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In this week’s edition of MarketEye, Walt Custer provides an economic update on the electronic industry and makes some predictions for the future .

Electronic Industry Update: 3Q’08 and Future

Walt Custer Nov. 10, 2008

Electronic Industry Update: 3Q’08 and Future

A global economic slowdown continues. North America and Europe are generally reporting negative industrial production growth ( Chart 1 ) while Southeast Asia is still expanding, but at an ever slower rate. As the Western economies sour, countries dependent upon exports to North America and Europe are seeing a sharp decrease in their manufacturing demand. For example China is now seeing job losses, bankruptcies, factory closures and the need for internal economic stimuli to bolster its economy.

Domestic Economic Data In the United States the signs of recession are abundant. U.S. consumer confidence has plummeted ( Chart 2 ), our unemployment rate ( Chart 3 ) is at its highest level since 1994, stock prices ( Chart 4 ) are approaching their post-2000 bubble “lows” and the ISM “Purchasing Managers’ Index” ( Chart 5 ) is at its all time low point. All very sobering.

World Response The global economy is responding. Perhaps strangely, the U.S. dollar has strengthened against most major currencies ( Chart 6 ). As the world economies soften the U.S. dollar is still viewed as a strong, safe currency in difficult times.

Oil prices, after skyrocketing in late 2007 and most of 2008, have abruptly plunged ( Chart 7 ). As world economic activity slows the demand for oil has also declined. Similarly copper prices ( Chart 8 ) have dropped to late 2005 levels. Inflationary pressures have declined drastically – as reflected in recent petrochemical and metals prices.

Lower Interest Rates – to “Prime the Pump” One response to an economic downturn is to reduce interest rates to stimulate economic growth. The U.S. Federal Funds Rate was recently lowered to 1%, its lowest level since June 2004 ( Chart 9 ). Lower rates stimulate the economy, but it takes time. Chart 10 shows that as interest rates decline (reciprocal increases), that it takes about 12-18 months to see a positive effect. Past history ( based upon Chart 10 ) suggests that domestic electronic equipment growth will not resume again until late 2009 or early 2010.

End Market Performance Most companies have now reported their calendar third quarter financial results. A few “biggies” (Dell, HP, Applied Materials and Medtronic) “close” their quarters “off cycle” at the end of October (rather that September), but for the most part with existing data we can estimate third quarter activity. Here are the results:

A group of 61 major OEMs representing over 50% of the world’s electronic equipment sales showed only 5% revenue growth in 3Q’08 vs. 3Q’07 ( Chart 11 ). Electronic equipment revenue growth decelerated sharply in 3Q’08, and based upon limited 4Q’08 guidance, it will likely decline 2% in the last quarter of this year ( Chart 12 ). Fortunately inventories ( Chart 13 ) remain “controlled” throughout the “food chain.” Our current downturn is not driven by the bloated stock levels that followed the 2000 bubble.

Performance by market sector is given in:
( Chart 14 ) - Business & Office Equipment
( Chart 15 ) - Instruments & Control Equipment
( Chart 16 ) - Medical Equipment
( Chart 17 ) - Military Equipment
( Chart 18 ) - Large "Communications" Equipment Suppliers
( Chart 19 ) - Internet Equipment
( Chart 20 ) - Computer Equipment
( Chart 21 ) - Data Storage Equipment
( Chart 22 ) - Semiconductor Fab, Test & Measurement Equipment

EMS Growth The EMS providers ( Chart 23 ) have also seen a slowdown. A group of the largest 11 EMS companies reported 3Q’08 growth of 12%. This relatively robust 3Q’08 growth number was inflated by Foxconn’s strong performance and Flextronics acquisition of Solectron. 8% was the average for the others. For these same companies (excluding Foxconn), a minus 5% guidance was given for 4Q’08 (based upon incomplete reporting). Chart 24 illustrates quarterly EMS growth from 2000 to the present. Notice the negative 28% “bottom” in 4Q’01.

Final Thoughts ( Chart 25 ) summarizes 3Q’08 growth by sector.

None of this information is (to say the least) very uplifting. However it provides a quantitative method for tracking the current downturn and also for comparing current to historical performance.

2009 is likely to be a difficult year with “recovery” now unlikely until 2010.