Persistent concerns about the war in Iraq and terrorism have dampened the growth potential of the global economy, but electronics industry executives said they still expect slow expansion as they cling to gains made over the last year.
Now that electronics companies have taken steps to bring their costs under control, stronger sales in the year's second half will hinge on political and economic factors, executives said.
"I'm optimistic the industry will see the beginning of growth during the second half of 2003, but I'm not expecting aggressive or dynamic growth," noted Roy Vallee, chairman and chief executive of distributor Avnet Inc., Phoenix. "The conflict in Iraq and other geopolitical activities are the wild cards. Depending on how these issues evolve, they will serve as the accelerator or decelerator."
Most electronics executives don't anticipate demand to come roaring back this year. In addition to the war and the threat of terror attacks, expectations are subdued because of low capital equipment budgets, continuing price erosion, excessive capacity, and the general economy's lack of strength.
"The hurdle is what happens in 2003," said analysts at Merrill Lynch & Co. Inc., New York, in a recent report. "Soft demand, low capacity utilization rates, and intense global pricing pressure are keeping a lid on prices and profitability."
While the economic outlook is uncertain, most industry executives still do not expect business conditions to deteriorate from the first quarter, which they said has lagged initial forecasts but not by much. In fact, the market has been marked by relative stability.
"We've seen our schedules firm up with our customers over the last part of the first quarter," said Tony Musto, vice president of sales and marketing at Reptron Manufacturing Services, Tampa, Fla. "I don't see a significant upside for the second half of the year, but I don't see a significant downside either, which says a lot about these times."
"We're at this point where there appears to be a stalemate in consumption," said Bruce Goldberg, president and chief executive of All American Semiconductor Inc., Miami.
Initial expectations for 2003 were a bit different. Many hoped for a strong second half to offset a slightly weaker first half, said Herve Francois, an analyst at Credit Suisse First Boston, New York.
"I don't really see companies commenting now about the second half," Francois said. "I saw companies commenting more on the second half of 2003 last year instead of this year. I haven't heard things are going to pick up, though I haven't heard things will get worse."
This view is widely shared within the electronics industry, where companies have worked hard to reposition themselves to take advantage of the upswing when it comes.
It is widely acknowledged, for instance, that inventories have been brought under control and now more closely track sales at most suppliers.
Overall, unit shipments of finished goods and components are rising ex-cept in depressed sectors, such as communications infrastructure. Nokia Corp. expects unit shipments of wireless phones to climb to 440 million this year, from about 405 million in 2002.
Passive component shipments are increasing at a 15% to 20% annual rate, said Glyndwr Smith, senior vice president and assistant to the chief executive at Vishay Intertechnology Inc., Malvern, Pa. Additionally, while average selling prices for passive components continue to drop, the rate of decline has slowed significantly since the market tanked in 2001.
"At this time last year, ASP declines were 10% per quarter," Francois said. "Now, they're 4% to 5% per quarter. If you strip out the ASP variable, unit growth has been surprisingly good."
There are other developments behind the scenes. Many suppliers said they have used the quiet period to produce a wide array of new products, many of which are forecast to hit the market later this year. Vishay, for instance, will be rolling out as many as 200 new products this year, according to Smith.
"We've been working on the technology outlook to protect the future of our company," he said. "Our customers, too, have created more time to sit down with our applications engineers to work on their product roadmaps."
Other suppliers said they have revised product lines and pushed strongly into new markets, including the growing wireless handset sector.
"We're going deeper into applications," said Frank Robertazzi, vice president of worldwide distribution at Agilent Technologies Inc., Palo Alto, Calif. "We have embedded a camera in cell phones and we're getting more blocks into cell phones. We never participated in this sector before."
Additional reporting by Spencer Chin and Claire Serant