Sobering Economic News Abounds

Repercussions of the sub-prime mortgage mess continue to spread globally. A combination of:

• Rising oil prices (Chart 1)
• Declining home sales & prices (Chart 2)
• Prospects of much higher “adjustable” mortgage rates
• The inability for many consumers to refinance to “take money out of a home” for other purposes
• The recent stock market plunge have combined to reduced liquidity for discretionary spending and lowered consumer and business confidence. The holiday buying season for consumer electronics is definitely at risk.

	Chart 1

	Chart 2

In an effort to bolster the U.S. economy the “Fed” dropped rates but a byproduct was further weakening of the U.S. dollar (Chart 3 and Chart 4). Major dollar holders such as China are becoming increasingly nervous about U.S. dollar deflation, causing them to consider diversifying their portfolios into euros and other more stable currencies. This will put further downward pressure on the dollar. The beat goes on!

	Chart 3

	Chart 4

Global OEM Sales Up 10% in 3Q’07, Component Inventories Drop

Not all third quarter financials have been released yet but with more than 95% of the companies in our multinational sample now reporting we can provide some good estimates of third quarter performance. Using composite sales, net income and inventories reported by 61 major global electronic equipment makers (Chart 5) we see that both sales and income rose 10% in 3Q’07 versus 3Q’06 while inventories remained in control. Since these 61 companies generate about 50% ($800 billion of the world’s $1,600 billion electronic equipment sales) this chart provides a good pulse of 3Q’07 business activity.

	Chart 5

Inventories compared to sales dropped sharply for semiconductor and EMS companies (Chart 6). The early-2007 component inventory bloat appears to be behind us.

	Chart 6

Electronic Equipment Sector Performance

In 3Q’07 a composite of 6 major military electronics companies (Chart 7) reported a 9% sales increase compared to 3Q’06. Instruments and control equipment revenues increased 8% (Chart 8), large communication equipment vendors climbed 9% (Chart 9), computers rose 10% (Chart 10), storage devices were up 22% (Chart 11) and chip makers sales climbed 9% (Chart 12) and as noted earlier the ratio of semiconductor inventories/sales (Chart 13) declined from its 1Q’07 “bubble.”

	Chart 7

	Chart 8

	Chart 9

	Chart 10

	Chart 11

	Chart 12

	Chart 13

EMS & PCB Growth Continues – Mostly in Southeast Asia

A composite of the ten largest EMS companies reported an 11% revenue increase in 3Q’07 (Chart 14). Foxconn’s +36% (Chart 15) and Flextronics’ +26% (Chart 16) led the charge.

	Chart 14

	Chart 15

	Chart 16

A composite of seven large Taiwan-listed ODMs (Chart 17) continued their rapid growth (up 41% in Aug-Oct 2007 versus Aug-Oct 2006); however, their revenues now appear to be “seasonally peaking” following their normal autumn “pre-holiday” sales surge.

	Chart 17

Taiwan-listed printed circuit makers (most with major manufacturing in China) recovered from their early 2007 doldrums and followed the ODM companies upwards in sales growth (Chart 18). Profits improved (Chart 19) to levels that would make most North American and European PCB producers envious!

	Chart 18

	Chart 19

Looking Forward

(Chart 20 and Chart 21) summarize consensus growth forecasts for the global electronics “food chain” for 2007 and 2008. The “sub-prime” fallout has recently caused various prognosticators to inject a more cautious outlook into 2008 growth prospects.

	Chart 20

	Chart 21