Few products are true, long-standing icons for the semiconductor and electronic industries; the personal computer (PC) is certainly one that comes to mind, particularly in the mind of consumers, both retail and corporate. Gauging the health of the PC market is very much part of the exercise of gauging the health of the entire semiconductor industry. This is simply because the PC market comprises the majority of semiconductor consumption coming in at roughly 40%, according to the Semiconductor Industry Association (SIA).
The forecasts for the PC market sector are strong, very strong, especially given the recent global economic crisis. There are a number of important reasons and compelling data supporting these forecasts. But more telling is understanding the reasons behind the forecasts and seeing the upcoming component trends that underlie the forecasts. That understanding provides an important strategic and very new and dynamic picture for the otherwise mature PC market. What we see happening in the electronics industry, how consumer demand trends are critical forces in product designs and the bill of materials (BOM), that is, the components, is significantly reshaping the PC market and changing what it means to be a PC device and which components will show growth and which will obsolesce over the next few quarters and years.
What's in a name?
We use the term "personal computing" (PC), on a daily basis, and most of us can recite in our sleep the components that make up the traditional, iconic PC. With the proliferation of smaller portable devices that meet most functional demands of today's consumer (personal or business), there's been much discussion in the industry as to what the expanding domain of the portable PC includes. Where is the line, if it exists at all, between PC and the forthcoming smartbook? (i.e., smartphone merges with netbook/notebook, see below for a discussion of this new product market)
It was the excitement of moving from desktop to laptop, or notebook, the portability of the computer that changed the way we worked and travelled. With that change came new displays, different memory, batteries, back-up and storage devices, etc. The components changed as the adoption of the new end product, the notebook, took the industry to new places because consumer demand insisted on it. Jump ahead to the smartphone and the same phenomenon repeats itself with demand driven component booms as other components recede in importance and therewith demand diminishes and those components obsolesce. In turn, other components capture the end-user and present new features, these components reshape the electronics end-product's use. Consumers then demand these new features; designers pursue new architectures based on consumers' (retail and corporate) functionality and product demands and dreams. For example, as much as MEMS changed the way we've come to interact with our mobile internet devices (MIDs), we too change the importance and demand for such components in our end-products.
Yet the question remains, what is a PC today? What does it mean, actually, when we say that the PC market is accelerating and is driving the strongest growth numbers in the semiconductor and electronics industries today? Which end-products housing which components are actually growing versus those that are not? What are the demand drivers from retail and corporate consumers that we need to attend to and what features and components should we be leaving behind? Who is buying what and what's in those products that makes them compelling.
The maturity of the PC market is at the point that the full meaning of "PC" is perhaps too large, or too generic, of a category to be meaningfully considered as a single entity. Rather, if we look at what is happening within the PC components' subsectors, we see new lines, new categories that have formed around a series of new end-products with new end-uses for those components; for example, display sizes and technologies (OLED versus LCD), processors and chipsets (speed, performance, design, compatibility, etc.), drives (SSDs versus HDD), memory (the prolific rise seen for NAND flash and the quiet commoditization of DRAM), and the changing importance of the CPU itself.
As recently articulated by The Wall Street Journal, "There was a time when people cared a lot about the microprocessors in their PCs [...]." (http://blogs.wsj.com/digits/2009/09/09/amd-time-to-play-down-chip-speed-in-marketing-pcs/) If the CPU is no longer the most important component in a PC, and given that the CPU is the heart of the machine, what is it that now draws demand? What is it that drives the consumer, retail and corporate, to purchase a PC and what form (or design) of an end-product does that PC have (e.g., a desktop, notebook, netbook, smartbook or smartphone)?
The important trends to decipher
With the backdrop of a demand-sparse, cautious economy in the aftermath of the global economic recession, positive numbers of any sort are welcome. That PC shipment is showing good momentum is vital to the health and stability of the semiconductor and electronics industries because PCs still represent roughly 40% of semiconductor consumption. While down year-over-year (YoY), by 4.3%, according to iSuppli's 2Q09 PC Shipment Report, the 67.2 million PC units shipped represents a 1% increase quarter-over-quarter (QoQ). The more important data are the trends that support a sequential growth forecast for the remainder of the year (Y09) and likely through the first half of next year (1H10).
iSuppli is not the only analyst group to be touting strong guidance for sequential PC growth. Gartner's numbers, released about a week prior to iSuppli, are parallel (see Figure 1, below). Furthermore, the financial analysts are using all of these data in conjunction with their own PC unit, volume and sales data by company, to forecast continued growth and sequential rebound into positive unit numbers, 9.8% according to Credit Suisse, for Y10 (Credit Suisse Equity Research, IT Hardware, Comprehensive Review of Recent PC Trends 09-09-09).
Figure 1: Credit Suisse Global PC Forecast
Source: Credit Suisse Equity Research, IT Hardware, Comprehensive Review of Recent PC Trends 09-09-09, p.1
In breaking down the analysts' forecasts, we begin to see that the iconic desktop PC is not the locus of growth. Instead, notebook PCs, for the corporate market, in addition to the newer netbooks and smartbooks are the drivers, the latter for the consumer market. According to analysts at Credit Suisse, the second quarter (2Q09) notebooks experienced growth at almost 5% quarter-over-quarter (QoQ), primarily based on netbook sales which "accounted for 18.4% of total notebooks. Traditional notebooks declined by 6.1% versus the prior year, [... and] a 5.8% decline last quarter. [...] desktop[...] units declined 18.7%, underscoring a steady deterioration and shift to mobile platforms." (Credit Suisse Equity Research, IT Hardware, Comprehensive Review of Recent PC Trends 09-09-09, p.2) The trends looking into 2010 continue to show the same trajectory with netbook growth leading the way at 39.2%, notebooks to grow 22.2% and desktop declines continuing with "unit compression
stabiliz[ing] at 0.9%." (ibid., p.2)
The market segments, or consumers (retail and corporate), are a critical indicator of the direction and type of growth forecasted. We need to consider the actual purchaser and their use patterns in addition to the regional consumption trends (where the wider Asia-Pacific + Japan (APACJ) leads and importantly shows 5.2% growth YoY) and the general end-product forecasts. While the retail market segment, i.e., the 'home' market, is presently a globally stable driver, thus far 11.2% annual growth, the corporate, education and government segments have been weak for a number of quarters. Critically, the most exciting news and anticipated growth 'spurt' is the corporate tech spend that is forecasted to provide the breadth and depth of demand to sustain recovery for the sector and the industry through at least the first half of next year (1H10).
Analysts across the board agree there are compelling factors that lead us to expect a significant demand for PCs because the corporate replenishment cycle is now overdue. Following the cyclical pattern of enterprise replenishment historically, we typically expect significant purchase levels between three to five years; the last cycle was only a slight build in 2003-2004 (see Figure 2, below). At this point, data indicate that most corporate PCs need to be replaced, with service agreements, operating systems (OS), features and compatibility issues at the point of necessitating the capital expenditures.
Figure 2: Global commercial PC unit shipments (YoY, %)
Source: Credit Suisse Equity Research, Asia Technology Strategy, The case for a corporate tech CAPEX cycle 07-09-09, p.8.
Corporate sales cycles are critical to the PC sector because, as Credit Suisse data underscore, this sector "still account[s] for 63% of total global spending on PCs, and PC spending comes with accompanying spending on software and networking infrastructure." (Credit Suisse Equity Research, Asia Technology Strategy, The case for a corporate tech CAPEX cycle 07-09-09, p.3) Additionally, these sales are critical because on average they represent 23% higher ASPs than consumer retail PC sales (ibid., p.6).
Why are analysts so confident and bullish that the corporate demand cycle is set to begin this quarter and be sustainable? The release of Microsoft Windows 7 is, after the delayed replenishment cycle itself, the most compelling variable. In a survey of CIOs and industry analysts, most corporate CIOs elected to forego the Vista OS cycle. Corporations are expected to finally recommence their technology spending with the October release of Windows 7 due to a combination of factors: necessity of new technology investments as existing hardware and software are beyond service agreements; economic easing at both micro- and macro-levels; economic confidence and market rebound in hand; and leading economists, such as US Federal Reserve Chairman Ben Bernanke, declaring the recession to have ended in the US, minimally.
One atypical variable that can be informative in forecasting market sectors is the consideration of ASP trending. This is especially valid because ASP cycles correlate with demand and life cycles of components and end-products in the semiconductor and electronics industries. While the PC sector data are very strong and solid for sustained growth, as summarized thus far, there are ASP declines that concern many. These ASP declines are due to pricing issues resulting from the recent consumer demand-sparse periods. ASP declines are not only the result of the economy, but also, importantly, are related to the ASP drag-down effect on the traditional notebook and even desktop PC markets due to the low-cost netbook's introduction and adoption (see Figure 3, below). While volume has offset lower price points for many, and the ability to even sell end-products in the worst of economic conditions was a critical lifeline, questions around the long-term impact of downward price pressures from netbooks have circulated throughout the year.
Figure 3: Netbooks pricing pressure on notebook ASPs
Source: Credit Suisse Equity Research, IT Hardware, Comprehensive Review of Recent PC Trends 09-09-09, p.5
While consumer confidence in the mature economies is rebounding, the greatest demand for consumer electronics, including PCs, is coming from emerging economies and notably from APACJ (cf. the Special Series articles in this issue of MarketWatch Quarterly for a comprehensive examination of growth in the semiconductor and electronics industries in four leading economies in the APACJ region).
There are two reasons for the demand trends favoring the APACJ region and emerging markets (EM): 1) the swift implementation of targeted stimulus programs geared to bolster the consumption of electronics end-products (particularly in APACJ); and 2) the variability in the severity of negative impacts from the global economic crisis (degree of GDP reduction, rapidity of rebound, ability of national banks to react swiftly and quickly, inflation levels in check or falling, among other financial factors. In short, one economic lesson learned from the past year is that EM 'decoupling' now means something different:
[...] emerging markets countries will: (1) survive the global recession less injured than will the more developed countries and (2) grow more rapidly than the more developed countries when the global recession is over. (Credit Suisse Emerging Markets Quarterly Q3 2009, 17-06-09, p.11)
In considering ASPs and PC sales on a regional level, the question begs what the emerging markets (EM) will demand, or more directly, be able to afford, in terms of PC consumption. The 'one laptop per child' is the original netbook market, and the regional target is the EM block. So, while the ability to penetrate these EMs exists as a result of improved, internal economic conditions coupled with reduced end-product pricing, given the reduced ASP, the unit volumes must be significant enough to make this a sustainable strategy for the OEMs' profitability.
Presently, until we are farther along in the PC cycle ASP and regional variables continue to be the critical variables to watch; the true PC cycle forecast will, therefore, be based on regional demand and end-product type demand.
What does PC trending tell us?
Given the trends summarized above, what we do know is that the traditional PC is not the demand driver (i.e., neither the desktop nor the notebook PC). This knowledge is important in drilling down to the components and their respective trajectories. The macro picture, i.e., the global outlook, indicates that EM will continue to dominate sales, particularly for the retail or home consumer, and those sales will be primarily for netbooks and smartphones. Likely, it is time for our traditional icon of the PC to be scaled down in size and merge with the mobile handset sector; to become the smartbook.
Smartphones have already cycled through the waterfall phenomenon and are commoditized to the point of being average. Coupling the 'smart is now average' market situation with the 3G proliferation (particularly in China and Japan), most analysts look beyond the netbook and advise that it is smartphone sales that will outpace the traditional PC and notebook PC sectors as soon as by 2011, estimating shipments at roughly 400 million/year (http://www.computerworld.com/s/article/9137086/Analyst_More_smartphones_than_PCs_by_2011?source=CTWNLE_nlt_pm_2009-08-25). Early movers have already engaged in the current market strategy that attends to this smartphone demand wave. Already the trend has begun for the increased margins and cycle improvements (i.e., shortened cycles) for the smartphone. Presently, the mobile chip market is in double digit growth mode and forecasted to continue to grow around 22.3% through 2013, according to In-Stat's research, as reported by DigiTimes 19 August 2009.
The mobile semiconductor market growth is critical to the industry and to the PC sector. It is the new nexus of innovation for not only the semiconductor IC market, but also for the next cycle of innovative PC end-products, the next 'mobile PC,' dubbed 'smartbooks' by many, such as Freescale CEO, Rich Beyer. As quoted by EETimes Supply Network, Freescale's Beyer provided his view on the new smartbook market, saying that "smartbooks [...] could be a bigger hit with consumers than conventional netbook computers." (http://www.eetimessupplynetwork.com/219501225?cid=NL_eetimessupplynetwork)
If there were doubts as to the future of this crossroads device, the latest alliance between two industry giants should quell that. Nokia and Microsoft have formally agreed to an alliance that will provide enhanced 'enterprise-grade solutions' for Nokia's smartphones to improve mobile productivity (cf. Mobile Europe e-Newsletter 14 August 2009). Thus begins the reality of the smartbook revolution.
OS and software enhancements will increase the functionality of smartphones and thereby promote them to the smartbook level. In turn, smartbooks (the crossroads of notebooks/netbooks and smartphones) weight features differently than the traditional PCs: battery requirements and power efficiencies, size, heat, weight, input and interactivity requirements, connectivity, and functionality (whether specific dedicated tasks or flexible devices). All of these features, demanded by consumers, and embodied in smartbooks also change the way components are prioritized and therewith priced and designed.
How components are re-designed and newly architected to be on the same chip in multi-dimensional configurations will continue to accelerate changes in the semiconductor industry. For example, the new input and interactive capabilities that consumers were introduced to through devices such as Apple's iPhone have lead to the further embedding of MEMS and ICs to meet design and feature requirements. It should, similarly, be expected that the suite of components in a traditional PC will continue to innovate as this entire sector expands and leads us toward new devices crossing markets and compelling users to purchase new and exciting products while challenging architects and designers to continuously improve and innovate the capabilities of semiconductor components. In the end, Moore's Law is not the only challenge on the block.