Special Series – The New World Order: Europe’s historical strengths are key to its future in electronics


This is the third article in a year-long series 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. In turn, these differences have directly affected supply chain and market dynamics for global electronics manufacturers and distributors.

Europe is an important market, having been at the heart of critical technological and architectural innovation, R&D, and a leader in specialized market sectors such as mobile, medical and aerospace electronics equipment, to name a few historical strengths. However, Europe was also the hardest hit geo-economic region during the global economic crisis. As a result, the landscape for semiconductor and electronics companies and supply chains in Europe has undergone significant changes, numerous insolvencies, down-scaling, and the complete exiting of once hallmark sectors. On the other hand, the private sector industry associations have strengthened and now have the support of the European Commission to reevaluate the importance of support for the high tech industries in Europe. The question on everyone's mind is: what is the future of semi in Europe?

Europe's geo-economic importance for semi
Europe is a well-developed geo-economic block with mature industries, consumers, and supply chains. It plays an important role in corporate and consumer mobile, network equipment, PC (from netbooks to desktops and servers), appliances, and general electronics. Additionally, medical and aerospace sectors have been key markets that continue to be housed in Europe due to the highly specialized R&D, manufacturing and production supply chain requirements, i.e., extremely precise instruments with high mix and low volume components.

Critically, as early as 2008, SEMI Europe data show that "the European share of semiconductor manufacturing capacity fell 25 percent from 2005-2007." These alarming findings point to the reverberating effect that the receding of high tech industry has had on the wider European economy.

The broader semiconductor and related high tech industry in Europe is pivotal to Europe's global position as a competitive geo-economic region. The lack of a strong semiconductor and high tech supply chain, and further the lack of monetary or fiscal policies to stimulate it, are critical components to why economic recovery has been stymied in Europe compared to what has happened in Asia and in North America. Europe has continued to loose semiconductor businesses and the semi supply chain is significantly thinner than ever before. The ramifications are lack of jobs for highly skilled personnel, decreased ability to compete globally in market share for semi equipment and materials, lack of market share for critical demand sectors that support the countries' and geo-economic region's GDP, and a disconcerting lag in technology development leadership.

What SEMI Europe and partner high tech industry groups have been stressing, and what was finally recognized in November 2009 by the European Commission (EC), is that the semiconductor industry is a critical, "key enabling technology (KET)," that necessitates recognition, support, and state aide policies. However, there is considerable worry within the semi industry that the urgency of support for high tech manufacturing and research is not felt and that the EC will not be able to act quickly enough, unlike the Asian and North American governments whose stimulus programs, both monetary and fiscal greatly staved off irrevocable declines in their regional semi supply chains (for a review of the differences and importance of such programs, cf. MarketWatch Quarterly Vol3:2, "The $787+ Billion Question: Will semi be stimulated?", and this issue, Volume 3:4).

With an established, mature economy such as Europe, comes staid but sustainable growth during rebounds such as this. That is an important reality; so the question then turns to industry to make the most out of the forecasted 2 to 2.5% overall growth in 2010-2011, and to determine the best strategic plans given these small percentages. [1]

One critical caveat is the divergence or 'decoupling' among individual countries' economies now being highlighted within the European Union. This underscores what we've seen on a global scale with the emerging economies, there is little belief left in 'coupled' economics. For corporations, being aware of the important differences in corporate and consumer behaviors and tolerances, requires new, finer brushstrokes in explaining and forecasting market data and trends to lay out the most appropriate strategies for growth.

Brief overview of European sectors for semi
As recently reported in Smith's MarketWatch Commentary, European DRAM took a fatal blow during the recent crisis, and there is no longer any DRAM manufacturing in Europe.

The critical electronics manufacturing services (EMS) sector stands a better chance than DRAM. However, it will take at least three years, 2010-2013, for the EMS industry globally to recover, with forecasted growth in the 5% range annually for those next three years (cf. as reported in Manufacturing Market Insider (MMI) (Vol. 20:1, January 2010, and Vol. 19:11, November 2009) and citing forecasts from InForum market research). With original design manufacturers (ODM) gaining market share, the question as to the who will be the victor in the ongoing EMS-ODM turf war is still unsettled and this may tip the scales away from European EMS recovery (cf. MarketWatch Quarterly Vol. 1:1, "EMS/ODM a Mixed Market;" and Vol. 2:2, "Co-Evolution and Organic Growth").

Unfortunately, as ODMs steadily gain market share, some important red flags are raised for Europe's high tech future. One important warning sign can be seen in the volatility of Russia's attempts during the past two years to foster an internationally backed EMS 'industry'. According to extensive research published by MMI in October (Vol. 19:10, pp. 1-2), most of the EMS plants and strategic plans have been withdrawn completely or their progress can no longer be confirmed. Some of the critical EMS companies and the markets they were planning to serve that MMI surveyed include: Elcoteq's St. Petersburg plant, Hon Hai with HP in a JV for PC production, Flextronics' LCD TV plans, and Jabil Circuit's plans to produce TVs for Sony. On a more positive note, the medical sector for the semi supply chain has seen some growth in Europe, particularly in the lower-cost European sub-regions (cf. MMI Vol. 19:10, pp. 5-6).

Mobile, Medical & Aerospace
While the mobile sector (telecom, devices, and networks) has been important for Europe, there are some areas where analysts see Europe, particularly Nokia in the handset market, being challenged by both North American and Asian OEMs. Similarly, in the network equipment market, ASP drops have provided Asian firms an opportunity over the European firms (cf., Morgan Stanley, "European Technology – Euro Tech Bytes: Week 61," 21 December 2009, pp. 2-6).

The medical sector has long been a stronghold for European semi supply chains, and this continues to be an important, strong and very positive growth sector both for Europe and for semi. With the ongoing successful R&D in microelectromechanical systems (MEMS) (cf. here and here) and now moving even smaller to nanoelectromechanical systems (NEMS), the opportunities for significant semi growth in the medical sector are truly opening.

In Europe particularly, MEMS and NEMS components for the expanding medical diagnostic market are a rich source for growth both in new markets, R&D support and opportunities, and a perfect match for the European semi supply chain's strengths (cf. Yole Developpement's new publication, MEMS' Trends, January 2010). [2]

The aerospace and defense sectors have been an equally important core for European high technology and semiconductor supply chains. With passenger traffic forecasted to increase beginning in 2010, analysts are more bullish on the future for aerospace for European firms, favoring some European firms over US in certain cases (cf. Barclays Capital, "European Aerospace & Defense: Initiation of Coverage – Navigating the Cycles," 04 December 2009, pp. 1, 4, 13-20). Defense spending is seen as slowing globally, and therefore not holding many growth opportunities.

These sector forecasts, while generalized and broad, are important in that they underscore European high tech industries ability maintain a solid footing. Therefore, the question is not the continued existence of high tech and semi's future in Europe, but rather the ability of European firms and supply chains to act in strategically successful manners so as to maintain and grow market share in these traditional sectors for Europe. Importantly, it is not just a matter of semi's growth future in Europe, but also Europe's economic growth and ability to stave off increased unemployment for highly skilled personnel.

The macro data: Important trends lay the foundation for growth
Looking ahead to 2010, there are many good economic indicators globally for the semiconductor and electronics industries. For Europe, with it's now compromised semi supply chains, it is more necessary than ever that the global outlook for recovery in general and the semiconductor industry especially, be positive, strong, and sustainable so as not to jeopardize the chances for semi's recovery in Europe.

Some important industry economic data that directly affect the opportunities for the recovery of semi in Europe follow:

  • Resumption of semiconductor CAPEX and R&D spending in the 18-25% range, respectively;
  • Semiconductor revenues worldwide continue a steady and healthy 3-month rise:

o September 2009 at -10.1% year-over-year (YoY)
o October 2009 at -3.5% YoY
o November 2009 at +8.5% YoY (data from WSTS as reported by SIA);

  • European semiconductor revenues that make up the above composite worldwide semi revenue data show a similar trend, but lag in the overall levels:

o September 2009 at -24.8% YoY
o October 2009 at -17.8% YoY
o November at -4.9% YoY (data from WSTS as reported by SIA),

  • Three month moving average (3MMA) sales of semiconductors worldwide show a slight decline over the same three month period:

o September 2009 19.7% 3MMA
o October 2009 19.5% 3MMA
o November 2009 18.1% 3MMA

While European sales showed a steady increase: the same three month period:

o September 2009 18.9% 3MMA
o October 2009 21.4% 3MMA
o November 2009 25.7% 3MMA (data from WSTS as reported by SIA),

These data are significant in that Europe and the Americas were the leaders with Japan and Asia Pacific loosing ground during the same time period;

How will European semiconductor and electronics industry supply chains emerge from this economic crisis? There are 'green shoots', to borrow a term from mid 2009 for describing North American and Asian recovery.

On the positive side, European firms generally fared relatively well and should be in a good position to take advantage of the Asian and North American trade opportunities (cf., Credit Suisse, "European Economics: Ten points for 2010," 04 January 2010, p.5). The extent to which that opportunity holds for European semi is not as clear. Given the lack of government stimulus targeting the critical industries of semiconductors and electronics, and the capital intensity they require in the face of continued bank lending conservatism and only muted consumer spending within Europe, it may be too early still to say if these 'green shoots' will flourish or whither (cf., e.g., Credit Suisse "European Economics: Forecasts and themes, 15 January 2010, and World Bank Global Economic Prospectus 2010).

For Europe's and semi's sake, let's hope that the EC can act on the urgency for action that SEMI Europe and the other industry associations continue to advice. Otherwise, Europe itself may only be able to support it's remaining critical but niche markets.

[1] Globally, GDP is set to increase across the board, albeit modest in the 1-2.5% range for developed economies and closer to 3-4% for emerging economies (excluding China with higher GDP forecasts see MarketWatch Quarterly Vol.3:3 , and Credit Suisse "European Economics: Forecasts and themes, 15 January 2010, pp. 1, 3,6).

[2] Double-digit semiconductor revenue growth, forecasted by Gartner based on global market growth and end user demand further spurred by "the introduction of new technology to the marketplace," according to Bob Johnson, VP Research, and Klaus Rinnen, Managing VP, Gartner. These findings are further confirmed in the most recent issue of MMI (Vol. 20:1, January 2010).


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