As we sift through the tomes of financial and industry analyst reports during the semi industry doldrums before the 3Q ramp up, there is a bit of something for everyone.The recent global semiconductor sales reports from SIA show that 2012 continues to see a steady, upward movement in sales on a month-over-month (MoM) comparison based on a three-month moving average (3MMA). SIA reported earlier this week that global semi sales for May were up 1.4% MoM, and that the recent three month tracking period, March-April-May, showed the best period increase since 2010, up 6.4%. These data aside, the macro-economic sluggishness and lingering concerns out of Europe are proving to hold growth to a more modest level. As Brian Toohey, president & CEO, Semiconductor Industry Association, was cited in the SIA brief, "Recent sales totals are in line with industry projections of modest growth for the remainder of 2012, but a sluggish global economy continues to provide substantial headwinds, limiting more robust growth."
Drilling down into more of the industry Q1 data, Manufacturing Market Insider's (MMI) June newsletter reveals that the global contract manufacturing (CM) sector had a similar sales growth period with 4.3% year-over-year (YoY) growth when Hon Hai is excluded; with Hon Hai, the number rises to 15.1%. As is well known, and as MMI confirms, "Hon Hai can exert such a large effect, a swing of 10.8 percentage point, because its Q1 sales grew by 35.5% year over year, and they represented 40.5% of the group total." Beyond the CM data, MMI's data show that when excluding Hon Hai from the data set, the EMS sector trails the ODMs by a significant amount. MMI data show that Q1 YoY sales growth for EMS providers decreased by -1.9% while ODM providers increased sales growth by 8.1% (June 2012, p. 5). The macro-economic headwinds slowing North American and EU demand are at the source of these growth slumps, but surprisingly, despite the added challenges and declines in the laptop PC sector, ODMs continue to outperform EMS. Moving forward through 2012, it will be interesting to see if EMS providers will be able to leverage the CE demand cycles for smartphones and tablets to improve their growth levels, while we also monitor ODM strategies to expand their value to OEMs and further diversify from laptop PCs.
Winding up this week's macro-level news for the industry, Citigroup Research published their "2012 Supply Chain Playbook and Q2 Preview" on July 2. While there are many points that we could discuss, tying into the above data also released this week, Citigroup continues to hold a conservative position with limited visibility into 2H12 for the semi CM sector and underscores their caution for the EMS sector, in particular, based on the macro-economic stalls that are pushing down global GDP forecasts (pp. 1, 5-25). The reason for Citigroup's conservative position is that their model indicates that the EU crisis has stalled the industry in Phase Two of Citigroup's EMS cyclical model, reducing growth for 2012-13:
Phase Two: OEMs also in-source production (i.e., shift it away from EMS) in the initial stages of a downturn in hopes of increasing utilization rates at company owned factories. By our estimate, this phase has cost the EMS industry [US] $7B to $10B in annual revenues since the macro recession began in late 2007. We note at this time most insourcing changes have occurred as well as OEM restructuring announcements. [GDP] revision have now started to stabilize. (ibid., p.5)
In short, there continue to be headwinds that restrain growth this year, although there are notable improvements. However, with continued caution, utilization rates are expected to remain conservative and push the already tight lead times even as we enter into the seasonally high-demand period of Q3. Demand for electronic end-products, however, is not weak, rather, semi penetration rates continue to climb in volume as well as across verticals. The caveat here, again – or more correctly, still – is that demand is highly correlated with macro-economic stability and consumer confidence.
For more on the diversification of end-markets and new growth opportunities for the semiconductor and electronics industry, watch for the latest issue of Smith's MarketWatch Quarterly due out early next week to subscribers (free subscription here) and the end of July through Smith's archives.