The year 2000 was exceptional for the electronics industry in many ways. It opened with fears of a Y2K crash, then the sector's revenue, stock value, and capital investments soared to lofty heights before plunging late in the year.
The first half of 2001 will be spent recuperating from last year's whiplash effect, with the electronics market beginning a measured transition to a more manageable growth andinvestment pace, according to industry executives.
The problems that scarred the industry in the dying days of 2000 won't go away easily despite steps already being taken to relieve pressures on revenue and earnings, analysts said.
High inventory levels at distributors, contract electronics manufacturers, and even some OEMs fabled for hands-off components management remain a concern, particularly after Solectron Corp. announced its results in December. The top-tier CEM's inventory rose to a staggering $4.6 billion in the quarter ended Dec. 1 from $3.8 billion in the prior quarter.
The components scarcity that initially prompted Solectron to accumulate products in-house is gradually easing but some constraints still exist, according to Koichi Nishimura, chairman, president, and chief executive of the Milpitas, Calif., company.
"We're working hard to return to our normal just-in-time business practices, and we're focused on actions to improve inventory metrics," Nishimura said.
In the semiconductor world, concerns that a downturn could be lurking will dominate the industry during the first half of 2001, analysts said. The year is not going to be all doom and gloom, however, because the industry is not in any danger of contracting and will actually expand, albeit at a slower pace, they said.
"Excess inventories and reduced capital spending are certainly problematic," said Joseph Osha, an analyst at Merrill Lynch
& Co. Inc., New York. "However, we see little evidence to support a multiyear downturn scenario."
Economists played down fears about the global economy, which Bear, Stearns & Co. Inc., New York, projects will only grow 1.3% in nominal dollar value in 2001, down from 3.2% in 2000 and 4.5% in 1999.
"Much of the world economy is still in reasonably good condition," said David Malpass, chief international economist at Bear, Stearns. "The U.S. enjoys low inflation and high levels of employment and productivity growth, Europe continues relatively strong, [and] China is growing strongly and is somewhat insulated from Asia's dip."
Much of what's in store for 2001 is still unknown because it has so far been hard to determine the amount of inventory OEMs and CEMs have piled up and also due to difficulties gauging consumer demand for finished equipment. Industry executives said they are bracing for a bumpy ride in the first and second quarters, after which the electronics market should resume its upward swing.
That's the good news. The flip side, according to more bearish observers, is that previous forecasts have fallen flat so often that the latest predictions must be viewed with a level of skepticism. Also, as the electronics industry discovered last year, the sector has grown too large to completely avoid being affected by problems in other sectors of the economy.
The semiconductor market, for instance, ballooned to more than $200 billion in 2000 from $50.5 billion in 1990, while the global telecom equipment market is expected to more than double by 2003 to $593 billion from $260 billion in 1998.
And, by all indications, the U.S. economy, which remains the driving force for global growth, is headed for some sort of landing this year. Whether it crashes hard or negotiates a soft touchdown will be crucial to global economic growth and the electronics industry's continued expansion, according to economists.
"Financial conditions have tightened, [high] energy prices hurt firms and consumers, the economy is slowing, and inventories [are] climbing," said William Dudley, director of U.S. economic research at Goldman, Sachs & Co. Inc., New York.
So what does 2001 really hold in store for the different areas of the electronic components market? Interviews with industry executives conducted late last year indicate that expectations are generally muted, with limited hopes for strong revenue growth in the first half of the year.
End-market demand is a major concern for PCs, telecom, and consumer equipment OEMs, while component suppliers said they expect to face some pricing pressures while struggling to strike a balance between supply and demand.
These fears mask the fact that the electronics industry is still a growing sector, and even the PC segment will likely grow at least in the upper single digits this year, analysts said.
"As sales and order momentum has slowed in recent months, investors are left to wonder whether they're facing a dip or a cliff in the electronics industry," said Jerry Labowitz, a Merrill Lynch analyst. "Our view is that the robust rates of expansion experienced in 2000, which were the best in recent memory, will be followed by a relatively good growth year in 2001."
If the global electronics industry is bracing for a hurricane, CEMs see themselves being called to action to construct more bunkers as OEMs whittle down production costs by outsourcing more of their manufacturing. Solectron, the No. 1 global CEM, expects its fiscal 2001 revenue to exceed $23 billion in the year ending Aug. 25 from about $14 billion in the prior fiscal year.
Inventory problems have only slowed CEMs' growth, not derailed it, analysts said. Even as the economy slows down, major CEMs can expect their revenue to climb as much as 20% in 2001, they said.
The global CEM market is a $382 billion opportunity that is only about 20% penetrated, according to Technology Forecasters Inc., Alameda, Calif. OEMs that currently outsource and those hesitating on the sidelines will be forced to tighten their belts in 2001 and turn to outsourcing as a cost-effective tool, the research firm said.
"There's so much outsourcing to be done," said Scott Heritage, an analyst at UBS Warburg LLC in New York. "Everyone will grow, but the question is which segments will grow the fastest?"
Communications and networking were the darling markets of Y2K and analysts expect that trend to continue well into 2001. Also, as more Japanese OEMs seek to emulate their more nimble North American and European rivals, they'll be forced to divest more plants to CEMs, analysts said.
"Flextronics [International Ltd., a Singapore CEM] is particularly well-positioned to cater to the wireless handset sector with its industrial campuses strategically located in low-cost regions, such as Southeast Asia, Central Europe, and Latin America," said William E. Cage Jr., an analyst at First Union Securities Inc., in Nashville, Tenn." The long-term fundamentals remain positive for the EMS industry and trends should continue to drive long-term sales growth."
During the past year, tightening component supplies forced some OEMs and CEMs to forecast product requirements 20 weeks in advance. Distributors said some of their customers double-booked orders to keep production lines open, which eventually led to excess inventory when demand slowed in the fourth quarter.
Based on current expectations for a soft landing in the economy, distributors hope to resolve the inventory overload problem in the first two quarters of 2001 and end worries over whether this is a short-term correction or a full cyclical downturn.
"The word on Wall Street is they're not sure if it's a correction or a downturn," said Arthur Nadata, president and chief executive of Nu Horizons Electronics Corp., Melville, N.Y.
The feedback from suppliers is that 2001 looks promising after the first two quarters, according to Nadata, who expects his company's revenue to grow at double the market rate. Following the inventory adjustment, the distribution market should grow between 15% and 17%, compared with the 33% to 35% experienced in 2000, he said.
Robert Damron, an analyst at Tucker Anthony Cleary Gull Inc. in Milwaukee, is more optimistic and estimates a re-acceleration in the economy and technology spending, which he said will push distributors' average growth rate to 20% in 2001.
"Approaching 20% growth seems reasonable, but it may start out a bit slower in the first quarter than first anticipated, and then accelerate as the year unfolds," Damron said.
The recent slowdown in the electronics industry could actually be a sort of blessing in disguise for passive-component and power-source suppliers, many of which spent the past year scrambling to keep up with surging demand. Industry executives said they are focusing on bridging the imbalance between component supply and demand and are not too worried about any temporary sales declines.
"The first half of 2001 will not be as bullish as the second half of 2000, [but] we're not losing any sleep over it," said Joe King, president and chief executive of Molex Inc., the Lisle, Ill., connector manufacturer.
In the connector segment, the automotive and PC industries have been hurt by declining demand, King said. But the telecom and datacom markets, which now constitute 22% of Molex's business, continue to do well. "We're expanding our production tooling for connectors used in cell phones," he said.
To address supply constraints in certain key markets, including the automotive segment, Molex is opening a new plant in Slovakia and doubling capacity at its Shanghai plant that builds connectors for PCs, consumer electronics, and cell phones. Currently, the lead times for some of Molex's products are as long as 16 weeks but "by the spring, lead times should drop to four to eight weeks," King said.
The world of switches and relays has also been beset by part shortages, but the severity depends on the type of part. For instance, power relay sales have slowed considerably in recent months, according to Steve Massie, product manager for power relays at Omron Electronics Inc., Schaumburg, Ill.
"Demand for power relays went gangbusters in the first half of this year, but has been flat recently because of the lagging markets in automobiles, appliances, and consumer electronics," Massie said.
However, there's no slack in demand for electromechanical relays, according to Mike O'Brien, product manager for low signal products at Omron. "There's little capacity to serve new customers in the near future," he said.
In power supplies, much of the growth activity centers on the high-density, high-power DC/DC converter market where the strong communications market-both wireless and broadband-is driving sales, according to Dave Hage, president of the AC/DC power division at Power-One Inc., Camarillo, Calif.
"In general, there'll still be some shortages of high-density DC/DC converters over the next six months," he said.
Prices for high-density DC/DC converters have been edging up, too, according to Hage. Prices of low-power DC/DC converters have risen a little more slowly, while AC/DC switching supplies have held steady on pricing.
Part of the problem for power-supply vendors is their products' reliance on discrete passive components-capacitors, resistors, and transformers. Shortages of these parts have further exacerbated the lead times for power supplies, which for Power-One's key customers presently run from 12 to 20 weeks.
Power-One said it has expanded its production capacity, now approaching 1 million sq. ft. of manufacturing space worldwide. Much of this space is in regions where manufacturing costs are lower, such as the Dominican Republic.
Meanwhile, despite rising inventory issues, passive-component makers said they are still scrambling to add capacity to satisfy pent-up demand for certain products.
"We still have allocated capacity in a number of capacitors, resistors, resistor arrays, and resistor/capacitor arrays," said Glyndwr Smith, senior vice president at Vishay Intertechnology Inc., Malvern, Pa. "Right now, our lead times are six to eight weeks for strategic customers, and eight to 12 weeks for distribution."
There is light at the end of the tunnel, however. Smith sees a slight softening of the component shortages in areas like small-case tantalum capacitors, though larger tantalum capacitors remain in short supply.
The myriad shortages of passive devices have resulted in higher prices, and that shows no signs of letting up. Vishay's Smith expects nominal price increases of 3% to 5% in the first half of 2001.
Capacitor shortages have also plagued Kemet Electronics Corp., Greenville, S.C. "In particular, the supply of 1206 ceramic and D-case tantalum capacitors is inadequate to meet demand," said Sandy Beck, vice president of marketing and quality. The lead times for these parts were much longer than the four to six weeks for smaller capacitors such as 0402 ceramic and A-case tantalums, Beck said.
Beck attributed the shortage of tantalum capacitors to a scarcity of tantalum powder used in manufacturing the products. So acute is the tantalum shortage that Kemet in November formed a joint venture with Australasian Gold Mines NL, a mining company located in Nedlands, western Australia, to fund exploration and development of additional sources of tantalum.
Even so, Kemet is forecasting a slowdown in demand at the beginning of 2001, which should end once manufacturers work their way through stockpiled inventory, Beck said.
"We're experiencing a widespread inventory correction by our customers now," Beck said. "It should be over by the end of the first quarter, but if it persists beyond that, we'll see a reduced demand in 2001."
As was the case last year, OEMs, CEMs, and distributors will remain in the forefront of implementing advanced supply-chain techniques, analysts said. The likely course of action will be to build on initiatives focused on improved integration, collaboration, and communications with trading partners, according to Karen Peterson, research director for Integrated Logistics Strategies, Research and Advisory Services at Gartner Group Inc., Dallas.
For the large OEMs, the emphasis will likely be on developing platforms to enhance product-design collaboration and demand planning, Peterson said. They will also be looking to link e-procurement systems internally and more efficiently coordinate with manufacturing partners, she added.
"The large OEMs will be working on fleshing out their supply-chain strategies, so that means working more in collaboration with trading partners both in collaborative design and planning," Peterson said.
Integration will be the primary supply-chain objective for CEMs in the coming months. Having acquired a number of manufacturing plants running on a slew of different software platforms, CEMs will spend much of this year making sure all of their facilities are integrated on the same back-end systems, she said.
Distributors are also expected to sharpen their e-commerce plans by paying greater attention to their Web operations. Component suppliers and foundries are not far behind, however. Although they have not been as aggressive as other electronics industry players, their primary goal this year will be to create better visibility in product pipelines, according to Peterson.
As the tables turn away from allocation, the loosening of supply will also impact the way supply-chain managers handle their responsibilities, noted John Ciacchella, a consultant at A.T. Kearney Inc. in Santa Clara, Calif.
"Supply-chain managers' jobs will change from chasing around parts and expediting products to working in an environment that's more stable," he said. "They'll have more time and flexibility to re-evaluate their supply base and look into ways of improving their supply-chain practices."
One area of improvement that may be a focus point is greater collaboration with suppliers and OEMs, which will be aided by new software tools that have hit the market within the last several months, he said.
"There are collaboration tools available now that weren't available a year or two ago," Ciacchella said. "As supply loosens up, there will be better opportunity to look at the tools they have in their toolbox and experiment with new ones."
Observers said that product design collaboration also will be of growing interest to companies this year.
"The whole area of collaborative product design will be a big issue. It's a massive and virtually untapped area," said Mike True, a London-based European supply-chain lead partner for the electronics and high-tech group of Accenture, formerly Andersen Consulting.
And unlike in previous years, when design information was considered proprietary, a shift in attitudes, particularly between OEMs and their manufacturing partners, is taking root, he added.
"Contract electronic manufacturers see this as a higher-margin service offering they can provide to their OEM customers, and OEMs are more confident about being able to release that information to the CEMs," True said. "If they collaborate on these areas and they can take two, three, four, or even five weeks off the design cycle, that impacts time-to-market goals."
With reporting by Bolaji Ojo, Spencer Chin, Laurie Sullivan and Claire Serant.