Electronics Industry Update

Worldwide Sales of Semiconductor Devices	Production Trends & Forecasts of Computers & Peripheral Equipment
Historical Data: World Semiconductor Trade Statistics (WSTS) Forecast: Semiconductor International	Historical Data: Federal Reserve Board Forecast: Semiconductor International
Production Trends & Forecasts of Communications Equipment	Production Trends & Forecasts of Electronic Components
Historical Data: Federal Reserve Board Forecast: Semiconductor International	Historical Data: Federal Reserve Board Forecast: Semiconductor International

According to preliminary data released by the Semiconductor Industry Association (SIA), the value of worldwide chip sales increased by 2.8% between April and May to a level of $11.37B. This represented the fourth straight month of improvement following three consecutive months without a net gain in chip sales.

But the over-the-year trend remains underwater — although it has floated just a bit closer to the surface during each succeeding month of this year. May global chip sales were still estimated to be worth 10.5% less than during the same month of 2001. There’s no question that market conditions have improved dramatically in recent months, though: As recently as this past September, worldwide chip sales were trailing the year-earlier total by 44.4%.

Between April and May of this year, semiconductor sales values rose in all of the four broad regions of the world except Europe. But in three of the four regions, May sales levels still came up well short of the May 2001 total, with the exception of the Asia-Pacific region (all nations of the region except Japan).

Following are the April-to-May semiconductor sales trends by major geographic region (with the 2.8% increase over-the-month average trend in global sales value being the relevant point of comparison):

• The Americas: +1.1%
• Europe: -1.8%
• Japan: +5.9%
• Asia-Pacific (excluding Japan): +4.8%

The dollar value of chip sales to the Americas this May was 21.9% below its May 2001 level — a much steeper contraction than the 10.5% over-the-year decrease in worldwide sales. Sales to Europe during May were valued at a level 21.6% below the May 2001 total.

Chip sales to Japan have improved markedly during the past several months, after plunging throughout most of the second half of last year. The estimated dollar value of sales to Japan was 26.8% lower this May than during May 2001 — worse than the global-average trend, but not nearly as bad as during the final months of 2001 or the first couple of months of this year, when the over-the-year monthly trend averaged a 47.1% decline.

But recovery is already fully established in the other parts of Asia. May chip sales to the Asia-Pacific market were valued at a level 22.4% above their May 2001 total. So the semiconductor market in Taiwan, China, South Korea, Singapore and other (non-Japan) nations in the Asia-Pacific region is where the action already is this year — and a model that other parts of the globe hope to emulate as we move into 2003. This will probably be difficult to do, however, since much of the resurgence in the Asia-Pacific market can be attributed to increasing momentum from the migration of semiconductor customers (end-market and component manufacturers alike) to lower-cost contract manufacturing facilities throughout much of the region.

The health of the semiconductor industry throughout the world clearly improved during the first half of 2002 — moving in the right direction, to be sure. But at the same time, there still wasn’t much in SIA’s May sales report to suggest that the industry will gain any considerable momentum in the months immediately ahead. Average prices have firmed up after being in near-freefall throughout much of last year. But worldwide demand on a unit basis from important end-market electronics industry sectors remains discouragingly weak.

Last year’s estimated 32% decline in global sales volume represented the sharpest annual contraction in the 50-year history of the semiconductor industry. Inventory levels at the end-market level are in much better shape now than they were throughout the 2001 downturn. However, the semiconductor industry’s problems have been more attributable to demand woes than oversupply, so a quick rebound just isn’t in the cards.

For 2002 as a whole, global chip sales are likely to be little changed from the 2001 total — up or down a couple of percentage points, depending upon whether or not we see a sustained improvement in average prices. But during 2003 we’re expecting to see solid growth in the market on the order of 30% — although this solid recovery would still leave 2003’s dollar value of semiconductor chip sales about 10% below the robust $204.4B level achieved during 2000.

[NOTE: This trend analysis of SIA sales figures is based upon a three-month-moving-total view of the data — widely considered to be the most accurate and meaningful way to look at this information, because it smoothes out the always erratic movements in intra-quarter sales volume.]

The government estimates that production (measured in a way approximating the unit count vs. dollar value of output) of computers, storage devices, disk drives, printers and the whole range of other computer-related peripheral hardware has been rising steadily throughout 2002. Although surplus global production capacity isn’t affording U.S. producers much pricing power and is therefore continuing to depress profit margins, output trends for American computer and peripheral equipment makers have improved markedly from the levels of late summer/early fall 2001.

Estimates from the Federal Reserve Board’s monthly industrial production survey show that computer/peripherals industry output rose for the ninth month in a row during June. Output increased by a modest 0.8% between May and June, following gains that averaged 2% a month over the previous eight months.

Following uncharacteristically subdued 2.3% growth in total computer/peripherals industry production between 2000 and 2001, output from U.S. manufacturers over the first six months of 2002 was running 4.8% ahead of the 2001 pace. And June production by itself was 11.1% higher than during the same month a year earlier — the strongest over-the-year performance turned in by the industry since March 2001. In addition, the manufacturing capacity utilization rate in the industry moved up strongly from 62.8% during the final quarter of 2001 to 68.2% during June of this year — although this remained well below the 80% utilization rate that would be considered normal and healthy for any sector within manufacturing.

We should continue to see solid month-to-month gains in output throughout the second half of 2002. And there’s every reason to expect that annualized output gains will be back in solid double-digit territory by this time next year.

We’re currently forecasting around 9% growth in industry output for full-year 2002, followed by a gain of about 12% next year. Not bad — especially in light of last year’s marginal increase — but still a far cry from the 30%-plus growth recorded during both 1999 and 2000.

Output from the nation’s communications equipment industry is beginning to show some encouraging signs of stabilizing — albeit at a production level much lower than even the lackluster pace of a year ago. Trends in the industry appear to have finally hit bottom, but it’s still much too early to say that we’re yet in the recovery phase. So we’ll likely see several months of the industry "treading water" before convincing evidence emerges that it has actually begun to slowly move forward.

Production among communications equipment manufacturers in the United States rose by 0.6% between May and June — the second gain in the past five months. This is the best performance turned in by the industry since the summer of 2000. But the state of the industry is still undeniably sickly. Output from communications equipment manufacturers has declined during 19 of the past 21 months, and was 17.9% lower this June than in June 2001.

Industry output plunged by 10.2% between 2000 and 2001, and total unit production from U.S. communications equipment manufacturers during the six months of this year was 22.6% below the total recorded over the first half of 2001. Furthermore, the industry’s manufacturing capacity utilization rate was an abysmally low 53.5% during June — dramatically lower than the long-term (1967-2001) industry average of 80.1%.

But the bright side to all of this is that it does, indeed, appear that communications equipment production has finally hit bottom. Although actual quarterly production totals for the first three quarters of 2002 will fall well short of the comparable levels for 2001, we should begin to once again see some halting improvement in the month-to-month trends over the final three months of this year.

Consequently, we’re cautiously optimistic that market conditions will finally begin to show some marginal improvement on a sustained basis by this year’s final quarter, and that overall industry output during the second half of 2002 will be only about 8-10% lower than over the final six months of 2001. There’s no getting around the fact that the industry will record its second straight year of production decline. But following output contraction of another 15-20% in full-year 2002, our preliminary forecasts call for production to increase at something on the order of 10-12% during 2003.

The modest upturn in electronics end-market production (particularly for computers and peripherals) that we saw over the first half of 2002 has stimulated demand for new electronic components. Manufacturers have started to cautiously build inventories again, and this has resulted in improved orders and production trends for semiconductor and other component makers.

Unit output from the nation’s electronic components industry group (dominated by semiconductors) rose for the ninth consecutive month during May, following declines during every one of the first eight months of 2001. Production at U.S. firms rose by a sharp 4.2% between April and May of this year, on the heels of monthly gains that averaged 3.2% during the first third of 2002.

Also encouraging was the fact that the industry’s capacity utilization rate — while still very low at 69.6% — was higher in June than the average (65.7%) for the first five months of the year. Thus, all signs suggest that the industry that is in the midst of a self-sustaining recovery.

Nevertheless, total U.S. industry production of electronic components during the first five months of 2002 was only 2.2% greater than over the first five months of last year — a meager gain, to be sure — but much better than the 14.5% over-the-year contraction recorded during the second half of 2001.

Still, there’s little doubt that the recovery in market demand will be painfully slow and uneven, with overall electronic component output during 2002 probably growing by only about 8% (following 4.4% contraction last year) — just a fraction of the average annual gains realized throughout the past decade. But production gains should again be in double digits next year — probably between 20-25% — as global end-market demand grows considerably stronger.