Electronics Industry Update

Staff -- Semiconductor International, 12/1/2002

Worldwide Sales of Semiconductor Devices	Manufacturers' Shipments of Electronic Components
Historical Data: World Semiconductor Trade Statistics (WSTS) Forecast: Semiconductor International	Historical Data: U.S. Department of Commerce Forecast: Semiconductor International
Manufacturers' Shipments of computers	Manufacturers' Shipments of Communications Equipment
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 continued to gather momentum during August. According to preliminary data released by the Semiconductor Industry Association (SIA), the value of worldwide chip sales rose by a solid 2.2% between July and August to a level of $11.93B.

Despite continued signs of timid consumer confidence, tepid gains in capital spending, and a tumultuous ride on Wall Street, August semiconductor shipments to almost all parts of the world increased (at least a bit) from their already-improved levels of July. And August 2002 semiconductor sales moved above the levels of the same month last year for all regions of the world except North America. Bottom line: Global sales were up 2.2% between July and August, and were worth 14.3% more this August than during August 2001.

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 August 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 recent gains in semiconductor sales are to be sustained beyond this summer.

In their analysis of the details (which we don’t see) underlying the August aggregate sales report, the SIA identified the wireless communications subsector as being the single strongest end market. The SIA attributed this strength to the fact that they've seen expanding demand for chips that are used in handsets. In addition, they pointed to solid growth in mobile phone subscriber totals -- particularly in Asia -- and to the modest incremental demand that comes from existing mobile subscribers upgrading to newer technologies.

The SIA breakout analysis also focused on the rapid growth of digital consumer products (DVD player, digital cameras, and video game systems) in Asian markets. And -- perhaps most significantly -- they pointed to the fact that a broad range of chip product lines registered increases in average selling prices (ASPs) during August. The overall dollar sales number released by the SIA in any given month is simply the product of unit sales multiplied by ASP. And, consequently, even when unit sales are flat or only growing marginally over the month, the dollar value of these sales can be pushed much higher if ASPs are rising.

Between July and August of this year, semiconductor sales values rose in three of the four broad regions of the world. The July-to-August semiconductor sales trends by major geographic region looked like this (with the 2.2% decrease in global sales being the relevant point of comparison):

• The Americas: -0.8%
• Europe: +2.8%
• Japan: +3.4%
• Asia-Pacific (excluding Japan): +2.8%

 The dollar value of chip sales to the Americas this August was still 0.8% below the region’s August 2001 level (as well as when compared to the July 2002 sales total).

But sales to Europe -- which had been running well behind year-earlier totals through the first half of this year -- were worth an estimated 4.7% more this August than during August 2001.

And chip sales to Japan have improved even more dramatically 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 7.0% greater this August than during August 2001 -- not as positive as the 14.3% global-average-trend, but quite a turnabout from the first couple of months of this year when the over-the-year monthly trend for Japan averaged a 47.1% decline.

And it’s clear that recovery is already firmly established in the other parts of Asia. August 2002 chip sales to the Asia-Pacific market (all nations of the region, save Japan) were valued at a level 38.6% above their August 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 would certainly 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.

Last year’s estimated 32% decline in global sales volume represented the sharpest annual contraction in the more-than-half-century history of the semiconductor industry. To be sure, 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 past year-and-a-half.

Through the first two-thirds of 2002, the value of worldwide semiconductor sales was running 7.5% behind the total for January-August 2001. But there’s little question that market conditions during the final-third of this year will continue to improve.

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 how quickly average prices recover and hold their marks (our precise forecast shows sales volume contracting by a slight 0.4% this year, based on our current best guess concerning unit demand and pricing trends over the final four months of 2002).

In recent months we’ve realized some net increase in ASPs at the same time that overall end-market demand has been, on balance, inching higher. The market appears to finally -- after about 18 months of difficulty -- have achieved some semblance of equilibrium between supply and demand, thanks to the final writing-off of excess chip inventory.

Nevertheless, although total semiconductor sales to Asia-Pacific will be higher this year than during 2001 by something on the order of 25%, 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 (and all of its regions) on the order of 25-30% -- although this solid recovery would still leave 2003’s dollar-value of semiconductor chip sales almost 15% below the robust $204.4B level achieved during 2000.

End-Market Demand

Shipments of electronic components (excluding semiconductors) rose by an estimated 1.6% during August, after declining by a cumulative 2.1% over the prior two months. The value of August 2002 shipments from U.S. electronic component makers was 3.8% above the total for August 2001 -- the second month in a row that the month’s total bested the year-earlier level, following a long 16-month period when component shipments came up short of the year-earlier total.

And the value of new orders received by U.S. electronic component makers rose by an even stronger 4.1% during August. Electronic component manufacturers in the United States received orders worth 14.6% more during August of this year than in August 2001.

Things don’t look quite as good for U.S. electronics component makers from a longer-term perspective, however. Through the first two-thirds of 2002, industry shipments were running 13.9% behind the year-ago pace, while orders were off by a less emphatic -- but still troubling -- 4.3% from the January-August 2001 total. Taken together, these relative trends suggest that shipment values will be slow to recover during the final third of this year, but that the over-the-year trend should be able to continue to improve upon its spring 2002 low. So we’re forecasting that the over-the-year shipments trend will grow less negative over the closing months of 2002, and we expect to see the trend will finally turn positive again during the first half of 2003.

Data compiled and published by the U.S. Commerce Department shows that the dollar value of shipments from U.S. computer manufacturers reached an estimated $4.03B during August 2002 (following adjustments for normal seasonal variations), a total 9.0% below July’s revised level. This unexpectedly large decline followed an exceptional 18.4% gain in shipments volume between June and July.

New orders to U.S. computer equipment manufacturers also fell during August, recording a modest 4.4% decline after soaring by 18.6% between June and July. Despite August’s declines, however, August 2002 values for both shipments (+18.2%) and new orders (+9.3%) easily bested the depressed levels registered during August of last year.

Year-to-date (i.e., over the first two-thirds of 2002), the value of product shipments from the U.S. computer manufacturing industry was estimated to be running 18.5% behind the total recorded over the first eight months of last year. And new orders to the industry were worth 20.2% less than the total recorded for January-August 2001.

The value of shipments from U.S.-based manufacturers of non-defense communications equipment was a negligible 0.1% less this August than in July, according to preliminary government estimates. But the August 2002 shipment level remained a steep 20.6% below the total for August 2001.

And the value of new orders received by U.S. communications equipment manufacturers faded by 3.9% between July and August, after soaring by a too-good-to-be-sustainable 12.3% between June and July. Still, new orders to the industry did record gains during four of the first eight months of this year, so it appears that, at worst, we’re currently bouncing along the bottom of this painful and unprecedented downturn.

But this has been no ordinary downturn for the industry, and the bottom looks more like the Marianas Trench (depth ~36,000 ft) than the Grand Canyon (depth ~5500 ft). Over the first two-thirds of 2002, the total value of industry shipments coming from U.S. communications equipment manufacturers was running 26.2% behind the already-depressed pace recorded during the first eight months of 2001. And orders to U.S. non-defense communications equipment manufacturers were worth an estimated 20.1% less through August of this year than over January-August 2001.