the release of Windows 7 have caused analysts to raise their late-2009 sales expectations for personal computers.
World Semiconductor Shipments
We are in the recovery phase of the 12th semiconductor global business cycle since 1984 (Chart 18). Comparing the 2001/2 and 2008/9 recessions, note how much better our present inventory control has allowed a faster rebound. Actual world growth will not occur until the 3/12 is greater than 1.0 (early 2010?) but we are headed in the right direction!
Semiconductor shipments to a region as reported by the SIA are a good measure of electronic assembly activity by area of the world. (Chart 19) shows the very dramatic shift of manufacturing to SE Asia following the 2000 “bubble.” Although there was a severe drop in chip shipments to Asia in early 2009, demand is again growing there, while the balance of the world is still relatively flat.
(Chart 20) is based upon the same data as (Chart 19), but better shows SE Asia’s shift in world electronic assembly market share from 20% in 2000 to 52% today.
Chip Foundries as a Leading Indicator
Looking forward, composite monthly sales of 14 Taiwan-listed chip foundries (TSMC, UMC, etc) provide a good leading indicator for global chip shipments. Based upon (Chart 21), world semiconductor sales will continue to expand in the near term. This “chip foundry” sales information is available about 10 days after each month closes so it can be useful for gauging short term growth prospects for the electronics industry.
SEMI Equipment
Manufactures of capital equipment for semiconductor fabrication, assembly and test have business cycles that swing much more than those of their customers (semiconductor makers). A recent forecast shows global SEMI equipment revenues declining 48% in 2009 but then rebounding 34% next year (Chart 22).
Solar/Photovoltaic Industry
Many suppliers of electronic components and capital equipment saw the solar/photovoltaic industries as high growth opportunities, especially as alternative energy demand increased due to surging petroleum prices. However as the world entered a recession in late 2008, oil prices dropped and also venture capital availability for new photovoltaic plants dwindled. Suppliers to the solar/photovoltaic industries saw a sharp revenue drop in late 2008 (Chart 23) following 68% revenue growth in 2007. Sales are now again growing as the quest for non-oil dependent energy sources will inevitably continue.
EMS & ODM Companies
Composite sales of eleven large EMS providers grew 5% on 2008 but growth varied significantly by company (Chart 24). Excluding Foxconn Hon Hai, the “pure” EMS companies saw sales begin to decline in 2Q’08 (Chart 25) as the Asian-based ODMs took market share. By comparison 20 large ODMs (Foxconn included) grew 9% in 2008 (Chart 26). Because of their dependence on “consumer electronics” (including PCs and mobile phones), these ODMs saw a large sales decline following the 2008 holiday season (Chart 27). However growth has returned (Chart 28). Compare ODM growth to that of the EMS companies excluding Foxconn.
Printed Circuit Boards
Approximately US$ 50 billion of rigid and flexible printed circuit boards were produced globally in 2008. Asia including Japan made almost 84% (Chart 29). Thanks to Dr. Hayao Nakahara, (Chart 30) lists the top 20 global PCB makers last year. This chart is color coded to show country of ownership of these companies (Japan – white, Asia excluding Japan – yellow, Americas – magenta and Europe – green). Note country of ownership is not necessarily country of production.
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Japan (domestic production) saw a major downturn in PCB production in 2009 (Chart 31). Japanese local electronic equipment production has also dropped – partially because of major outsourcing to lower cost regions.
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Taiwan listed PCB companies (often with manufacturing in China) have been growing strongly although they were hurt in early 2009 by the consumer electronics and export recession (Chart 32).
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(Chart 33) lists the major PCB producers in Europe (local production), ranked in order of sales while Chart 34 gives the total annual sales of the top 5, next 5, etc. listed in (Chart 34).
In North America (primarily the USA & Canada) PCB sales peaked at over a $12 billion annualized rate during the 2000 “bubble” but imploded in 2001 due to lower demand, inventory and excess order corrections and then aggressive outsourcing and assembly movement of the OEMs and EMS companies to lower cost Asia (Chart 35). From 2002 to present Americas PCB production has been shrinking at about 5% annually.
(Chart 35)
(Chart 36) compares the growth of N. American PCB and U.S. electronic equipment orders. Notice that PCBs “cycle” above and below electronic equipment due to order and inventory corrections during highs and lows in the recurring business cycle. However the historical trend is downwards and it is likely that the next American PCB “growth peak” in 2010 may still be negative
(Chart 37) shows regional PCB production on a 3/12 growth basis. Comparing recent 3-months sales to the same 3-months in 2008, Taiwan/China was down14%, Japan down 27%, N. America down 24% and Europe down 29%. Obviously to return to the 2008 world total, exceedingly high world PCB growth would have to occur in the last few months of 2009. More likely 2009 global PCB production (at constant exchange) will decline 15 to 20% @ constant exchange compared to 2008. Fortunately all regions reached the bottom of their current cycles and are again headed to real growth (3/12 =1.0).
(Chart 38) shows actual monthly PCB revenues (in US$) by region. SE Asia dominates. (Chart 39) uses the same data in a stacked bar chart to show the historical changes in regional market share and (Chart 40) gives total global PCB sales (US$) on a monthly basis. It suggests that 2009 will be about US$10 billion below 2008.
Global Electronics Business Cycle
(Chart 41) compares the global 3/12 growth of electronic equipment, semiconductors and printed circuit boards. PCBs are the most volatile. All curves “bottomed” in early 2009 but actual growth won’t resume until the 3/12s reach 1.0
Forecasts
(Chart 42) my colleagues Hayao Nakahara’s estimate of PCB production by year compared to the data from Custer Consulting Group’s world model. I hope that I am wrong! Calculated at constant exchange rates 2009 will be significantly down vs. 2008 with rebound in 2010. Compare Custer Consulting Group’s forecasted 19.5% PCB decline with Gartner’s recent 17% forecasted semiconductor decline for 2009 (Chart 43).
Looking forward electronic equipment production is expected to decline in all regions this year, rebounding in 2010 and 2011, with SE Asia continuing to “outgrow” the world (Chart 44).
Walter Custer
President
Custer Consulting Group
PO Box 299
The Sea Ranch, CA 95497 USA
+1 707 785-1777
walt@custerconsulting.com
Special thanks to Ed Henderson of Henderson Ventures/Electronic Outlook Corp. and Dr. Hayao Nakahara of N.T. Information Ltd.
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