This is the first in a series of articles surveying changes to the geo-economic landscape for the semiconductor and electronics industries in the wake of the global financial crisis. The crisis has played out differently across regional economies which has directly affected the dynamics for global electronics producers. Companies along the various supply chains also have changed, through mergers, acquisitions, joint ventures, consolidations, and insolvencies. Underlying this policy and corporate upheaval, consumers, in terms of consumer confidence and spending, have been critical to the move out of recession and into recovery, particularly in the economies farthest along in recovery.
There is now a new world order based on where consumers are and what types of products and components are in demand. In turn, these factors influence where manufacturing centers are being (re-)located in order to help bolster the diminished margins by reducing logistics expenses while perhaps taking advantage of stimulus monies available through some governments.
A logical starting point for viewing the post-crisis landscape is to look at the economies that have led the recovery. It is the wider Asia-Pacific (APACJ) region (including Japan and China) that is leading economically, both generally with growing GDPs and importantly with significant improvements and growth along the entire semiconductor supply chain. In this first article of the series, we consider the APACJ region starting with Japan and South Korea. In the second article, we move westward to consider Taiwan and China.
Asia-Pacific's New Leadership
Japan, South Korea, Taiwan and China were chosen because they represent mature, leading manufacturing economies that are heavily involved in the semiconductor and electronics industry supply chains. Significantly, they are also leading in consumer sales for not only the region but globally. Because of these critical factors, we will explore how, which sectors, and why these geo-economies are leading the industry regionally and globally.
One among many groups heralding the true recovery and the surprising increased pace of growth is the Organization for Economic Cooperation and Development (OECD), who as summarized by The Wall Street Journal on 3 September 2009, forecasts that "the global economy is emerging from its worst slump since Second World War faster than it had forecast only three months ago." (http://online.wsj.com/article/SB125196798819182649.html?mod=djemalertNEWS) Furthermore, it is the "large emerging-market economies, notably China and Asian countries, where the recovery that began earlier this year is gaining momentum." (ibid.)
Due to the resurgence of consumer spending especially in the broader APACJ region, original equipment manufacturers (OEMs), contract manufacturers (CMs), and those at the final end of the electronics product supply chain also show generally positive trajectories, though not as strong as those companies farther upstream, such as the foundries, fabs, and IC companies. The upstream companies, for the most part, represent significant investments and revenue streams in their countries, and therefore have been able to influence and take advantage of government stimulus support to recover from the global recession. Furthermore, consumer spending has been encouraged in the APACJ region by government stimulus plans focused on one of the most critical regional industries: consumer electronics and therewith the semiconductor industry. These now highly successful stimulus packages have supported the entire supply chain not only in their home economies, but also regionally, and added significant strength to the entire, global semiconductor supply chain.
An important result of these economic stimulus efforts is that APAC now accounts for the most semiconductor sales by region over a three month moving average (3MMA), as summarized below, in Figure 1, from The Wall Street Journal:
Figure 1. Global Semi Sales by Region 3MMA
Source: Wall Street Journal http://online.wsj.com/article/SB125146469395066623.html?mod=djemTECH
Perhaps the most noteworthy news out of Japan recently is positive real GDP growth for the first time in five quarters. After Japan's L-shaped economic trajectory over the past decade, this uptick is significant. But what does this mean for semis? Does this indicate improved manufacturing or consumption patterns?
To understand the outlook for Japan, let us briefly consider a few of the variables that will impact the forecasts. The GDP growth thus far has primarily been due to (1) external demand (i.e., exports), (2) public investment (particularly by the Japanese government as part of their stimulus package), and (3) personal consumption. Each of these three variables has ramifications to the health of the semiconductor industry globally as well as in Japan and the APAC region.
Exports are important to the long-term health of the Japanese economy, and therewith directly affect the other critical economic variables. Semiconductor exports, as well as automotive, were the main sectors underpinning the export volume increases (values were flat due to price declines). This is important news given Japan's role in microcontroller (MCU) and memory manufacturing (i.e., NEC, Renesas and Elpida, respectively) and some of the leading electronics OEMs headquartered there (e.g., Casio, Nintendo, Panasonic, Pioneer, Sanyo, Sharp and Sony). The export demand has increased in part because of the weakness of the Yen coupled with regional government stimulus programs for electric appliances (esp. TVs for the regional markets), durable consumer goods, and more efficient automobiles. As these stimulus programs begin to wind down, there are questions as to the sustainability of the export demand; whether there is inherent, sustainable recovery in global demand.
The Japanese government stimulus support to private firms that were hardest hit by the global financial crisis is improving the position of a number of local semi manufacturers, namely Elpida and Renesas. Facing continued depressed demand are the game hardware companies, who are balancing pressures from consumer demand-sparse global conditions as well as price attritions, which are not improving demand significantly.
On the manufacturing side, inventory management continues at a good pace and across the board, Japanese companies have been successful in reducing inventory and returning to healthy levels. Exports are doing well, in part due to the Yen foreign exchange (forex) values. The export to the rest of Asia and to the US is supporting semi production in Japan, and as the general electronics market improves, Japanese semi manufacturers should continue to show improvements as well. According to industry analysts from UBS Investment Research, semiconductor 12" wafer shipment data from Japan increased by 8% month-over-month (MoM) during 2Q09 while 8" increased 34% MoM (UBS Investment Research, Semiconductor Equipment Industry Update 16 August 2009, p.9). Further support to the electronics industry comes as corporate sentiment globally, Japan included, is lessening, and while in Japan spending is still low, it is no longer at the lowest points.
Many of the Japanese electronics companies have been implementing restructuring strategies and reviewing product strategies and core focus as a means to weather the global, regional and local economic conditions. In short, these companies appear to be better positioned and will survive, with some important joint-ventures (JVs) and mergers in progress underscoring the breadth of consolidations globally (e.g., NEC-Renesas merge, now set to be penned this Fall (cf., MarketWatch Commentary 27 August 2009 (http://www.smithweb.com/sw/en/marketwatch-commentary/The-Rising-Tide-Japans-economic-upturn-supporting-a-new-heavy-weight.html) for more details); Casio-Hitachi-NEC JV for mobile-phone market still rumored but developing (cf. http://online.wsj.com/article/BT-CO-20090827-717388.html); among others).
Two major electronics trends to watch that will affect Japan's economic situation for semis are how consumer electronics (particularly TVs), automotive, and PCs will do during the back-to-school and winter holiday season as well as into 2010 (Y10). In terms of diversification for semi and electronics supply chains, global market solar demand, particularly solar batteries, offer growth opportunities for Japanese companies, among which Sharp is presently well positioned.
Consumer demand issues
A healthy export level promotes jobs within the country, bolstering consumer spending and private and public investment and spending. Outside of external demand, one critical negative pressure in local consumer demand in Japan rests in the troubling employment numbers. While Credit Suisse reported on 28 August 2009 in their Japan Macro Flash, that "although the unemployment rate has reached a historical high, some numbers are beginning to show signs of stabilization in the job markets." (Credit Suisse, "Signs of stabilization in Job market," p.1)
Likely as a result of the continued high unemployment numbers, there is still reluctance by Japanese consumers to spend beyond what is supported by the government's cash rebate from their stimulus package. This leads to a negative 3Q09 forecast for personal consumption and likely grim sales numbers for the general electronics industry in Japan. As a reflection of this conservative consumer sentiment, imports have continued to weaken and are not forecast to improve through 2009. One bright spot seen in consumer electronics is the increase of smartphone adoption in the Japanese market. While Japan has for decades been the mobile market leader, the introduction of 4" display smartphones is only just beginning. But with a mature 3G network in place, agreements with handset OEMs well solidified, the adoption rate is expected to be good and market opportunities are seen as positive (cf., http://www.eetasia.com/ART_8800582475_499488_NT_03b172ac.HTM).
Perhaps one of the 'darling' stories of this New World Order, post global financial crisis, is South Korea. Korea has seen a strong and rapid recovery rate in terms of real GDP, according to analysts such as those at Credit Suisse. Figure 2, below, highlights the leading economic recoveries, including Korea.
Figure 2. Recovery in Economies with Financial Crisis, Credit Suisse
Source: Credit Suisse, Asia Pacific Equity Research, Asia Equity Strategy, 01 September 2009, p.2.
Diverse analysts seem to agree that while Korea is, like most other economies, facing serious employment drags, unlike most others, Korea is understood to be well into a recovery and no longer in recession, based on the sustained real GDP growth and trajectory. Furthermore, over the past couple of months, Korea's semiconductor and display sectors have continued to show strong improvements and growth trends with good profit margins (both operating and net).
Korea's tech recovery
Korea has followed an interesting and exciting path into the technology limelight since the implementation of strategies to emerge from the Asian Financial Crisis in 1997-98. Korea's metamorphosis into a technology powerhouse comes from very directed strategies focusing on specific industries and the ability to attract and to nurture R&D centers and staff them with the best and the brightest.
By focusing on semiconductors and electronics/technology, specifically memory and LCD displays, Korea was able to move through the ranks from simply manufacturing to becoming an unmatched leader and innovator in these sectors. As summarized in a recent report by the OECD, "The extreme degree of concentration in a handful of chaebol [South Korean business conglomerates] still distinguishes the Korean electronics industry from that of Japan, where none of the big electronics groups comes close to achieving the overwhelming dominance found in Korea." (OECD Reviews of Innovation Policy, Korea, 2009:95, http://www.oecd.org/document/32/0,3343,en_33873108_33873555_43396320_1_1_1_1,00.html)
As the OECD underscores, the chaebol were critical in maturing the Korean business environment by promoting an export-driven economy to the point that Korea has a mature and leading electronics industry from foundries through to consumer electronics products. According to the OECD, "Korean firms now have the largest world market share in DRAM semiconductors, TFT-LCD and CDMA cellular phones. This success has few parallels around the world." (ibid., OECD 2009:16) Among the leading chaebol are these recognized semiconductor and electronics industry leaders: Samsung Electronics, LG Electronics, LG Innotek, LG Display, Hynix, and SK Teletech, to name only a few.
Why this history lesson? Because the nature of the political and economic power that the chaebol have in Korea is directly related to their ability to garner support from the Korean government through stimulus packages that would target their industries and businesses. The maintenance of global leadership positions is explicitly stated and pursued by the Ministry of Knowledge Economy (MKE) for both the semiconductor industry, specifically memory but expanding to non-memory chips, and for the electronics industry, specifically displays but expanded to other sectors.
Figure 3. IT Global Market Share Trend
Source: Credit Suisse, Asia Pacific Equity Research, Asia Equity Strategy, 01 September 2009, p.20.
Leading Korean chaebol
Considering the ups and downs of the memory sector on top of the macro-economic climate, Korean memory giants have had a challenging course to navigate. Despite these challenges, many are doing well. Samsung Electronics continues to hold leading positions in the semiconductor industry across the sectors it operates in. (Samsung is not alone in this trend nor forecast, but is presented as a Korean bell-weather for similar companies/chaebol.) Having recently increased CAPEX spending and provided statements underscoring the move to increasingly smaller nanotechnologies for both NAND and DRAM production, it is evident that Samsung has emerged still holding a strong industry leadership position.
Figure 4. Samsung's CAPEX contribution out of global CAPEX
Source: Credit Suisse, Asian Daily, Samsung Electronics 13 August 2009, p.1
With the increasingly positive data supporting demand and growth in the PC/notebook and netbook sectors, Samsung is well positioned to take advantage of its insourcing in the netbook and notebook sectors as well as the demand increase for memory. As reported recently by DigiTimes 14 August 2009, both Samsung Electronics and LG Electronics are forecasted to experience significant growth in 2010 due to strong netbook sales, and are set to surpass Taiwan's notebook vendors who, according to the article, are pulling back from the netbook market.
Of course Samsung competes with LG in the TV and display sector, among others. TVs and displays are relevant because along with the PC demand increase, this sector represents the second of three major consumer electronics product sectors that are driving growth and contributing to the semiconductor industry rebound along with the geo-economies in which those sector leaders are found. The third area is handsets, particularly CDMA and 3G with special attention to smartphones and netbooks.
The connection between the rising popularity of netbooks to handsets is important, particularly in the case of Korea. The expertise in mobile handsets is what companies such as Samsung and LGE are leveraging to take over the leadership roles in direct competition to the Taiwan notebook giants. As both PC and mobile handset sectors are growth drivers during this recovery period, otherwise relatively demand-sparse, the sling-shot effect for Korean companies to grow and increase market dominance is compelling.
Add to this opportunity the fact that displays are the third and final growth sector, and considering the Korean strength in this market and again the connection to 4" and smaller displays for smartphones and the slightly larger displays for netbooks, notebooks and PCs which are growing plus the resurging demand for TVs, there's ideal conditions for a strong Korean leadership movement.
An exciting region
All four of the geo-economies examined in this two-part article share an important characteristic: they have been an important center for the semiconductor industry and are now moving into leadership positions as a result of their recovery paths. These geo-economies also share a special relationship with the semiconductor industry; they house semiconductor and electronics companies so valuable to the geo-economy that the industries have been able to garner special support through stimulus measures from the governments. To no small degree, this support enabled those semiconductor and electronics companies in these geo-economies to weather the economic storm and now recover better and quicker than elsewhere in the world.
The growth and industry leadership in Japan, Korea, Taiwan and China is significant and warrants review and consideration by the business and financial sectors. The ability to so quickly rebound after the global economic crisis is due to solid economic plans: stimulus programs; well engaged strategic plans during the global recession by the private and public sectors; and the added nexus of consumer demand around targeted electronics products (due to stimulus incentives, but also general consumer trends). Financial analysts have explored the effect of these variables on individual companies, and that leaves us lessons to be learned for other businesses. But what is also interesting is the end result of these successful strategies, a decisive regional shift in the industry's leading companies along the entire semiconductor supply chain, from foundries to consumer product manufacturers.