MarketWatch Commentary

Tablets, 'toughbooks', 3-D laptops and displays have dominated the industry news and analysts' blogs lately.  But, the question remains, what will adoption be by consumers given the tepid consumer economic climate?  One answer that shines positively in favor of these newer devices' adoption, and therewith success, is their use in the medical electronics market.

At this week's Healthcare Information and Management Systems Society 10 (HIMSS 10) conference, the electronics industry is in full display to aide heathcare in pushing farther into the electronic records, electronic check-in and billing kiosks, mobile networking and field care settings, patient monitoring, thin-client mobile workstations, and new procedures.  Not only new and dedicated medical electronics devices are on display, but also improved battery solutions, nanotechnology, sensors and the applications for these critical technologies.  A nice review of some of the top devices for more mainstream adoption is presented here by Channel Web. 

Additionally there is the consumer end of medical technology, whether for patient monitoring (self or automated reporting, such as this example).  Interestingly, in this sector much as we've seen with automotive electronics, the established companies are starting to feel the impact of new entrants to these markets as diversification is still par for the course in tepid waters.  We at Smith's MarketWatch will be watching the momentum and marketplace jostling.

As mentioned, and of particular interest to the MEMS and NEMS sectors, medical electronics is showing some exciting advances from nanotechnology to mobile devices and the funding from governments, such as the US ARRA among others.  Coupling this governmental support for medical electronics with the need to support these low volume high mix and highly precise markets we are seeing the medical electronics market becoming a beacon for many, as presented above. 

Another variable worth watching in the medical electronics market is the geographic diversification: will medical continue to be the dominant domain of European and American companies or will the field spread out more as more players enter?  For more on Europe and medical electronics, be sure to read this article in Smith's recent MarketWatch Quarterly. 

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That's all fantastic news.  We also know that there are numerous reports and forecasts of shortages set to continue for a handful of sectors in semi, due in part to the lean inventory management that saved many during the recession, and due to the reduced utilization levels and CAPEX at the fabs for a few years that have also reduced capacity in the market.  These variables have helped strengthen ASPs and resumption in some consumer demand has also helped orders as reflected in the strong three month moving average (3MM) book-to-bill ratios with billings at US $946.3 million and bookings at US $1,132.4 million (=1.20 ratio). 

January's positive indicator has not been matched by uniformly positive macro economic forecasts for the later half of 2010.  While we see very strong numbers for this year (Y10), the financial analysts are either getting bored with the better times or there are dips ahead in our ongoing roller coaster ride. 

At MarketWatch we've been noting the connection between semi's health and consumer demand for years.  That means, of course, that we need to think smartly about this 'rebound' year and not expect an easy upward trajectory revenue ride. 

The Information Network was reported by DigiTimes on 2/23/2010 as forecasting a "mid-year Y10 slowdown in semiconductor revenues [...].  Personal consumption will remain sluggish in the second half of the year because of a jobless recovery, further deterioration in credit, and continued weakness in home prices."  These concerns are echoed here in Manufacturing.net but with predictions moved to 4Q10.  Wall Street analysts tend to see greater storm clouds, such as this one, but as financial analysts say, "that and $2 will buy you a cup of coffee." 

Here at MarketWatch,  we'll be monitoring ALL of the information to provide you with reliable insight, as more data unfold and can be brought into a fuller analysis.  Watch especially for our next Quarterly edition in April where we'll feature the economic state for semi in the Americas.

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The lynchpin necessary to avoid such a double dip is not the US, but China.  It is the Chinese monetary and fiscal policies that are critical to the continued forward momentum for the global economy, as seen expressed by The World Economic Forum, which held it's annual meeting last week in Davos, Switzerland. 

The Davos Forum was a critical event not just for the global economy but also for semi: China reaffirmed that it is committed to "continue with accommodating fiscal and monetary policy, and make sure we have smooth macro-management, [...]. We are shooting for roughly 8% or 9% GDP growth rates," according to Zhu Min, Deputy Governor of the People's Bank of China as quoted in this transcript from the Davos Forum.

It is China's continued stimulus policies that support the broader trends in the global economy presently.  Particularly important is the driving role of emerging markets such as China and India with their significant consumer demand for handsets, computers, networks, and the infrastructure that promotes increased overall semiconductor demand, according to yesterday's SIA release.  As George Scalise, President of SIA, stated, "with improving consumer confidence and signs of economic recovery around the world, the semiconductor industry is well positioned for growth in 2010." (Ibid)

For more information and Smith's perspectives on these topics, including our recently  released MarketWatch Quarterly, consider our discussion of the semiconductor industry and the latest news about the global economic rebound here in this MarketWatch Commentary section.  In the last issue of MarketWatch Quarterly, we provided a more detailed review of China's geo-economic policies and role in the semiconductor industry here, and in this earlier piece, a review of the US stimulus policies.  Finally, we considered the role of new consumers and new electronics products for consumers in the latest MarketWatch Quarterly released last week to subscribers and next week to the public here. 

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EMS companies have been faring well, relatively speaking, and the strategic moves to diversify into new markets with important core capability links has analysts and market researchers generally more bullish than conservative. 

What is particularly interesting, as we continue to watch the ongoing EMS-ODM turf war (cf. MarketWatch Quarterly Vol. 1:1, "EMS/ODM a Mixed Market;" and Vol. 2:2, "Co-Evolution and Organic Growth"), is the varied strategies EMS companies are embracing.  As well presented in the latest MMI (Vol. 20:1, pp. 1-4) report, some EMS companies are following a new, retail path (e.g., Hon Hai's retail outlets); some are expanding to sister industries (e.g., Jabil's venture into solar panels and medical disposables); some are supporting new supply chains for the still fragmented clean/smart technologies (cf. the latest MarketWatch Quarterly Vol. 3:4, now available to subscribers and next week to the public); and some are engaging in more traditional M&A deals to expand their market reach and capabilities (e.g., Celestica's acquisition of Invec Solutions, as reported in MMI Vol. 20:1, pp. 2, 7).

Among the other trends forecasted by market analysts, we should see a resumption of more normal consolidation numbers for small- to mid-sized companies, renewed momentum for regionalization/localization (cf. MarketWatch Quarterly Vol. 2:3, "An Expanding European Microcosm" for more discussions on localization), and continued distinctions between EMS and ODM businesses but with increased "credibility to a hybrid strategy" (MMI Vol. 20:1, p.4).

The next one to three years hold promise for the EMS sector, and based on early analysts' reports for 2010, the new market opportunities may provide important growth for EMS in directions beyond the past 'turf wars' with ODMs.

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The semiconductor industry has been faring better than many industries based on 4Q09 reports.  The 1H10 forecasts continue to show the tendency for pent up demand to be strong from consumer and corporate sales alike.  However, with the loss of almost two years of CAPEX investments to support fabs, the growth that we're engaging now may prove to be a tough challenge for the industry because of these "missed investments," as underscored by Bill McClean, President of IC Insights.

According to McClean, IC Insights research and data show that despite the "worst recession in 63 years (since 1946) in 2009, flat PC unit shipments were quite an amazing accomplishment. Moreover, cellphone unit shipments were down only 5%.  Now consider that both PC and cellphone unit volume shipments are forecast to increase at double-digit rates in 2010."  This begs the following questions from the recent McClean Report: "What effect will this have on the IC industry? Are we on the cusp of an all-out IC market boom for 2010?"

IC CAGRs are forecasted in the 9% range; ASPs and revenue are set to rise across the board for memory, even for DRAM;  increased demand is expected for PCs; and emerging economies' consumers are hungry for electronics.  Underscoring this positive reality is the recently released, strong, 9%  increase in North American-based semiconductor equipment manufacturers book-to-bill ratios, now at 1.03 for December, holding onto a 6-month rise. 

The 2010 forecasts are no longer just New Year's dreams.  While exciting and welcomed news, these forecasts pose interesting challenges for the industry that must now grapple with being able to meet what TSMC calls "urgent recent increases in customer demand."  TSMC has begun both new construction and capacity expansions at their fabs in Taiwan, increased R&D spending for 2010 by 25%, and plan to hire 3,000 new staff, "primarily engineers." 

Those companies who remain from the last round of survival of the fittest now have a new, positive battle ahead.  Economic indicators are up 1.1% for December 2009 and point to economic growth this Spring.  Are we really ready?!

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EMS for Europe has been very important, and therein are found some significant opportunities.  EMS forecasts are not stellar though (as reported in Manufacturing Market Insider (Vol. 19:11, November 2009) and citing forecasts from InForum market research).   Growth has started for EMS worldwide and looks to hold steady around the 5% range +/- from 2010 through 2013; it's just going to take three years to recuperate the losses from 2008-09. 

The lag in an EMS rebound needn't be seen as negative for Europe though; growth is growth, after all.  With EMS rebounding, albeit slowly, and Europe being heavily invested in EMS, particularly specialty or niche markets, there are noteworthy opportunities for European EMS to lead in new markets and sectors.  These opportunities and markets will be explored more closely in the upcoming MarketWatch Quarterly edition due out later this month!  Subscribe here to get your copy before public release.

The EU reaffirmed it's commitment to green policies at all levels during the UNFCCC's COP15 conference in Copenhagen, Denmark in December (see here for our commentary from COP15).  While that makes for nice political talk, it does have bearing on business markets, particularly semi.  One of the important ways in which Europe continues to be a world leader is in the consumer purchase power of highly efficient appliances and consumer electronics products. 

European governments are now providing reduced or no taxes on electric cars (meaning up to 180% reduction in high tax countries such as Denmark).  Couple this incentive with eager consumers for smaller, greener autos in light of the European auto sector having a better footing than, for example, the American auto sector, you realize quickly that there is ample opportunity for European auto to lead the global electric vehicle market.  Electric vehicles are an important market for semi, moving the percent of chips per vehicle significantly higher than traditional autos.

Will European semi rebound?  That's an interesting and very important question for many companies and for both the semiconductor and electronics industries.  There is vacillating investment in Russia, there are politico-economic reasons (see above) to believe new markets hold opportunities, and there is existing consumer support for products.  Although the pace will be staid, don't they say, "slow and steady wins the race"?

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Yesterday's Mayors' Summit was easily among the most collaborative events wherein mayors from many of the world's largest urban centers gathered alongside of academics and leaders from business and industry to meet and share ideas in the old halls of The University of Copenhagen, established in the 15^th century.  ARC3 researchers and mayors agree that while COP15 debates continue, urban centers represent a central variable not just to climate discussions, but also to be the loci of change because of the population densities and increased public health, energy and transportation issues taxing these cities' infrastructure.

So, what does all this have to do with semiconductors?  Quite a lot, actually.  One of the critical issues to climate debates at these levels is people's behavior around energy use and 'smart metering' systems are agreed to be a turnkey device; particularly in the ability to facilitate behavioral change by allowing people to self-regulate, for whatever reasons they choose, their energy use. 

The heart of smart meters?  Yup, semiconductor chips.  These smart meters, along with the necessary investments beginning to roll into 'smart grids', especially in the US, are effective opportunities for improving energy efficiency and reducing energy waste, along distribution lines (the grid) as well as at the consumer level.

What's smart about the new bidirectional meters and bidirectional grid systems? Hardware, middleware and software.  We are in the midst of a new, green economy, as many leading economists here report in personal interviews conducted this week.  For the semi and electronics industry, advanced metering systems (hardware and bidirectional communication grid devices) are likely to be as important to our bright future as mobile phones and laptops have been.  Watch for more details in this Commentary space from all that's being learned by Smith & Associates' COP15 attendance over the next few weeks, and in the January edition of MarketWatch Quarterly.

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For the semiconductors and electronics industries, the agility of the otherwise conservative consumer to overcome continued poor, but improving unemployment numbers, albeit very modest.  According to The Wall Street Journal, "consumer spending increased in October by 0.7% as incomes rose and inflation remained low, boding well for economic growth. Personal income rose by 0.2% for the second straight month." (cf also here)  Furthermore, as reported in WSJ, US GDP forecasts for 4Q09 are also on the rise by almost one-half a percent, from 2.7% to 3.1%.

These are important economic indicators because we need to see improvements in consumers' economic health to support the positive forecasts for semiconductor growth today and over the coming three years.  As many analysts have identified, and as we all were painfully reminded during the past 18 months of recession especially, the consumer IS the key to health and growth in our industry.  To underscore this importance, the five growth areas in semis as identified by analysts cited here, here and here are all oriented around the daily lifestyle improvements of the consumer:  netbooks, portable navigation devices (PNDs), digital televisions (DTVs), DVD recorders, and video game consoles.

The direct correlate for improved consumer sales is the critical health of the IC sector in semi.  Sales for ICs seen as remaining at low inventory levels, according to DigiTimes earlier this week ("Taiwan IC designers expect low inventories through January," 11-24-09), but with the requirement of respectable holiday sales, globally.  Beyond inventories is the important compound annual growth rates (CAGR) which are also presently forecasted in the 20 to 30-percent range for the above listed five consumer product areas.  Those are respectable numbers but need the bolstering of consumers who have shed their skittishness and are also looking forward into a more prosperous next decade.

Meanwhile, let's keep our fingers crossed for this holiday weekend's sales results and hope that it is a good sign that Chinese New Year and Valentine's Day fall on the same day in 2010...  Why not, after all analysts and soothsayers all love numerological alignments.  Here's wishing for a happy holiday season.

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As stimulus (ARRA) money continues to fund projects intended to stimulate the US economy and workforce, and with the project mandates, particularly from the Department of Energy (DOE) and the Department of Labor (DOL), including the requirement to show measurable, positive economic impact in the short-term as well as long-term, it's time for MarketWatch to review the 'when' answer provided above.

Some of the larger grants from DOE are co-funding critical 'Smart Grid' and 'Smart Meter' projects that are not only moving the US more quickly on a renewable energy track, but are having significant stimulating effects on the semiconductor and electronics industries.

The Smart Grid, and the requisite smart meters to enable the Smart Grid, is, for semiconductor interests, essentially, a bidirectional communication system.  This entails not only an increase in hardware that now is no longer an analog device, but a bidirectional digital device, the smart meter, that also opens the floodgates to the consumer market in the form of various in-home and business devices which allow the energy consumer to directly govern their energy use in real, or near-real time.  The interactive devices, the ability of new consumer devices that can be governed, as well as the meters themselves all point in one direction:  Semi is quite certainly being stimulated and the clock has now been quite certainly started.

A cautionary note:  with SEMI's book-to-bill numbers just out, and the outlook holding steadily in positive territory (happily) but with only slow capital expenditures (CAPEX) increases, will the industry be ready and able to handle these stimulating events?

In the next issue of MarketWatch Quarterly, due out in January, watch for a focused analysis of the effects of the enactment of the smart grid and smart metering technology on the semiconductor and electronics industry. 

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