Electronics Industry Update

Worldwide Sales of Semiconductor Devices	Production Trends & Forecasts of Computers
Historical Data: World Semiconductor Trade Statistics (WSTS) Forecast: Semiconductor International	Historical Data: U.S. Department of Commerce Forecast: Semiconductor International
Production Trends & Forecasts for Communications Equipment	Production Trends & Forecasts of Electronic Components
Historical Data: U.S. Department of Commerce Forecast: Semiconductor International	Historical Data: U.S. Department of Commerce Forecast: Semiconductor International

Semiconductors

The slow but steady recovery in semiconductor markets appears to have gathered some momentum during July.

Although it’s often said, “One month does not a trend make,” the July sales numbers were extremely encouraging from any perspective. Despite signs of faltering consumer confidence, tepid gains in capital spending, and a tumultuous time on Wall Street, July semiconductor shipments to all regions of the world increased at least a bit from the already-improved levels of June. And although July 2002 semiconductor sales remained much lower than during July 2001 for all regions of the world save Asia-Pacific (excluding Japan), the over-the-year trend has grown steadily less negative as we’ve moved through the spring and summer of this year.

And there’s good reason to believe that these gains are sustainable into the fall and winter of this year. Demand for most categories of IT/electronics products improved during July as well, as measured in the government’s survey of shipments from — and orders to — U.S. manufacturing firms. So end-market demand (with the notable exception of the communications equipment sector) really does appear to be picking up — a necessary condition if the gains in semiconductor sales are to be sustained beyond July.

According to preliminary data released by the Semiconductor Industry Association (SIA), the value of worldwide chip sales rose by a solid 2.9% between June and July to a level of $11.68B.

Between June and July of this year, semiconductor sales values rose in all four of the broad regions of the world. Following are the June-to-July semiconductor sales trends by major geographic region (with the 2.9% decrease in global sales being the relevant point of comparison):

• The Americas: +0.5%
• Europe: +0.5%
• Japan: +8.5%
• Asia-Pacific (excluding Japan): +2.3%

Still, the dollar value of chip sales to the Americas this July was 3.4% below the region’s July 2001 level. And sales to Europe during July 2002 were valued at a level 4.3% below the July 2001 total.

At the same time, 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 only 4.0% lower this July than during July of 2001 — still considerably 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 firmly established in the other parts of Asia. July 2002 chip sales to the Asia-Pacific market (all nations of the region, save Japan) were valued at a level 37.4% above their July 2001 total. So the semiconductor market in Taiwan, China, South Korea, Singapore, and other (non-Japan) nations in the Asia-Pacific region is unquestionably where the “action” is this year — and a model of recovery 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.

In their analysis of the details (which we don’t see) underlying the July aggregate sales report, the SIA identified the broadly defined “digital consumer market” (DVD players, digital cameras, video games, etc.) as being the sector where growth has been most robust in recent months. And this market growth is driving demand for optoelectronics, flash memory, and standard cell computer chips. The association noted that the wireless communications sector also recorded an increase between June and July, which it attributed primarily to growth in handset sales to Asia and growing adoption rates for 2.5G technology in the region. However, sales to the PC sector — while showing some improvement in recent months — continue to lag historical trends, according to the SIA.

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. But the semiconductor industry’s problems have been more attributable to demand woes than oversupply, so full recovery can’t happen until both consumer and business markets are on the mend. And business capital spending for IT products continues to lag — although not nearly as badly now as during the prior 15 months.

Through the first seven months of 2002, the value of worldwide semiconductor sales was running 10.8% behind the total for January-July 2001. But there’s little question that market conditions during the final five months of this year will continue to improve.

Analysts at the SIA believe that the strong July numbers put the global market back on track for 7%-9% growth between the second and third quarters of this year. While we believe that the quarterly trend will be solidly positive, we think that the magnitude of growth will be a couple percentage points lower than this. But semiconductor sales continue to move unambiguously in the right direction, and momentum appears to be building — although it should hardly be seen as unstoppable, given the risks and vulnerabilities still being faced by the world economy.

For 2002 as a whole, global chip sales are likely to be little changed from the 2001 total — up or down a couple percentage points, depending upon how quickly average prices recover. Sales to Asia-Pacific will clearly be higher this year than during 2001 by at least 25%, but declines still seem unavoidable for the other regions of the world.

But during 2003 we’re expecting to see solid growth in the global market on the order of 25-30% — 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.

End-Market Demand

Estimates from the Federal Reserve Board’s monthly industrial production survey show that computer/peripherals industry output rose for the second straight month during August following three consecutive months of decline. Output is estimated to have increased by a solid 0.8% between July and August, the best month-to-month output trend for the industry since March of this year. In sharp contrast, overall manufacturing sector production declined by a disappointing 0.1% over the month, and was only 0.6% greater this August than during August 2001.

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 was 4.4% greater through the first two-thirds of this year than during January-August 2001. August 2002 production — by itself — was almost 10% healthier than during the same month a year earlier. This August-to-August over-the-year performance was the strongest turned in by the industry during any single month since April 2001.

In addition, the manufacturing capacity utilization rate in the industry moved up from 62.8% during the final quarter of 2001 to 64.3% during August of this year — although the utilization rate during April had reached an even more encouraging 67.1%.

We should continue to see at least modest month-to-month gains in computer/peripherals output throughout the final third 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 modest 7% growth in industry output for full-year 2002, followed by a gain of about 14% 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 fell by 1.2% between July and August of this year. This followed a much steeper 4.4% loss the month before — but an encouraging (albeit, modest) gain of 0.7% during June.

So the state of the industry remains unambiguously sickly. Output from communications equipment manufacturers has declined during 21 of the past 23 months, and was 18% lower this August than in August 2001.

Industry output plunged by 10.2% between 2000 and 2001. And total unit production from U.S. communications equipment manufacturers during the first two-thirds of this year was 21.6% below the total recorded over January-August 2001. Furthermore, the industry’s manufacturing capacity utilization rate was an abysmally low 50.5% during August of 2002 — disconcertingly below 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 is bouncing along the bottom, and is unlikely to move much lower. On a three-month-average basis of measure, industry production through August 2002 was contracting at its slowest rate since May 2001. 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 few months of this year.

We’re cautiously optimistic that market conditions will finally begin to show some marginal improvement on a sustained basis by next year’s initial quarter, although overall industry output during the second half of 2002 will still be about 14% lower than over the final six months of 2001. Consequently, this won’t be nearly enough in the way of stabilization to allow the industry to avoid its second straight year of steep production declines. But following output contraction of another 15-20% in 2002, our preliminary forecasts call for production to increase at something on the order of 5% during 2003 — albeit from a depressingly low base of activity.

The modest upturn in electronics end-market production (concentrated primarily in computers and peripheral equipment) that we’ve seen over the first two-thirds of 2002 has stimulated demand for new electronic components. Manufacturers have started to rebuild inventories with increasing confidence that end-market demand has nowhere to go but up, and this has yielded 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 11th consecutive month during July 2002, following declines during every one of the first eight months of 2001. Production at U.S. firms rose by a solid 1.8% between June and July of this year, on the heels of monthly gains that averaged 2.8% during the first six months of 2002.

Also encouraging was the fact that the industry’s capacity utilization rate — while still very low at 69.4% — was higher in July than the average (66.1%) for the first six months of the year. During the past 35 years this industry’s capacity utilization rate has averaged 79.6%, so the July 2002 level is certainly nothing to write home about. Still, almost all signs suggest that the industry is currently in the midst of a self-sustaining recovery.

Total U.S. industry production of electronic components during the first seven months of 2002 was 7.3% greater than over January-July of last year. A solid gain, to be sure — and dramatically 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 slow and uneven, with overall electronic components’ output during 2002 probably growing by about 10% (following 4.4% contraction last year) — just a fraction of the average annual gains realized throughout the past decade. But production gains should be even stronger — probably up 13-15% from 2002’s improved output total — next year, as global end-market demand slowly but surely grows stronger.