Global electronics industry outlook

Major global economies are currently in (or near) recession (Chart 1). This present downturn (crash) began at least partially in the USA in mid-2007 as over-extended financial and real estate markets, much higher energy and material costs, plunging consumer and business confidence and sharply lower stock prices all combined to cause a severe reduction in business and personal spending. As home and investment values dropped, financial sources (including credit, venture capital and IPO) “dried up” and living and business costs surged, consumers and businesses had less money for discretionary spending (including both locally made and imported consumer and business electronics). Waning electronic equipment demand in late 2008 led to sharply reduced “electronic food chain” revenues, rising unemployment, swelling inventories and ultimately bankruptcies and factory shutdowns.

No geographic region is immune. Even China’s mighty “factory of the world” has stumbled as rising costs and lower export demand have combined to significantly lower its GDPgrowth (Chart 2).

Cyclicality and seasonality further complicate this current recessionary decline. The global electronics “food chain” has historically been highly cyclical. In “good times” each level of the supply chain increases inventory stock levels in anticipation of stronger demand. When the economy slows these suppliers reduce stock levels. The result is amplified growth in the expansionary periods of the business cycle and severe declines in slowdown periods (as excess inventories are flushed and capital spending is curtailed). Raw material and process equipment suppliers see much larger business cyclefluctuations compared to their customers (Chart 3).

As we enter 2009 we are facing a “perfect storm” combining sharply lower GDP growth with the end of the pre-holiday business season. The next seasonal upturn will not occur until mid-year leaving current swelled stock levels, weak orders and empty factories as major problems for the first half of 2009.

The current recession will certainly end some day. But “when?” is a difficult question. Most present forecasts are highly uncertain and in a continuous state of flux as corporations, trade organizations and venerableprognosticators all continue to degrade their outlooks. Real GDP growth is now predicted to “bottom” in 2009with a recovery expected in 2010. Despite being the “manufacturing capital of the world”, even China’sexpansion rate is now substantially less robust than in prior years.

Inventories now climbing
Chart 4 shows the ratio of quarterly inventories to sales for four levels of the electronic “food chain”. OEMs have clearly shifted inventory responsibility to electronic manufacturing services (EMS) companies and their suppliers. Recent reports indicated a large buildup in component inventories in 4Q’08 (at the time of sharply declining OEM sales). Hopefully we are not headed to the same type of disastrous inventory overhang that we experienced in the post-2000 recession. Chart 5 shows 3Q’08 growth for key members of the global electronic “food chain.” Fourth quarter 2008 will likely be much worse.

Semiconductors
Global semiconductor shipments growth has been primarily in “low cost” South East Asia following the“2000 bubble”. Using composite sales of Taiwan-listed chip foundries as a leading indicator; it is likely thatSIA semiconductor shipments (a measure of electronicassembly activity) will plunge late 2008. Both lower volumes and price degradation (especially in memorychips) are driving this decline.

Because of declining chip demand and also because the DRAM producers invested heavily in CAPEX in 2007, SEMI capital equipment spending growth has already moved sharply into negative territory - with further declines likely (Chart 6). Capital equipment suppliers (throughout the electronics food chain) live in a “boom or bust” world!

EMS & ODM companies
EMS and original design manufacturers (ODM) represent an ever increasing portion of the electronics supply chain. The top 11 EMS companies (Chart 7) will likely post a 4Q’08 revenue decline based upon the “guidance” of those who provide it. ODM companies (Chart 8) had begun their normal seasonal slowdown in November 2008 with their annualized trend linesuggesting little growth for 2009.

Printed circuits
Approximately $50 billion of rigid and flex printed circuits were produced in 2007 with over 80 percent manufactured in Asia (Chart 9). Global PCB shipment growth was already in negative territory in autumn 2008 in all geographic areas. The sharp November Taiwan/China revenue plunge for both rigid PCBs and CCL (laminate) shipments illustrates the magnitude of the autumn 2008 PCB downturn. For 2008, total world PCB production will likely have decreased 3-5 percent (due to the large demand drop in South East Asia late in the year).

Conclusion
Chart 10 shows the most recent electronic equipment growth forecast by year by region. As it now appears, business conditions will “bottom” in 2009 with recovery in 2010. However, as noted earlier, accurate forecasts are currently a major challenge. Business conditions arechanging very rapidly.

For further information, Walt Custer can be reached at walt@custerconsulting.com

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Voices of the industry 2009

In light of the global economic downturn in 2008 and worsening conditions predicted for 2009, how are contract manufacturers, distributors, and electronics assembly equipment and materials suppliers gearing up for challenging times ahead? A host of leading companies offer brief insights into their plans and strategies for the year.

John Byers,
President, Asymtek

During the current situation, Asymtek will continue to invest in product development to ensure that we are stronger when the economy turns around, and that we will be able to support our customers when they require our products and services. Although a large portion of Asymtek’s business is in the consumer electronics industry, we sell products into a wide range of other markets, including computers, handheld devices, automotive, industrial, life sciences, medical device, LEDs, and flat panel displays. We also have a strong “parent” and are part of a larger company, the Nordson Corporation, which recently recorded over $1 billion of profitable sales for the last fiscal year. Nordson’s largest business segments serve markets that are less affected by economic downturns of the current type.

Boris Mathiszik,
Managing Director, Asia Pacific,BTU International

We believe that the downturn will eventually run its course, and, based on the limited forward looking visibility that we have, we expect the business to stabilize sometime in the first half of 2009. We have weathered many storms before this one, and so we will be there when things pick up again: we keep investing in R&D, and we will continue to innovate to give our customers a competitive advantage when it comes to high performance and low cost of ownership. We also see the possibility that some of our weaker competitors may exit the business. As with every crisis, there is opportunity, and we will continue to be well positioned to serve our customers – in good times and in bad times.

Paul Salmon,
Business Development Manager,Balver Zinn

It’s difficult to know when the lowest point of the downturn will be reached. In common with most companies we are watching our cash flow and looking for maximum efficiency. We expect the first half of 2009 to be hard, but hope that the recovery will be evident in the third quarter. The inauguration of President Obama will send a message of hope to the world, encouraging confidence. Balver Zinn is using the opportunity presented by the current difficulties to reassure our existing customers of our continued service and offering solutions to new ones, we are amongst those companies whose business is robust enough to weather this storm. Our strategy is to work with customers to improve their processes helping them to build a profitable future during this “interesting time”.

Terry Hsu,
Asia Sales Manager,CyberOptics

Year 2009 is a critical year for the China SMT market not only because of the competitive landscape but also due to the worldwide economic downturn. The SMT industry forecast may drop 20-30 percent but production requirements continue to require improvements in cost, quality, production cycle time, etc. At CyberOptics, we are focusing on maintaining our current leadership position and will continue to invest in the inspection systems business. We have opened a new manufacturing and R&D center in Singapore allowing for lower cost manufacturing and quick local R&D application support for the China and Asia market. We have also expanded our Shanghai office and demo center and have set up service offices in Yantai and Shenzhen in China. In 2009, we are targeting to continue our strong partnership with our key customers and continuing to implement our high quality technology in our inspection systems and solutions.

Michael Brianda,
President, DEK

DEK’s leadership team is continuing with the current company strategy: Retain our position as the SMT/semiconductor market leader in high accuracy, mass imaging deposition solutions for electronic materials; increase the recurring revenue service business; and become a leader in alternative energy applications, such as metallization of solar cells. We consider it our responsibility to be at least one step ahead of the challenges our customers face – whether rooted in economics, technology or production. From encapsulated print heads, high-speed understencil cleaning, flexible dispense solutions through to print verification and automaticboard support; these technologies are engineered to solve specific production challenges by delivering more yield and throughput. In general, we are approaching the New Year as any other; with an unrivalled commitment to meeting our customers’ challenges and exceeding their expectations- whatever these might be.

Marcus Hauer,
Chief Representative, DELO IndustrialAdhesives, Singapore

By talking to our customers we recognized—especially within the past weeks—a massive drop in orders by the industry throughout all segments and countries. We definitely expect cutbacks due to the generally severe situation on the financial markets. As we have several pillars all over the world and don’t focus on only one segment, we are in a good position for the time to come. We expect tailor-made adhesives for special applications to be still in high demand in the future – most of all in innovative segments and niche applications. We have to keep being very active in this field and join the development of new and unique products right from the start.

Carsten Barth,
Director, Marketing and Communications,Elcoteq

The ability to react rapidly to changing market conditions is of particular importance in times of increasing economic uncertainty and ever more challenging predictability of markets. There is clear demand for greener electronic products that consume less energy and contain, for example, recyclable components. Our task is to help our customers meet the demands that come from consumers. Adopting environmental issues will again be an important element in our company strategy in the future, and it will create concrete added value in the long term in different ways. We also introduced a new customer-centric organization model early 2008 that enables us to respond better to business needs – in an equal manner in all thebusiness segments we serve.

Martin Ziehbrunner,
CEO, Essemtec AG

2009 will be a year of consolidation after 16 years of heavy growth in a row. We expect a moderate year on the same level as 2008. The reason is that Essemtec is offering a wide spread of equipment and is active worldwide in all major markets, so a downturn will not effect us dramatically. Additionally, the last few years have been extraordinary and as Essemtec is a family owned business, a highly solid financial base has been built during these years. This allows us to continue the development of new products and options to be ready when the market returns back. We expect a return to a normal market not before 2010.

Fanny Lee,
Asia Sales Manager, Europlacer

Our markets are more related to high value, technical products in the industrial, medical, aerospace and instrumentation markets and these are not always directly affected by consumer downturns. In addition many of our customers use our machines for prototyping and NPI (new product introduction) and most companies need to continue this activity even in tough markets. Therefore we believe that only the innovator who continues to develop new products in the most cost effective way can continue to sustain their business while other manufacturers with a less forward thinking approach may not survive during difficult time. For these reasons our plans for 2009 are to continue to push into these areas of competition and our hope is to see a continuous growth in our activity from 2008 to 2009.

Keith Wheeler,
Director of Sales andMarketing, Asia, EFD

Our Asia outlook is very positive, driven by opportunities in new applications and markets where our new products are offering enabling technology to our always growing customer base. EFD’s Asia business experienced high double-digit growth in 2008 and we expect similar growth in 2009 despite the economic downturn. In these times, EFD sees more opportunities as customers are rapidly searching to eliminate cost from their products and processes. To capture these opportunities, we are accelerating our investment in people, production and technology that will continue to strengthen our ability to help our customers meet their objectives.

Thomas Paul,
Sales Director Asia, GE Sensing & Inspection Technologies GmbH,phoenix|x-ray

I see the global economic downturn as a chance to strengthen our marketpresence, to deepen our long term customer relations. We offer to a diverse market, flexibility and modularity on a high performance platform. This is a philosophy we followed for many years and for which we have gained recognition in a global market. Our goal has been to delight our customers with operational excellence, and to provide innovative solutions for diverse businesses, especially in electronics. Now as part of GE Sensing & Inspection Technologies, we are building new demo centers in growth regions such as China, India and Brazil - to be close to our customers in order to help them to improve on quality and know how.

Eric Slezak,
Director of Business Development and Assembly Products,Indium Corporation

Indium Corporation believes that there is strength in our diversity. We look at harsh economic times as opportunities to pick up where other less diversified companies, or less forward thinking companies, are cutting back. We continue to invest heavily in new product Eric Slezak, Director of Business Development and Assembly Products, Indium Corporation development and custom product manufacturing because our experience tells us that our customers appreciate it and that it will pay dividends in the long run. If prior history is an indication of the future, we will see one to three years of predicable restructuring in the business environment. First, there will be an inventory adjustment, which leads to some downsizing and consolidation of industry capacity, followed by cautious asset positioning, investment, and growth. Only by staying in intimate contact and working with our customers, will we know best how to position ourselves through the entire cycle.

Joseph DeBiase,
Senior Vice President and General Manager, Henkel Adhesives Electronics Assembly

In times like these, the challenge is to implement tight cost control to weather the short term storm without significantly impacting longer term customer programs. Customer needs for new, innovative materials solutions don’t evaporate during a slowdown, so funding innovation will remain Henkel’s top priority, ensuring that we and our customers are well-positioned for better than normal growth once global demand returns. We are building for the long run and fully expect some bumps along the way, but it won’t deter us from our goal of becoming the industry’s leading global electronics material supplier and, in so doing, enabling our customers’ long term success.

Simon Leow,
General Manager,Icon Technologies

In 2009, we will implement cost containment steps to control our indirect business costs like traveling and communications. I have always been a firm believer that efficiency is better than cost reduction and efficiency improvements pay better dividends in the long run. We will look to re-engineer and streamline our business processes to make it more efficient than before. We will continue to invest in product development and service-enhancement initiatives as again, I believe that these investments will pay off big dividends when market conditions return.

Hiroshi Inagaki,
Group Leader, Electronic Assembly & Test Systems,Juki Corporation

We will continue to develop products that will meet the needs of the market. In 2009, we shall commercialize our feeders and expand our range of high speed chip mounters. This economic downturn is anticipated to last until second half of this year and currently, all enterprises are preparing for the growth phase which is sure to come. Assembly factories need to do things in hardheaded manner by adjusting their turn around period, improving quality and increasing productivity, so as to obtain cost benefits comparable to the industry. We will strive to not only meet customers’ needs in our products, but also to help them in terms of support and service. Ensuring customer satisfaction is most important in such a difficult period.

Freddie Chan,
Vice President,KIC

I believe that cost and quality will become paramount issues for the SMT industry in general, and in China in particular. There is already talk about moving some production back to North America or Europe in part due to the increasing cost of manufacturing and shipping from China and in part due to quality concerns. (It is interesting to note that much of the quality problems in China have come from industries outside of the electronics, but we will be deemed guilty by association). The SMT industry will need to enact better production inspection, documentation and traceability processes. At the same time, the factories need to drive automation to an even higher level in order to meet these quality requirements, and to drive down production cost. One challenge is to maintain and improve upon our customer support during the industry slowdown. As our customers start trimming some of their payrolls, the demand on KIC for customer support has expanded beyond servicing equipment to providing advice onapplying the equipment and even process support.

Tom Forsythe,
Vice President,Kyzen

2009 is going to be an interesting time, and much like the intention of that old Chinese proverb, all of us in the global economy will face many diverse challenges. For much of the past 20 years, Kyzen has prospered during both booms and busts, and we believe the outstanding skills, knowledge and experience of our global staff is the critical reason. Whether it is R&D developing breakthrough technologies, our field technical staff working to implement world class, extremely effective and efficient processes with our customers, our manufacturing group delivering 100 percent first time quality, our customer service staff listening to our customers and addressing their concerns or some combination these groups, Kyzen is dedicated to customers. It is all about our team listening to our customers and meeting their needs.

Tetsuro Nishimura,
President,Nihon Superior

The current global financial crisis has had a significant impact on many electronics manufacturers and the volume of solder alloy needed, which in turn has affected us. Most of the electronics industry has experienced a decline and the future remains uncertain. However, we are pleased that we will be celebrating the 10th anniversary of SN100C this March. SN100C with its composition of tin, copper, nickel, and germanium has changed the ways of conventional thinking in the development of lead free alloys. We continue to develop new products based upon this technology and also to strengthen the global supply system with the enhancement of our global partners and licensed production. Indeed, the current environment of the global economy is very tough. To use a baseball metaphor, the Japanese say “the chance comes after the pitch” meaning that opportunity of winning presents itself after you get out of a jam such as overcoming the current worldrecession.

Chandran Nair,
Managing Director ASEAN,National Instruments

National Instruments serves a wide variety of industries. In fact no industry contributes to more than 10 percent of our revenue. So to some extent we are sheltered from the full impact of the predicted downturn. The expected downturn forces companies to look at more effective alternatives to test, control and design systems and products. Our framework of user defined solutions based on commercially off-the-shelf technologies caters to these needs. We will continue investing in R&D and in our technical sales capability through 2009, while keeping a close eye on our expenses. In a nutshell we are cautiously optimistic about our ability to continue growing in a difficult economy and we will be agile to meet changing conditions.

Tom Seratti,
VP Global Sales and Marketing,OK International

2008 has been a year of change for OK International. We have a significant presence and have enjoyed substantial business growth in parts of Asia and Europe that just a few years ago were alien to electronics manufacturing. We perceive a change in globalization strategies with the potential for serving local markets becoming a new priority. We’ve been making operational and supply chain changes, while continuing to expand our product line with creative solutions for new packages and processes. Our new products have been specifically designed to achieve efficient, productive,cost-effective assembly for applications at all levels.

Kermit Kwok,
Asia Field Service & SalesEngineer, Sono-Tek

We believe that the SMT market is looking for effective ways to reduce the cost of production in terms of labor and equipment. For the former, in addition to China, other Pacific Rim regions like South East Asia countries are having chance to establish manufacturing factories for overseas vendors. In the latter, utilizing economical equipment is the easiest way to adapt. This matches Sono-Tek’s plan of launching new fluxers at the beginning of this year. Our new models are more user-friendly and maintain the ultrasonic benefits with reduced cost. We expect stable business for bothproducts in Asia.

Kevin Laphen,
President,Practical Components

Our strategy has always maintained these key elements: Maintain an overwhelming technology advantage over our competitors’ products by introducing leading edge component and process advances in a timely manner; Foster good relationships both customers, distributor partners and suppliers by maintaining open and free lines of communication; Under-committing and overperforming; and more than anything else, saving the customer money. Practical Components has structured and streamlined product delivery and customer service for its existing and future customers to these aims. During challenging economic times saving money onsetup, test and training makes a lot of economic sense.

Marc Dalderup,
Chief Commercial Officer,Rehm Thermal Systems

Well in these interesting times it is important not to be ruled by fear but instead, be motivated by realistic future goals that will take your business into new areas of prosperity. First of all we are delighted to announce that we have extended the scope of the Rehm Reflow technology range so that our mid-range systems can now be delivered with the top thermal technology conventionally used in larger systems. We are currently finalizing the expansion of our building in Blaubeuren, Germany, and our team in the Americas has also just moved into a new larger building in Atlanta. We are also pleased to announce a new partnership in Japan with Techno Alpha that will enable us to exhibit at Nepcon Japan in January, marking the first time we have demonstrated at this major show for the Japanese market.

Bryan Gass,
Vice President,Techcon Systems

There is no question 2009 will be a challenging year for most. The current economic climate has required companies to increase their efficiencies. Implementing new processes in manufacturing will improve productivity and reduce waste. Customers will look to the material and equipment manufacturers for new or improved solutions in addressing these concerns. While most markets served by Techcon Systems anticipate minimal growth at best, we are positioned to take advantage of customers looking for alternatives to their existing supply chain. With increased marketing efforts, valued quality, and cost effective pricing, we expect to see growth in the coming year.

Heinz Dommel,
Asia General Manager,Universal Instruments

Given the global economic downturn in 2009, we expect to see a very modest growth in the electronic consumer products industry with a shift towards mid- to lowrange products serving the huge domestic markets in China and India. Under such circumstances, we will focus on helping our valued customers to cut production costs and at the same time improve efficiency throughout this difficult time. To this end, we will greatly promote our low-cost solutions, including through-hole solutions and AdVantis platforms to customers through seminars with product demonstrations. The Advanced Process Laboratory in Shanghai will continue to play an active role to support the industry, the semiconductor and PCBA manufacturers alike, by helping in prototyping, failure analysis, process review and audit, and organizing seminars and workshops. It is the ultimate objective of Universal Instruments to offer tailor-made back end assembly solutions to our customers to meet changing market demands and conditions.

KH Ong,
President,Valor APAC

With the economic crisis impacting almost every business, we believe the most important value that we can bring to our customers is to continue to provide our best support and services, ensuring that they will be able to operate as usual and to weather the difficult times together, as a true partner. We will be making necessary adjustments to our offerings, including on-going support and services that will be aligned to the customer’s needs and situation. We will also be taking the opportunity to further strengthen the overall skill level and competency of the team in China and Asia Pacific through more training, and this will be cascaded down to our customers and users as well. It is our goal to emerge from the economic crisis as a much stronger organization, to be ready for the nextwave of growth and challenges.

Jean-Marc Peallat,
Marketing Director,ViTechnology

For Q1 2009, we expect this global slowdown to continue but we believe that some industries will at least maintain their activities. Besides low spending in capital equipments, customer’s requirements have turned into real ROI by either gaining overall product quality or increasing lines productivity. When expenses have to be justified in effective gain, manufacturers are looking for solutions to optimize their production lines without heavy investment. ViTechnology has already made decisions and developed solutions to deliver value to customers. During the past months, we established strong partnerships with several customers and companies to enrich our offer and continue to improve the triad “Quality, Service and Cost”. Also, since the beginning of 2008 we have been delivering inspection machines to the back-end semiconductor industry. Being a player in this market with new products development will maintain our growth and offer value to our SMT customers. This is clearly a driving factor for us. Service priority number one also means to be at the forefront and to deliver state-of-the-art solutions answering tonew demands as and when they emerge.

Douglas Robinson,
Manager Asian Operations,VJ Electronix

Well actually it is supposed to be the “Year of the Ox” in Chinese lore, but this year doesn’t look so bullish. 2009 will be a year when factories can invest in training the people they do keep. And the people will stay longer. Engineers can finally get a handle on the new processes needed to cope with making and repairing more complex assemblies. During this lull they can tune lines, replace old equipment, and basically position themselves as a more efficient company when things turn around.

And it will turn around. Don’t look for anything in Q1 2009 or maybe even towards the start of Q2 2009. But starting late Q2, the pent-up demand for all the HDTV set top boxes, 3G phones, new computers, new gaming systems, and those amazing micro projectors, will emerge. No killer app yet, but I see a real thin silver lining around this cloud. At VJ Electronix, we are still investing in people and are beginning a real push to use this time for educating our customers.

Hamed El-Abd,
President,WKK Distribution Ltd

Without doubt 2009 will be a very poor year for our electronics industry. We don’t believe that with the economic conditions facing the world that many customers will be purchasing new equipment so our intentions are to focus on support and upgrading our customers’ equipment. We believe that our customers will be looking for improving the efficiency and productivity of their present equipment. Further, we think that customers will look for any means by which they can save money so we intend to help our customers in these areas.

Ralph Hoeckle,
Managing Director,Zestron Asia Pacific

Our strategy will be to help our costumers to minimize their total cost of ownership by providing best support possible on a global scale. We want to achieve this by offering our customers some key benefits for their cleaning process. These include safe decision making by supporting our customers independently from any manufacturer to find the best cleaning machine for their requirements. Our technical centers in Europe, USA and China are equipped with all machine types (ultrasonic, spray, jet, batch, inline, etc.) of leading machine manufacturers. Customers can choose from 35 machines and test their SMT assembly, stencil, misprint or solder frame cleaning process under real production conditions so that there will be no surprises later on.

We want to help our customers to produce high quality products and to work more cost-efficiently than their competitors. In Asia Pacific, we will increase our local support by expanding our engineering team in Singapore and Malaysia. Overall, we are looking forward to the year 2009 with confidence and anticipation to face and overcome the awaiting challenges in this difficult economic situation.

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