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Walt Custer provides another timely electronic industry update. In this edition of MarketEye, he discusses the exchange rate flux, commodity prices, the status of the global food chain, and the SIA and WSTS forecasts. .

Electronic Industry Status Update

Walt Custer Nov. 24, 2008

Currency Exchange Rates - Major State of Flux Persists U.S. Dollar up 15% since summer; Yen Even Stronger

The U.S. dollar continues to strengthen against most major currencies as its trade weighted average has climbed 15% since summer ( Chart 1 ). The dollar is much stronger against the euro ( Chart 2 ), Canadian dollar ( Chart 3 ), Taiwan NT$ ( Chart 4 ) and South Korean won ( Chart 5 ). It is remaining steady versus the Chinese yuan ( Chart 6 ). A major exception to the dollar’s rising value is the Japanese yen ( Chart 7 ), which is much stronger compared to virtually all world currencies. Compared to the U.S. dollar the yen is at its strongest point since at least 1995 – severely hurting Japan’s export efforts.

Commodity Prices Continue to Tumble

After peaking at more than US$140/barrel in early summer oil prices have been in a freefall, dropping below US$50/barrel last week ( Chart 8 ). Metal prices - copper ( Chart 9 ), tin, ( Chart 10 ) and silver ( Chart 11 ) have also plummeted. Gold ( Chart 12 ) has been more stable as it is viewed as a “safe currency alternative” in times of economic turmoil.

Global Electronic Equipment Shipment Growth Continues to Slide; Food Chain Suffers

Through 3Q’08 electronic equipment shipment growth ( Chart 13 ) was negative in Japan, approaching zero in the United States and Europe and at its lowest level in seven years in Taiwan/China. OEM sales guidance for 4Q’08 suggests a 4-5% global electronic equipment revenue decline compared to 4Q’07. Electronic components and capital equipment are being hit much more (see below).

From DigiTimes: Nan Ya Printed Circuit Board believes PCB industry sales are to fall 15-25% in Q4 due to decreased retail demand for IT and communications products in the US. NPC's major customer Intel last week announced that fourth-quarter sales will see a more than 10% decline. In terms of telecommunication products, Nokia has also adjusted its global handset shipments forecast downward for the fourth quarter this year and 2009. NPC has seen a fall in its utilization rate for the fourth quarter. Flip-chip utilization fell to 80-90% from fully loaded in the third quarter, while wire-bonding substrates and traditional PCBs decreased to below 70-80%.
In light of the recent economic deterioration, VLSI Research has revised its 2008 and 2009 forecasts for both integrated circuits (ICs) and semiconductor equipment. IC sales are now expected to decline by 1.7% in 2008 to US$214.1 billion, and 2009 will be even worse with a 6.9% drop. VLSI Research cites a slowing electronics demand and an inventory correction that needs to take place to get supply back in balance with demand as the primary reasons for the revision. The previous 2008 forecast for ICs was 3.6% growth.
In the equipment sector, VLSI Research has further downgraded the 2009 forecast for both IC and display equipment. Following a 24% decline in 2008, IC equipment sales are expected to drop an additional 25% in 2009. The previous forecast was negative 12% for 2009. With IC sales expected to decline next year, chip makers have been announcing further planned reductions in capital expenditures for 2009, which will cause yet another double-digit drop for equipment.
The volatile display equipment market is on track to grow 34% in 2008, and is predicted to experience a 45% loss in 2009. This comes as a result of slowing display sales, owing to the decline in demand for flat-panel TVs. The previous forecast was negative 26.5% for 2009.

Europe Cools; Measured in U.S. Dollars Decline is Much Greater

European electronic equipment growth peaked (on a euro basis) at the end of 2007 ( Chart 14 ). Because of the weakening euro versus the dollar, US$-denominated European end market growth has plummeted - after being inflated by the stronger euro in 2006 and 2007. U.S. companies with European subsidiaries will see offshore profits plunge this year as their repatriated euro profits are substantially deflated (compared to 2007) when converted to dollars.

Japan Slows; Strong Yen and Weak Global Demand Limits Exports

Japanese electronic equipment production continues to drop ( Chart 15 ). With the yen near a 15-year high ( Chart 7 ) Japanese export are substantially more expensive – at a time when the global recession has already limited demand.

SIA & WSTS Associations Sharply Lower Chip Forecast

On November 18 and 19 the WSTS and SIA released their (substantially revised) new semiconductor forecasts ( Chart 16, Chart 17, Chart 18 & Chart 19 ) - showing the first decline in global chip shipments since 2001. The WSTS press release stated:

"The WSTS foresees a continuously growing demand for electronic products such as PCs, digital consumer appliances, mobile communications, and last but not least automotive electronics, enhanced by the increase of semiconductor content per installed system." said Dr. Ulrich Schaefer, Worldwide Chairman of WSTS. He continued, "These trends are expected to unfold in a challenging, yet generally healthy world economy. Although the present worldwide economic crisis will cause a reduction of sales in the next year, in the long run this positive trend will however continue." The current forecast anticipates a positive growth from 2010 on, peaking in 2011. The Asia Pacific region continues to be the fastest growing geographical area, due to the dynamics of both strongly rising domestic demand and the continuing manufacturing shift to this region."