Taiwan/China Industry Update

Sales of Taiwan-listed electronics companies (most with manufacturing in China) showed the expected sharp seasonal winter downturn in December (Chart 1). Revenues of a composite of 101 Taiwan-listed OEMs peaked in October and November, following normal pre-holiday season order fulfillments. Based upon historical seasonality their revenues should “bottom” in February 2008 and then remain rather flat until about July, when the next “fall busy season” begins. Relative to 4Q’06 their combined sales were up 26.8% (Chart 2), but their growth is slowing. Presumably (in addition to seasonal effects) a softening of global end market demand is taking its toll on consumer electronics sales.

	Chart 1

	Chart 2

ODM Sales up 33% in 2007

2007 was an excellent year for Taiwanese/Chinese electronics companies. A group of 17 large ODMs (Chart 3) enjoyed a 33% increase in sales in 2007 vs. 2006. Foxconn, Quanta, Asustek & Compal led the charge with incredible annual growth rates for mature companies. However, these ODMs have also moved into their post-holiday “slowdown” season (Chart 4).

Component Demand Wanes

Electronic component demand is also softening. Taiwan’s chip foundries (a leading indicator for SIA global chip shipments) reported a large December revenue decline (Chart 5). It will be interesting to see if SIA’s December shipments (released about February 1) follow the chip foundry trend. PC motherboard makers (Chart 6), flat panel display makers (Chart 7), package & test companies (Chart 8) and passive component suppliers (Chart 9) all saw December sales declines. Memory chip makers (Chart 10) were also hit last month - but their revenues have been sliding since early 2007 due to overcapacity and severe price erosion.

	Chart 3

	Chart 4

	Chart 5

	Chart 6

	Chart 7

	Chart 8

	Chart 9

	Chart 10

PCBs – Controversial Findings?

An analysis of Taiwan-listed printed circuit board producers monthly revenues yielded some unexpected findings. While a composite of 8 of the largest and longest standing Taiwan-listed PCB makers (Chin Poon, Compeq, Gold Circuit, Tripod, Unimicron, Unitech, Vertex and Wus) had 4Q’07/4Q’06 growth of +16%, a broader composite of 26 PCB producers (including the “+16% group”) was down 9% in 4Q’07 vs. 4Q’06. Per Chart 11, the late 2006 “Anticipated Vista Operating System” PCB “bubble” in Taiwan/China was followed by disappointing actual Vista PC demand and a sharp downward order/inventory correction in early 2007. The net result suggests that PCB production by Taiwan-listed manufacturers actually declined in 2007 (versus the 2006 bubble). This is probably a controversial conclusion but (Chart 11) supports it. I would welcome reader feedback. Send it to walt@custerconsulting.com

Rigid copper clad laminate demand (Chart 12) dropped sharply in December (much more than PCB shipments) suggesting that PCB makers were reducing their inventories in preparation for weaker board demand in the coming months.

	Chart 11

	Chart 12

Some Industry News

Gold Sachs Sees U.S. Recession in 2008

Goldman Sachs expects the U.S. economy to drop into recession this year. It predicts that real GDP will contract by 1% on an annualized basis in both the second and third quarters. For all of 2008, the Goldman said GDP would rise by 0.8%. It also predicts that the unemployment rate will rise to 6.5% in 2009 from the current 5% and that the Fed will cut interest rates significantly. Source: Reuters

DRAM pricing shows sign of stabilizing in early January

According to DRAMeXchange, contract quotes for 1GB DDR2 667 DRAM modules stopped their recent decline to stabilize at US$17 in the early January. Average DRAM capacity per PC in 1Q’08 is estimated at 1.5-1.7GB, up 10% compared to 4Q’07. However, DRAM production capacity will also grow 10%. With the average DRAM capacity in high-end desktop and notebook PCs increasing to 3-4GB in 2008, this will help also increase overall DRAM usage, while low-cost PCs will also help to digest excess capacity. Source: Digitimes

DRAM Testing & Packaging Houses to Cut Quotes By 5% in 1Q

Despite contract prices for DRAMs that show signs of stabilizing in the first half of January, the stiff cost pressure that DRAM makers face has pressured back-end houses to cut their quotes by an average of 5% in 1Q’08. Source: Digitimes

Asustek completes spin-off

Asustek Computer completed its planned spin-off Jan. 2, 2008. Asustek has now become a pure brand company after transferring ODM related operations to newly formed subsidiaries, Pegatron and Unihan Corporation.

Copper Prices Stabilize (Chart 13)

	Chart 13

Cochilco, Chile's state copper commission, forecasts that the 2008 world copper price would average $3.10/lb compared to $3.23/lb in 2007. Cochilco's VP Eduardo Titelman expects overall copper supply will reach 18.4 million tons this year, just short of a predicted 18.5 million tons in global demand, especially from China. He projected as far back as November that copper ore supply would stay tight in 2008 with high prices as the market remains vulnerable to mining disruptions. Source: Purchasing Magazine & Reuters

Japanese SEMI CAPEX 08/09 World Shipments Forecasted to Drop 6%

SEAJ predicted that global sales of Japanese semiconductor equipment would fall 6% in the year starting April ’08 following record sales this current business year, reversing its July forecast of 11.5% growth. The Semiconductor Equipment Association of Japan also said it expected sales of Japanese equipment for making flat panel displays to jump 46% next business year, raising its previous estimate of 30% growth. Source: Reuters