While the positive effects of China and Japan's economic stimulus packages are already being felt by the semiconductor supply chain and tracked by analysts, the U.S.'s packages have not yet gained momentum. Will the semiconductor industry be further propelled by the federal programs? And if so, when, which sectors, and who along the supply chain stand to benefit?
The simple answer is rather clear and straight forward: undoubtedly. While some may question this positive position, the facts truly are entrenched in the ‘yes’ camp.
This article will offer a review of what the U.S. fiscal and monetary stimuli mean to the semiconductor and broader electronics industry. The impacts are both direct and indirect; the effects are both subtle and overt; and, long-term the shifts in U.S. social and economic spending patterns are extremely positive for our industry. Undoubtedly, those companies who survive what some now call ‘The Great Recession’, who have solidified their R&D and component or product strategies, will see a rebound in positive activity.
The timing? There is considerable debate on the question of timing. The most optimistic time frame is 3Q09 (i.e., beginning around August 2009), the more conservative time frame is another 12-24 months. This uncertain timing is attributable to the fact that there are different stimuli positively affecting and poised to positively affect the entire electronics industry. The combination of these stimuli is the foundation for the ‘undoubtedly’ positive response above. The why, where and how will require more than one word.
Identifying the stimuli
Perhaps the best place to start is defining exactly what is being talked about: the stimulus packages. Yes, packages. While we have come to call the US$787 billion American Recovery and Reinvestment Act (ARRA) the ‘Stimulus Bill’ and similar permutations, this is really only one part, the fiscal economic policy, of what, from an industry and economist’s standpoint, is a two-pronged strategy. The other economic policy that has been enacted is the monetary policy.
The goals of monetary economic policies are to govern the flow of money through its supply (i.e., printing money), availability, and through the cost of lending (i.e., interest rates). The best known aspect of the present monetary policy, begun during the last year of the Bush Administration, is the Troubled Asset Relief Program (TARP), though it is importantly the offspring of the US $700 billion Emergency Economic Stabilization Act of 2008 (EESA, aka ‘the bailout’), as well as a few other Acts. The goal of the EESA is global in scope, allowing for intervention by the U.S. Treasury in both U.S. markets and international markets in order to restore confidence in the credit markets by infusing cash into banks (both U.S. and foreign). One of the goals of TARP specifically was to reinvigorate lending, both inter-bank and commercial, and stabilize the entire financial sector (i.e., the banks and credit markets), nationally and globally.
Why is monetary policy important in a discussion of the electronics industry? Without access to bank loans and healthy credit markets, it is impossible for a high-cost and high-loan dependent industry such as the semiconductor industry, which directly supplies the electronics industry, to operate. Without the credit markets and larger lending institutions available to offer and support the significant loans that finance production supply chains, physical expansion, and R&D, many semiconductor producers and suppliers would have been forced into dire financial positions.
Although there is significant debate and healthy critique of EESA and TARP, the direct impact on the semiconductor industry and broader electronics industry has been positive and even a life-blood for many companies. Without stabilization of the credit markets, both in the U.S. and worldwide, it is impossible for a global industry that requires significant capital investments and loans, such as the electronics industry, to survive.
Monetary policy refers to the control of money itself (supply, availability and lending rates); fiscal policy refers to the control of the acquisition and spending of money. In other words, fiscal policy is a government strategy for collecting (through taxation or borrowing) and spending money in order to affect the economy. Presently, the most prevalent fiscal policies are the ‘stimulus bills’ that have been passed and initiated by many leading nations including the U.S., China, Japan, and some in the EU, among others.
The most important U.S. fiscal policy at the moment is the American Recovery and Reinvestment Act of 2009 (ARRA, aka ‘the stimulus’), enacted on 17 February 2009. The specific date is important because at the time of this article, that is just a short four months ago. As a result of the shallow timeline, the majority of the US $787 billion has yet to be distributed, limiting the ability to accurately gauge its true economic impact.
The intent of the ARRA is to provide fiscal stimulus to the U.S. economy. The targets of the ARRA are multiple: tax relief, social economic policy spending (Medicare/Medicaid, unemployment benefit extensions, other welfare agents), and new infrastructure, research, healthcare, energy and education spending. The goal is to ‘stimulate’ the U.S. economy by providing jobs, activities (projects/contracts) that promote commercial transactions and spending, with the added bonus of improving the future economic position of the U.S. through improved education and research (new IP, innovation and knowledge centers), infrastructure (eased transportation of goods and services), and energy efficiency (increased independence and improved national security while reducing carbon emissions).
How does ARRA affect the electronics industry? While not a named, hence not a direct, recipient group in the ARRA’s 407 pages, electronic solutions are critical to the successful implementation of well over half of the funds. This critical theme resides in the manner in which the fiscal stimulus is to be directed, the improvement of technology for healthcare, education, energy, and most of the federal, state and local government offices, not to mention the research grants. While on the face of it, these technology improvements are very much the realm of Information Technology (IT), there is a significant hardware component that is both overtly and tacitly required. The hardware is the stimulus to the semiconductor and broader electronics industry, from short- through long-term impacts and through direct and indirect funding by ARRA.
The following table, Table 1., compiled by Goldfarb, Maloney and Lindeman of The Washington Post (http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/11/GR2009021101150.html), outlines the recipients, the amount committed and the amount distributed thus far of the roughly US $7.8 trillion the U.S. federal government has committed through monetary and fiscal policies since the beginning of 2008:
Table 1. Outline of US $7.8 trillion committed by the U.S. federal government since early 2008 (Source: Zachary A. Goldfarb, Brenna Maloney and Todd Lindeman – The Washington Post (http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/11/GR2009021101150.html))
A closer look at three of the named sectors to receive ARRA funding will provide a more concrete discussion of how, why and even some hints as to when the electronics industry will experience positive effects.
Arguably the most complex sector that is expressly identified to receive significant funding (US $147.7 billion) is healthcare. Over 10% of the healthcare budget, US $19 billion, is directly assigned to health information technology (HIT), and a larger sum of “$36.5 billion in spending to create a nationwide network of electronic health records” (http://www.washingtonpost.com/wp-dyn/content/article/2009/05/15/AR2009051503667_pf.html). The U.S. Department of Health and Human Services describes HIT as: “The application of information processing involving both computer hardware and software that deals with the storage, retrieval, sharing, and use of health care information, data, and knowledge for communication and decision making”
The benefits of HIT are wide ranging but they are only tangentially relevant to our discussion. What is important is that the present state of the healthcare industry is considerably arcane and rooted in, well, paper. Regardless of the amount of legal and socio-political negotiations that lay ahead for healthcare to come to the point of information sharing, which will be a boon for many in the semiconductor supply chain (servers, networks, computers, handheld devices, patient monitors, etc.), the simple act of individual health care provider institutions (i.e., doctors’ offices, clinics, etc.) digitizing their existing patient records even for internal use presents a nice market demand for a good array of electronic equipment providers, and therewith the direct demand for the component suppliers and manufacturers of these products.
While the information and data sharing standards, among other quagmires, face the healthcare industry regarding HIT, the fact that massive amounts of digitized data are going to be created is a demand that the electronics industry can bank on in the short term. The eventual expansion within larger healthcare networks (either hospitals, HMOs, or other ‘collectives’/corporations) that need to share information internally but across providers, billing agencies, etc., bodes well for more than just the server and networking subsectors in the electronics industry. As we look further down the road, once standards and other issues are resolved, the proliferation and demand for hardware, new medical electronic devices for at-home monitoring, data relay, etc. (such as is presently in place for some heart pacemakers, for example), will be a significant driver and increase the size and importance of the medical and communications/networking sectors.
Reducing the U.S.’s dependence on fossil fuels through improved energy efficiency and energy independence is another critical area that the ARRA supports through significant funding. By upgrading and improving all aspects of the U.S. infrastructure relating to energy use, from physical structures (i.e., buildings) and the systems housed in those structures (i.e., computer, appliance, machinery, etc.) to the types of vehicles produced and purchased by federal, state and local governments (i.e., hybrid and electric vehicles made in the U.S.) and to the modernization and complete upgrade of the U.S. electrical grid system (i.e., digitization to create a ‘smart grid’), the fiscal stimulus is intended to create jobs, invest in high-tech equipment to improve processes and energy use, and to increase the rate of adoption of renewable energy sources by lowering the cost barriers and achieving ‘grid parity’ (the point at which the cost of electricity generated by renewable sources is equivalent to that generated by fossil-fuel based sources). The end result is not only increased economic activity to bolster a faltering U.S. economy, but investment in long-term means for propelling the U.S. towards a more economically independent and strong future with an eye to responsible global stewardship.
Over US $61 billion has been earmarked for energy, and roughly US $11 billion of that to be used to develop a ‘smart grid.’ The upgrading of the existing power grid to a ‘smart grid’ is truly an IT and hardware project. From the residential customers upgrading to digital thermostats to utilities providing smart meters to consumers, the entire ‘smart grid’ project is rife with direct electronic equipment purchases; a significant driver for growth in the industry both immediately and through the next decade. Beyond the simple and immediate availability of smart meters and consumer equipment, the utilities will be purchasing their end of the two-way network communication devices that enable the grid to ‘get smart’ – necessitating further investment for data storage and massive amounts of new data to be immediately processed and acted upon, among other data mining and business intelligence uses.
Evidencing the significant market opening from a smart grid, Cisco has made public its strategy regarding the smart grid, including the estimate that “Smart Grid communications infrastructure market [is] projected by Cisco to reach $20 billion annually over five years” (http://newsroom.cisco.com/dlls/2009/prod_051809.html):
Cisco's plan establishes a complete communications fabric from electrical generation to business and the home based on Internet-Protocol standards. This will build intelligence, resiliency and two-way communications into an electricity distribution system that has been traditionally fragmented. Cisco's Smart Grid solutions will address critical points within the energy infrastructure: from data centers and substations, through neighborhood-area networks, to businesses and homes. (http://newsroom.cisco.com/dlls/2009/prod_051809.html)
In addition to smart grid projects, energy efficiency programs themselves present multiple opportunities for the electronics industry. These opportunities come through the tax relief and the federal grants available to directly purchase more energy efficient high tech equipment, appliances, and upgrade fleets to hybrid or electric vehicles (which are made with a higher percentage of electronics than standard vehicles).
Finally, the renewable energy market has already proven to be a driver for the semiconductor industry. Not only allowing for reasonable diversification by many equipment manufacturers and silicon-based product companies, the solar photovoltaic (PV) industry and the lithium-ion battery subsectors have much to learn from and share with the semiconductor industry (see last summer’s article, “Power Play: Exploring the intersect of Solar and Semi” in MarketWatch Quarterly Vol. 2, No. 3 (http://www.smithweb.com/sw/en/summer-2008/273) for more details). As PV panels increasingly become a consumer product, made more attractive by government subsidies, tax refunds and other incentives across the entire supply chain for the product (from consumer up through the R&D grants to improve the technology and materials), an important ‘next generation’ electronics product market will take off. Why an ‘electronics product’? Granted, it is an industry-centric perspective to label solar PV panel installations an electronic product, but considering the critical electronics components in PV panels for solar energy conversion, it is a realistic driver for significant growth over a healthy period from today and into the future.
As with healthcare and energy, broadband introduces a few hurdles relating to standards agreements that must be ironed out prior to forecasting smooth trajectories for growth. However, for over a decade broadband has been and continues to be seen as an important growth sector by semiconductor, high-tech and telecommunications industry groups. Approximately US $7.2 billion is earmarked for broadband expansion.
Beyond the obvious reach to yet untapped consumers in less densely populated areas, the secondary business growth opportunities from these regions through broadband connectivity is highly significant for both local and national economic stimulus and for the electronics industry. With the ability to access the Internet and subscribe to wireless communication services, consumers in less densely populated areas will significantly increase demand for an array of handsets and headsets, networking equipment, computers (from mobile internet devices (MID) to desktops), and as small businesses develop, demand for servers and more sophisticated networking devices as well as numerous other electronics products will increase.
Several studies conclude that, in slack economies, more broadband means more jobs. The Brookings Institution, [sic] a think-tank in Washington, DC, projects that for every percentage point increase of broadband penetration at state level, employment increases by 0.2% to 0.3% per year, equivalent to 300,000 jobs nationally. (http://www.economist.com/business/displaystory.cfm?story_id=13022193&fsrc=rss)
Why the wait?
With all this money and these quite obvious opportunities for short- through long-term markets and drivers, why are there any questions at all about the impact prospects of ARRA on the semiconductor and wider electronics industry? In short, time and standards. Beyond the hurdles mentioned of the development and agreement of standards necessary in the respective market sectors, healthcare, energy and broadband, the massive influx of significant sums of money has overwhelmed previously modest departments and granting agencies responsible for being good stewards of the government’s money. Combined, there are immediate and significant delays in the distribution of large sums of the stimulus money, see Table 1, above.
Even the most optimistic pro-stimulus believers agree that the earliest initial effects of the ARRA would not be felt until at least six months after enactment, meaning August 2009. More conventional analyst wisdom is offering a 12-24 month timeframe for the electronics industry to feel the positive effects of the fiscal policy, particularly since most grant money will not be awarded until well into 3Q09.
So, is it good or bad news? Obviously, having any fiscal boost is better than no prospect of such support, but what of the wait? The most obvious result is the continued consolidation in the industry as many companies are simply unable to survive until a promised future. That may not be a bad thing though. It has long been known that some problems with the electronics supply chain were rooted in overproduction and overpopulation of the markets; the present ‘culling’, while painful, is seen by many analysts as healthy and a necessary adjustment phase to promote future growth.
One last point is critical: as 1Q09 numbers have shown, the bottom seems to have been reached, not only for the macro-economic situation in the U.S. and globally, but selfishly, for the electronics and high-tech manufacturing sectors. As regularly monitored and discussed in the MarketWatch Commentary (http://www.smithweb.com/sw/en/marketwatch-commentary), there are many indicators and other variables pointing to a present rebound towards healthy (or at least healthier) territory across the electronics industry. If these data do hold, and if economists and industry analysts are to be believed that the ARRA stimulus has yet to be felt, then the present uptrend is quite organic (or at least a result of the monetary policies enacted beginning in 2008). If we couple this organic growth with a boost from ARRA beginning in August 2009, then those proposing a U-shaped recovery may not be as idealistic as some have thought.