North American Slowdown

As October’s data trickle in the various economic and electronic industry indices suggest a business slowdown in North America and Europe.

In the U.S. industrial production (Chart 1) dipped, consumer confidence fell (Chart 2), the ISM (Purchasing Managers’ Index) dropped sharply (Chart 3) and SEMI capex continued to slide (Chart 4). The Conference Board leading indicator of economic activity also declined (story below). This week we’ll receive more new information DOC’s October U.S. electronic equipment shipments, orders & inventories, SIA’s semiconductor shipments, IPC’s printed circuit orders & shipments and on Nov. 1 the latest ISM “Purchasing Managers’ Index.

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My guess is that a slowdown will be evident “across the board” in North America driven by the mortgage/housing crisis and ever higher energy costs. The fall “busy season” is now over, and we are moving into a normal electronic industry seasonal downturn overlaid on an economic slowdown.

Leading Indicator Index Declines - Data suggest U.S. Slowdown Could Worsen

The U.S. economy's slowdown could accelerate in the coming months due to rising costs and the sinking housing market. The Conference Board’s index of leading indicators fell by 0.5% in October to a two-year low, after rising 0.1% in September and falling 0.9% in August.

"The data are pointing to a continued slow economy," said the group's economist, Ken Goldstein. "It might even slow a little more after the holidays." Energy costs are major source of anxiety.

Economic Situation

As it struggles with an ever stronger euro (Chart 5) and suffers from the downdraft of the USA’s financial/housing woes, Europe’s electronics industry also appears to be flattening. Euro-denominated electronic equipment production declined slightly in September (Chart 6). Although semiconductor shipments to Europe are increasing, (Chart 7) suggests that this chip growth might be caused by inventory building. European semiconductor growth is far in excess of end market growth – a situation that normally leads to an imminent chip shipment downward correction.

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European Chip Distribution Market Slows Down (Chart 8 and Chart 9)

In Q3’07, the European semiconductor distribution market declined by 3.8%. According to DMASS (Distributors' and Manufacturers' Association of Semiconductor Specialists), members reported quarterly distribution revenues of 1.31 billion euros. Ian Bass, newly appointed Chairman of DMASS, commented: "As cycles always come back and do not exclude certain market segments, it was inevitable that the semiconductor distribution market came around to a slowdown after a long run of very successful quarters. The main reasons for the slowdown are the ongoing dollar weakness and the subsequent pressure on equipment export (our customers' business); the broad technology inventory correction over the last few quarters; and finally the massive component price differences to Asia, which has encouraged a lot of grey market activity and resulted in huge market volume just not materializing as expected. It seems as if 2007 is ending slightly negative for DMASS."

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Bass continued, "The accumulated picture for 2007 still shows many positive signs, among them a strong Benelux, Nordic and Eastern Europe. Of the big regions, only Germany remained positive with an increase of 2% to date. It is amazing to see how the German market seems to avoid erosion effects like other traditional industrial markets such as United Kingdom and France."

Japan Also Flat; Southeast Asia Facing End of "Busy Season"

Japanese electronic equipment production (just updated) is flat at best (Chart 10). PCB shipments (Chart 11) peaked in October 2006 and have been slipping since.

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	Chart 11

Taiwan/China continued to boom through October but will shortly see electronic equipment and component demand decline as part of the normal, post-holiday seasonal downturn.

Other News

DRAM Contract Prices - Minimal Chance for Near-Term Rebound (Chart 12)

Per Digitimes most PC OEMs already have sufficient DRAM stock to meet end-of-year demand and are confident of supply availability in 2007. Recent vendor stock clearance activities will just prolong the weak pricing environment in the DRAM contract market. Some industry watchers project that prices will not rebound before 2008.

	Chart 12

Although PC OEMs are cautious about their inventory, they are hoping that the expected launch of Windows Vista SP1 during first quarter 2008 will boost DRAM consumption.

SEMI Reports Third Quarter 2007 Worldwide Semiconductor Equipment Figures; Billings US$11.13 Billion (Chart 13)

SEMI reported that worldwide semiconductor manufacturing equipment billings reached $11.13 billion in 3Q’07, 1% greater than 2Q’07 and about 1% greater than the same quarter a year ago.

	Chart 13

SEMI also reported worldwide semiconductor equipment bookings of US$8.93 billion in the third quarter of 2007, 23% less than the same quarter a year ago, and 10% less than 2Q’07 bookings.

"The industry continues to see modest quarterly growth in billings," said Stanley T. Myers, president and CEO of SEMI. "While bookings appear to have peaked for the year, some regions, specifically Taiwan and China, are expected to experience significant growth given the strength of the first two quarters."

China’s Yuan Continues to Strengthen vs. Dollar and Euro (Chart 14)

China's yuan finished trading Friday Nov. 23, 2007 at 7.4060 - indicating that Beijing may be permitting faster appreciation ahead of talks with major trading partners. Traders said they expect to see more strengthening in the yuan this week as well.

	Chart 14

The yuan has strengthened 12% since July 2005, following 10 static years where the yuan/dollar exchange rate was held at 8.3.

Per a recent WSJ article, “French President Nicolas Sarkozy is due in China and is expected to comment during his visit that the pace of yuan appreciation has disappointed the European Union, China's biggest trading partner. U.S. Treasury Secretary Henry Paulson will visit Beijing on Dec. 12 and is expected to carry the same message.”

China Wants Strong Dollar

Zhou Xiaochuan, governor of the People's Bank of China, told U.S. Treasury Secretary Henry Paulson that China wants a strong U.S. dollar reported the Xinhua News Agency.

"Zhou said he told Paulson China hopes to see a strong dollar," Xinhua reported. It said Zhou was responding to Paulson's prediction of a long-term recovery of the weakening dollar, which fell to another record low against the euro Thursday.

China keeps much of its US$1.43 trillion reserves in US$-denominated assets such as U.S. Treasuries. A falling dollar erodes the value of its holdings. Financial markets are watching to see whether Beijing shifts to a stronger currency such as euros.

Worldwide white LED market to grow from US$6.6 billion in 2007 to US$7.7 billion in 2008

Per Digitimes the production value of the global white LED market will grow from US$6.6 billion in 2007 to US$7.7 billion in 2008 with 10-inch and above backlighting, decoration and display signage markets all seeing explosive growth during the period, according to industry sources.

Although first quarter 2008 will be a traditional low season for the LED market, white LED revenues will have over 20% on year growth during the quarter thanks to a widening of applications such as backlighting, automobile, lighting, digital photo frame and low-cost notebook markets, according to LED makers.

The China market will see a significant growth in the LED sector over the next few years, added the makers. The China government has invested over 2 trillion yuan (US$269 billion) to replace lighting facilities on the national highways with LED-based solutions, noted the sources, adding that the China high-brightness LED display market will also grow to 12 billion yuan in 2010.