Written by Lisa Ann Cairns, Ph.D.
Given the challenges of more controlled growth measures being implemented from within Emerging Markets (EMs) and of stumbling mature markets’ drag on global trade, how do we understand the semiconductor and electronics industry's growth and long-term expansion prospects? Considering China, we can better understand what has changed, its importance, and the impact on growth opportunities for the industry.
One of the promises for sustained growth, particularly for enterprise and consumer electronics (CE), was escalated demand from emerging markets' booming businesses and new middle classes. While this promise is still becoming a reality, concern has lingered that the troubles facing the US and European economies have dragged down the rest of the global economies. For the emerging markets there is a slightly more complicated, but also more positive, set of challenges and opportunities that is affecting their growth, particularly the largest market among them, China.
The emergent growth question
Depressed demand in the US and EU is certainly dampening global demand for goods and services of all types. That much is simple and straightforward. Once there is a secure rebound path for these major economic blocks, there will be more confidence from within both the business and consumer markets globally, which will improve demand levels and hold cycles and seasonality more in check for everyone.
Naturally, depressed demand in the mature economies hasn't been a positive development for the emerging markets (EM) of Brazil, Russia, India, China, and South Africa (BRICS) or those of Malaysia, Indonesia, South Korea, and Turkey (MIST). But, just as stimulus was and is needed for the mature markets to stabilize and resume growth, similarly, the EM were in need of more controlled growth to prevent an overheating and inflationary implosion. In response to the imbalance that was beginning to show, various EM governments put fiscal and economic controls in place in 2010, but – as any economic plan takes time to come to fruition – the effects have only begun to be noticed this year. The Economist sums up the economic brakes that were implemented:
To squash price pressures they [EM] raised interest rates, curbed speculation and allowed their currencies to appreciate. With a lag, that tightening has had the predicted result. […]
Fortunately, policymakers in the emerging world have plenty of scope to respond. Whereas target interest rates of central banks are near zero in America, Japan and Europe, they average almost 6% in emerging markets. Fiscal stimulus is a luxury few advanced economies, whose budget deficits average 6% of GDP, can afford; it is still an option in many developing economies, where deficits are a more manageable 2%.
Economists estimate that 2012 GDP growth for the US will hover close to 2.1%, while the prospect for growth could be as much as 3-4% in the next five years, according to the IMF and The Conference Board, as discussed in this FinancialTimes article. On the other hand, the EU is still looking at a flat GDP for 2012, or even possibly a contraction of up to -1%, depending on what the fourth quarter brings (see IHS Global Insight summary report). The importance of these mature market GDP points is that sluggish trade and lackluster demand will continue and affect trade imbalances as a result (see SupplyChainBrain for a summary of this impact).
Despite the economic malaise of mature markets, BRICS growth is still forecast in the 5-7% range. The ability to sustain a 5-7% GDP range signifies a significant growth market, particularly in light of the global macroeconomic situation. Importantly, though, with the pullback of the mature markets from growth support, the remaining forward movement is actually more attractive for EMs because it increases a focus on organic, internal growth that is even more likely to be sustainable for those nations, long-term. The fact that EMs are projected to see these healthy growth levels is also further evidence of the EM decoupling that was noted during the 2009 global recession (see this issue of MarketWatch Quarterly for more on decoupling).
Growth prospects, same but different
Given the challenges of both more controlled growth measures' being implemented from within the EM and the drag on global trade as a result of the stumbling mature markets, how do we understand the prospects for the semiconductor and electronics industry's growth and long-term expansion? If we consider the situation for the leading EM, China, in terms of potential medium- to small-business sales, CE sales, and manufacturing locations, we can better understand what has changed, how that is important, and what the impact is likely to be on the mid- to long-term growth opportunities for the semiconductor and electronics industry.
Perhaps the biggest questions regarding China's economy are: (1) What is China's growth and economic potential? And (2) What should we make of China's economic slowing in terms of electronics growth opportunities?
While China is certainly an important and noteworthy global economic power, and while it will likely one day come head-to-head with the US, presently China's GDP of US $7.3 trillion is still barely one-half that of the US's GDP of US $15 trillion, according to a review in Bloomberg Businessweek. Percentage-wise, China's GDP has fallen from its previous 9-10% growth levels to a more reasonable 7.5% level, according to market research from Citi Research Economics, "Emerging Markets Macro and Strategy Outlook," 27 July 2012, pp. 3-5, 20, ff. The move down to the 7-8% range signals a longer-term rebalancing of the Chinese economy to a position that is more sustainable in the long term. In economics, perception alone does count for quite a bit, and the global perception of China's importance is certainly growing. With that perception of economic power gains comes an increased effect on markets when there are economic reports of Chinese economic shifts, particularly any trade imbalances or slowdowns. In this regard, China is quickly reaching the point where its economy is having an effect on the real and psychological drivers supporting or limiting global demand for goods, especially for electronics components and finished products (see, for example, China's changing global trade positions from Seeking Alpha).
Electronics demand drivers strong
China itself continues to grow (despite a more normalized pace and inflationary issues) as demand drivers supporting China's growth are generally favorable, especially for small- to medium-sized business computer and CE devices. Importantly, though, Chinese consumers favor domestic brands. Lenovo and Acer are the leading PC OEMs in China, where PC shipments are very strong and set to rise at a level three times that of the global market, according to iSuppli:
PC shipments for consumption in China for 2012 are projected to reach 83.6 million units, up 13.1 percent from 73.9 million units last year. In comparison, global shipments are set to increase by only 4.4 percent this year.
Domestic shipments of both desktop and notebook PCs to the Chinese market have been growing at robust double-digit rates for several years, and the healthy pace of expansion is set to continue for at least two more years before the market moderates slightly to a 9 percent increase in 2015. […]
China's export PC sector is even bigger than its domestic counterpart. Full projections for this year are not yet available, but Chinese PC makers last year exported a total of 234.1 million notebooks and 37.2 million desktops.
These data underscore two important points: (1) China's economy, while slowing in its overall growth level compared to previous years, is still solid with a strong demand component, unlike the mature markets; and (2) China, similar to many other EMs, continues to be an important growth region supporting the semiconductor and electronics industry sector and semi's overall growth numbers.
If we consider the domestic situation for electronic components and end-product manufacturing in China, it goes without saying that China continues to be the leader in terms of manufacturing bases for our industry. Furthermore, expansion west into inland China continues to grow in response to reducing costs and leveraging logistical reach to the growing regional demands of Asia.
Among the growing subsectors are the display and panel manufacturers in China, which saw a late entry to the overall LCD market, but, since this summer, have surpassed the million-panel shipment number on a monthly basis, indicating a growing supply chain base, as detailed by DisplaySearch. Presently, Chinese panel makers hold roughly 17% of the domestic market, while Taiwanese companies hold 47% and South Korean companies 32%, according to the same report. As DisplaySearch notes, "There is much discussion about the maturity of the LCD and TV industries, but the rise of China could lead to a rejuvenation, and more importantly, a reshaping of the business model."
One of the positive aspects of falling average selling prices (ASPs) for components and electronic end-products is that what is lost on the selling price in the mature markets can, for some sectors, be made up for in volume in the EM, where lower prices for improved devices are demanded. Not only is there a second wave of TV replacement from the EM sector demand for lower-cost but better quality product, but the situation of multiple generations living under one roof also increases the demand for multiple devices to access content, which means increased support for mobile devices, as cited by a recent DisplaySearch report.
Mobile devices are certainly continuing their global penetration, and, as the latest iPhone5 hits many countries this quarter, the trickle-down of price cuts for older-model smartphones has increased demand for low-priced, dual-core smartphones, especially in the Chinese market, as tracked by Credit Suisse, "Asian Daily: China Smartphone Sector," 31 July 2012. Specifically, Credit Suisse notes that there is rapid adoption by many Chinese-branded and whitebox smartphone manufacturers: "Implications are (1) even faster proliferation of low cost smartphones – one of the few upside unit drivers in tech now, (2) more competitive low-end of the market, and (3) upside volumes for direct component beneficiaries, notably Mediatek, TXC, AAC Acoustics." Again, this type of second-life for maturing components and end-devices in the semiconductor and electronics industry is, as Credit Suisse points out, "offsetting mature product weakness […]."
Growth – slowed but still steady
Concerns for continued growth for China, as well as the entire EM group, are certainly easy to find in the wider press. However, by considering the example of China more closely, the level of worry ought to abate some, for our industry in particular. Considering the significant amount of print on China's GDP fluctuations, when taken into a global macroeconomic perspective, the expected 7-8% GDP growth for this year and likely increase to 8-9% growth in 2013 are relatively strong.
It is not that there are no worries for China or the rest of the EM nations, particularly due to the negative impact on EM trade from the lingering concerns over the US regaining a strong economic footing, and the continued instability from the EU. When we consider that the EU purchases 19% of China's exports, it is no wonder that what happens in the mature markets is affecting the rest of the global economies, as detailed recently in The Economist. While the EM have, like their mature market brethren, seen a fall in their growth predictions, the consensus remains that GDP growth in the 5-7% range can still be had for BRICS, in spite of the slowdown in trade and exports. And, when we look to MIST and the additional EMS, the average GDP forecast is in the 5% range, as noted by Bloomberg Businessweek.
Importantly, though, China and much of the EM group continue to buoy many industries and sectors in terms of demand and purchase strength, from automotive to industrials and the wider semiconductor and electronics industry. For semi, there are a few important takeaways that point to the still-substantial growth opportunities in EM. Notably, falling ASPs for mature components and waning end-products may deplete margins in the developed markets, but the volume sales for these lower-cost items can more than make up for the margin losses. The reason is simply because, once the ASPs are low enough to be within EM purchasers' reach, the demand for these low-cost, next generation devices and components strengthens for both enterprise and CE.
The EM regions are still ripe with emerging middle classes and new enterprises in need of higher-quality, improved, and expanded feature sets, as well as multiple connectivity options to access content and participate in growing economic enterprises. The way this demand is met is through the sale of these lower-priced electronics as they phase out of top demand in the mature markets. These are positive points for our industry, ones that we can continue to grow on through volume increases and an awareness of the demand drivers within the EMs.