There are finally outstanding growth numbers to relish again, and that is big news in the wake of the global financial crisis. The economies of Taiwan and especially China are skyrocketing to the top of the global IC market. As a recent report by IC Insights details:
China's IC market is expected to reach $100.1 billion in 2013 and represent over one-third (35%) of the worldwide IC market, up from only 14 [%] in 2003 [as represented in Figure 1, below].
In 2009, China and Taiwan together are expected to represent about 75% of the IC market in the Asia-Pacific region. In 2013, IC Insights forecasts that the China and Taiwan IC market together will reach about $139 billion and represent almost 80% of the total Asia-Pacific IC market and almost half (48%) of the worldwide IC market! (http://www.icinsights.com/news/bulletins/bulletins2009/bulletin20090804.html)
Figure 1. China's IC Marketshare Forecast by IC Insights
Source: IC Insights, http://www.icinsights.com/news/bulletins/bulletins2009/bulletin20090804.html
The economies of Taiwan and China are often coupled for many reasons, but the reasons herein may be quite eye-opening to those who have not been watching the individual economies' paths to recovery. In the now post-global economic recession, the recent 2Q09 and forward-looking forecasts are strong. Therefore, this Part II of this new article series for Smith's MarketWatch Quarterly will focus on these two leading economies.
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 in Figure 2, below from The Wall Street Journal:
Figure 2. Global Semi Sales by Region 3MMA
Source: Wall Street Journal http://online.wsj.com/article/SB125146469395066623.html?mod=djemTECH
There is much good news coming out of Taiwan according to a survey of major financial and market analysts (e.g., Credit Suisse, Morgan Stanley, Barclays Capital and UBS). Average data pertaining to the semiconductor and electronics industry in Taiwan reveal that:
- sales are up 5% on average month-over-month (MoM),
- revenues are up 3% on average MoM, and
- order visibility is very good and in strong positive territory through 1Q10.
The numbers for 2Q09 show double digit growth in the semiconductor industry in Taiwan. The three month moving averages (3MMA), which are gaining ground, are the most encouraging numbers and the ones that give us the best indication of sustainable rebound. The 3MMA, despite generally low compared to non-recession years, are still in negative territory, but they are moving up steadily and that is critical. The better for the semiconductor industry comes from the upstream sectors (foundries, fabs and equipment manufacturers) ARE showing significant upturns after a difficult few quarters. Financial and industry analysts alike now forecast a V-shaped recovery for semi. Most importantly, we see the economic indicators for sectors in the semiconductor and electronics industries improving; the upward trend is confirmed, sustainable, and we are in a post-recession recovery.
Foundries & fabless ICs
Upstream at the foundries, there is strong growth based on good order clarity and dramatic ramp-ups in utilization levels. Should these levels persist, analyst consensus is for greater than 100% utilization levels by 1H10 - which will have significant impact on pricing and lead times as competition heats up for components.
Inventory management and closely managing the product stream continue to be at the fore of upstream strategic plans. Coupling these strategies with the retirement of older technology and equipment, the better CAPEX spends on the books for the upcoming quarters mean that there will be significant investment and rapid movement to the next level nanometer architectures. We understand this semi equipment spend to be based in the cost-savings anticipation at these levels and the ability to now sling-shot forward after a period of CAPEX conservatism.
We've seen significant semi equipment order increases, further evidencing that the CAPEX spend forecasts are coming to fruition; suppliers are showing between 30% to 200+% quarter-over-quarter (QoQ) changes in orders and/or shipments for 2Q09 (cf. particularly, UBS Investment Research, Semiconductor Equipment Industry Update 16 August 2009).
Figure 3. Taiwan Foundry Sales, Monthly
Source: Credit Suisse Semiconductors, July Taiwan Monthly Sales 13 August 2009, p.7
Looking more closely at the individual Taiwan foundries' performance data, there is a tight connection between foundries' improved numbers and the sales data for PCs and notebooks (companies include, but are not necessarily limited to: TSMC, UMC, Onotera, Nanya, Winbond, Promos, Powerchip, Vanguard). Due to the importance of the PC sector to the semiconductor and electronics industry as well as the role it is playing in elevating sales along the supply chain, this quarter's MarketWatch Quarterly Sector Brief focuses entirely on the PC sector, wherein more detailed data and trajectories can be found.
As evidenced in Figure 4, below, Taiwan's fabless IC companies are the show-stealer upstream, with not only double digit sales, 14.4% MoM, but also up 17.5% YoY, the only sector to show true positive sales data and with continued growth forecasts, (cf. Credit Suisse, Semiconductors, July Taiwan Monthly Sales 13 August 2009).
Figure 4. Taiwan Fabless IC Sales, Monthly
Source: Credit Suisse Semiconductors, July Taiwan Monthly Sales 13 August 2009, p.10
2Q09 also saw improvements for Taiwan memory companies' sales, up 11.9% MoM (almost 3% above seasonality); test and packaging sales were up MoM and QoQ, though in single digit territory (thankfully beginning to reach near-positive territory overall); motherboards were up 15% MoM, but only up 3% YoY, still in positive numbers overall.
EMS and component manufacturers
Overall, Taiwanese mid- and downstream companies along the supply chain also show generally positive trajectories, though not as strong as the upstream companies.
One important exception is notebook PCs sales which continue to trend up, as we'd expect given their leading position in the industry and in the region, showing 4.3% MoM but 10% over seasonality and almost 19% up YoY, as presented in Figure 5, below.
Figure 5. Taiwan Notebook PC Sales, Monthly
Source: Credit Suisse Semiconductors, July Taiwan Monthly Sales 13 August 2009, p.14
As argued in the introduction, there are important convergences of government stimulus packages in the APACJ region that have promoted consumer electronics spending. However, because of the geographic nexus of these variables, we see APACJ as the locus of significant consumer electronics spending. This is helping the individual and regionally based APACJ economies and having the intended stimulus effects. Importantly though if the broader global trends follow suit, as other economies begin to recover, the APACJ supply chain will be very much in a strong, leadership position going into the next year and possibly for years to come.
Drilling further we find that gains were very modest for the EMS sector in Taiwan. The Taiwan EMS sector barely reached a growth of 1% MoM and was down by almost 4% YoY. While some individual companies fared better in the double digit or near double digit range (e.g., Yageao, Kinsus, Txc, and Tripod), the majority were in the low single digits with some in negative territory MoM and YoY; likely as a result of the increased insourcing and consolidations that occurred during the recession period globally. The exception was Hon Hai, which reported 2Q09 net profits +26% YoY on 31 August (cf. Wall Street Journal's summary http://online.wsj.com/article/SB125174611037473485.html). See Figure 6, below from Credit Suisse, which presents their compiled components and EMS sales data for Taiwan.
Figure 6. Taiwan Components and EMS Sales, Monthly
Source: Credit Suisse Semiconductors, July Taiwan Monthly Sales 13 August 2009, p.15
Hon Hai is traditionally an outlier, and they continue to outpace the sector. Hon Hai attributes their noteworthy growth to cost saving measures and strategies that were implemented as well as the follow-through of their strategies begun as early as 2006 of moving production sites to inland China. These strategic production moves over the past three years from coastal sites inland as well as the R&D center in Tucheng, Taiwan, have enabled Hon Hai to deliver "lower cost [... that] will help its expanding leading gap with peers and continue to win more outsourcing business," according to analyst Robert Cheng at Credit Suisse (Asian Daily 01 September 2009).
There is good news on the horizon for the EMS sector, both in Taiwan and globally. EMS is anticipated to see significant rebound in the coming quarters, according to Citigroup Global Markets analysts. More specifically, Citigroup sees the EMS cycle as being in phase three of the traditional four-phase cyclical pattern, meaning that "macro recovery finds OEMs with too little capacity which drives further outsourcing to EMS companies," thereby improving EMS growth (https://www.citigroupgeo.com/pdf/SNA39319.pdf, p.3).
Overview of Taiwan
In short, the news out of Taiwan is perhaps among the most promising globally, as confirmed by data from Credit Suisse's Asian Daily 20 August 2009:
2Q09 GDP was strong at 5.17% on a seasonally adjusted basis and was up 20.69% when annualized. The data marks the end of technical recession in Taiwan and identifies 1Q09 as the bottom of this down cycle. (p.1)
These improved numbers are significantly related to the upward export orders, primarily to China and regional consumer demand for electronics. However, these stellar GDP numbers were dragged down by increased unemployment levels - a serious global and regional trend for economies and for consumer confidence and spending. In Taiwan, unemployment levels are at historic highs of 6% and are likely to have negative impacts on domestic consumer spending going forward. Despite these problems, the outlook consensus by financial and industry analysts alike is that Taiwan has seen the end of the recession as of 2Q09 and can look forward to continued overall improvements, though with significant weighting to external, global, demand.
China is oddly placed at the end of this initial group of major geo-economies that are bringing the semiconductor and electronics industry along with them as they rather quickly exit the global economic recession. It is odd to place China at the end of the list because without China's aggressive and highly successful government stimulus plans for internal demand generation as well as national support of major semiconductor firms, it is likely that the semiconductor and electronics industry supply chains would NOT be in as healthy a position as they are at the time of writing this article. In fact, some industry journalists propose that as a result of China's ability to increase economic growth nationally, coupled with their external, global, contributions, "some observers think China could play a key role in leading the world out of its worst downturn since the 1930s." (http://www.manufacturing.net/article.aspx?id=213970) Analysts at Credit Suisse also echo this view of China's new economic role, offering that "we think the burgeoning of import demand [in China] would be positive for global commodity demand, spilling China's growth to the rest of the world." (Credit Suisse, Asian Daily China Economics 01 September 2009)
China's new fabless venture
There is, however, a reason for China's ultimate placement in this discussion of the 'New World Order' for the geo-economic landscape in the semiconductor and electronics industries. China leads as the major economic stimulator in driving consumer demand and sales revenue, positively affecting the entire global supply chain. Another aspect of the Chinese stimulus programs has been the support of national corporations critical to the Chinese economy. This has encouraged public-private joint-ventures (JVs) as well as new venture capitalists to explore new opportunities that can propel China into new leadership roles in the semiconductor industry.
One important new venture for China is the challenging fabless semiconductor sector. Backed by roughly US $586 million from the Chinese government, "as a source of funds for grants, loans and equipment for fabless startups," according to EETimes (http://www.eetimes.com/showArticle.jhtml;jsessionid=H2VZGFOQG54XVQE1GHRSKHWATMY32JVN?articleID=219100187).
Why fabless startups? Well, as EETimes suggests, "China hopes to follow the example of Taiwan. Three of Taiwan's fabless startups have become billion-dollar companies [...]" and with "China's IC market [...] expected to grow to $100.1 billion in 2013, when it will represent 35 percent of the global chip market [... and] China's 12 percent [compound annual] growth rate will be twice that of the global chip market," there is good reason to look to set up shop now (http://www.eetimes.com/showArticle.jhtml;jsessionid=H2VZGFOQG54XVQE1GHRSKHWATMY32JVN?articleID=219100187).
Further supporting the timing for fabless ICs, and IC companies more generally, is the data presented at the beginning of this article from IC Insights forecasting "China's IC market is expected to reach $100.1 billion in 2013 and represent over one-third (35%) of the worldwide IC market, up from only 14 in 2003 [...]." (http://www.icinsights.com/news/bulletins/bulletins2009/bulletin20090804.html) The reasons behind these growth numbers are not exports alone, but production driven by national consumer demand in conjunction with continued export trends.
ICs are not the only sector forecasted to do well in the growing China marketplace, with 3G deployment now well entrenched, the "3G handset market will grow 5- to 10-fold in 2010," according to DigiTimes 28 August 2009. As the DigiTimes article goes on to note, "As the sole manufacture [sic] for Qualcomm and MediaTek's 3G chips, [...] TSMC is also expected to see strong orders between fourth-quarter 2009 and first-quarter 2010." The relational variables here underscore the important interconnectedness of not only Taiwan and China but also the important role that the entire region plays for the global semiconductor industry by creating new, vibrant consumer markets in addition to being a major center for manufacturing and design, alongside North America and Europe.
Similarly, with the multi-billion dollar stimulus program supporting consumer electronics, the demand for TVs in China has played a critical role in the TV sector at a time when panel prices were dropping and inventories were skyrocketing to unhealthy levels. Now moving into much healthier territory, some in the TV sector, such as Korean LG Display and Samsung Electronics have publically stated their intent to build flat-panel manufacturing plants in China (cf. http://www.manufacturing.net/article.aspx?id=213970).
In sum, China has emerged from the global economic recession as a very dynamic and strong economy which is, as argued by journalists and analysts alike, leading and supporting many aspects of the global economy as a result of massive stimulus packages that have been successful. Not only have the stimulus packages aided China's own economy, they have been a catalyst for significant new investment in China and laid the groundwork for new sector strength possibilities for China in the semiconductor and electronics industry.
There is a significant amount of positive news, from outstanding to encouraging numbers for sales, revenues, CAPEX spends, order clarity, among other variables that we track to monitor the health of the semiconductor and electronics industries and the nodes along the supply chain. Certainly, Taiwan and China as both economies and nations are leading the world in terms of recovery and, as argued by some, leading other geo-economies out of recession, especially in the electronics industry.
There are important reasons for this economic success story, not only in Taiwan and China, but as seen in Part I of this series, in Korea and Japan too. Among the more noteworthy factors and resulting trends that help us to understand the recovery rate of the geo-economies and of the semiconductor and electronics industries in the region, include the following:
- These geo-economies are home to many corporate headquarters, fabs and major manufacturing facilities of multi-national companies in the semiconductor industry. As such, these companies have significant holdings that greatly impact the local economy and together create an important group to influence government policies, such as which industries are targeted for stimulus grants.
- These geo-economies contain some of the most mature manufacturing markets in the industry, not just regional factories, but deeply entrenched companies upon which ancillary supply chains rely (e.g., logistics, shipping, and other labor markets), as well as being the employers of tens of thousands.
- Targeted and well-timed government stimulus programs implemented by these geo-economies have been a model of success for other economies worldwide.
- A critical result of the stimulus packages has been the intended new consumer demand trending, which was intentionally targeted to support the purchase of consumer electronics, and thereby bolster the semiconductor supply chain.
- The ability of the greater APACJ region, and Taiwan, China, Korea and Japan especially, to sling-shot out of recession ahead of other regions not only increases corporate advantages in the market and along the supply chain, but also supports domestic consumption which in turn supports locating regionally to meet that demand cycle, etc.
It must be underscored that the above list does not represent the complete set of reasons for understanding how or why these four geo-economies have been so successful. These factors should help to underscore the directed convergence of efforts that produced the results they intended: recovery via direct stimulus to key industries, companies, and consumer sectors that would trickle up to further support the industries and therewith GDPs. The end result is a success story, at least at the present time and in the context of the recent global economic recession and financial crisis.
During the past few quarters, some economists and analysts have pondered whether a possible result of the global financial crisis that underscored the corporate and financial sectors' interconnections would be a retreat to protectionism, nationalism or other anti-globalist mentalities. It does not seem that this has born fruit. Certainly, consolidations have occurred and therewith concentrated the efforts and reach of many multi-national corporations. Perhaps better understood as regional or localization efforts, the macro-economy only increased the corporate strategic fine tuning that was begun by last summer's logistics and shipping re-evaluation due to skyrocketing oil and gas prices.
As we move forward through the early stages of the global economic recovery, taking note of what individual and regional geo-economies are doing, and doing well, serves as a reminder that it is impossible to go backwards towards protectionist or nationalist economic policies because today's supply chains interconnect beyond geo-political or geo-economic lines. As a result, the phenomenal recovery being seen in this powerful subgroup of the wider APAC region therewith harkens a more wide-spread recovery for the global semiconductor industry.
In the next issue of MarketWatch Quarterly, due out at the end of the next quarter, (http://www.smithweb.com/sw/en/quarterly-review-and-analysis) we will explore the new geo-economic landscape for other important economies to the semiconductor industry. All relevant updates and events in the interim period will be presented through Smith's MarketWatch Commentary (http://www.smithweb.com/sw/en/marketwatch-commentary).