Regional Growth:

Through July 2008 it appears the economic weakness in the U.S. economy has had only a minimal effect on other regions of the world. Specifically, the U.S. economy remains very weak in automotive subassemblies and heavy truck manufacturing segments and in residential and commercial construction sectors. Since automotive electronics and consumer electronics related to new home construction make up a significant portion of the US high tech economy as it relates to manufacturing, Paumanok notes slowdowns in demand for passive components sold locally for applications in under-the-hood and passenger compartment applications; and for industrial passive components consumed for new heating and ventilation systems; large home appliances, small home appliances and residential and commercial alarm systems, smoke detectors, and related line voltage type equipment consumed in new homes.

However, specific value-added and application specific component markets continue to perform well in the United States and this is alleviating the drop in demand (somewhat) from the list revenues in the automobile and home appliance businesses.

For example, aircraft manufacturing at Boeing is up strongly for the output of the 787 Dreamliner; and demand for defense related aircraft is also up sharply. Demand from the power segment, for AC power line capacitor and industrial grade resistors and inductors is also up, primarily for applications related to wind energy, solar energy and for power transmission and distribution applications supporting coal fired and nuclear electric power generation systems. Medical electronics for both implants and test and scan applications continue to perform well as the devaluation of the U.S. dollar has made specific types of domestically produced implants and scan equipment more affordable overseas. Also domestic demand for sensor packages consumed in mining, oilwell exploration and agricultural related businesses continues to be strong as global competition for raw materials has created substantial growth opportunities for operating efficiency and for new prospecting of natural resources./p>

As noted in the table above, overall consumption of passive components in North America will be down for 2008 as forecasted; however, small domestic manufacturers who specialize in production of value-added and application specific components (e.g., high voltage and high frequency) are doing reasonably well, not only from domestic customers, but especially from overseas customers who are opting to purchase parts in the United States because of the weak dollar, which translates to lower sales prices.

The European market will most certainly register flat year over year sales growth for passive components. European production of automobiles and trucks will probably be flat overall for the year, but is performing better than their US counterparts. Aircraft production however, is up sharply at Airbus and this is helping regional demand for specialized passive components consumed in aviation power supplies and related aircraft subassemblies. New construction for residences and commercial operations is also flat in Europe and this should keep sales of power film capacitors and metal film resistors consumed in HVAC systems and large home appliances also flat year-over-year in Europe. The bright spots in Europe continue to be in power related equipment and for medical electronics. In power the focus continues to be on electronic for renewable energy systems and for efficient delivery of conventional power.

In China and Southeast Asia, which constitutes almost 70% of global consumption for passive components, demand is up for parts on a year-over-year basis by almost 10%. This is largely due to the continued movement to the production of consumer electronics with higher passive component content than previous models. So even though global unit output of handsets, portable computers and flat panel display TV sets is not as robust as was the case in CY 2007, the passive content of these devices continues to rise to support multi-function phones, flat panel displays with HDTV tuners, and multi-core processor computing systems.

Introduction:

In the first and second quarters of 2008 Paumanok Publications, Inc. Industrial Market Research conducted a significant amount of research to help capacitor customers create models that showed the variable and fixed costs associated with the production of capacitors by type. The interest level among automotive, wireless handset, computer and television set manufacturers was keen due primarily to the vision of many of these manufacturers to align themselves with those capacitor vendors who exhibited tight controls over their fixed costs and who showed the greatest knowledge in the potential for their variable costs (raw materials and labor) to encroach upon margins.

Long-Term Forecasts Remain Robust:

Overall, the forecasts for passive component consumption remain robust, with Paumanok Publications, Inc, forecasting an additional $6 billion USD in value flowing into the industry during that time period. This is primarily a result of higher passive component content, portable electronics becoming an increasingly larger portion of the total build, and operating renewable energy systems and hybrid electric transport powertrains requires high dollar value, capacitors (DC link type), wirewound braking resistors and large core inductors. In power, demand for power factor correction components for use in power supply solutions for power transmission and distribution will also grow to ensure the efficient delivery of conventional power grids. Additionally, the value-added and application-specific component markets for applications in oilwell services equipment and mining electronics will continue to grow as global resources become more limited and more difficult to locate and maintain. Demand from the medical sector also looks bright over time as the proliferation of implants expands beyond cardio-rhythm management and into pain management, and scan equipment becomes more advanced.

Note: Capacitors, Resistors, and Inductors Only

Profitability Outlook:

The profitability outlook is less certain than growth, primarily as a result of rising raw material prices. Paumanok Publications, Inc. notes that costs for mining noble and non-noble metals have risen sharply, by more than 80% in some instances, and this is affecting the costs of dielectric material production worldwide. The mining costs have been adversely impacted by rising fuel prices as have the delivery of passive components through traditional freight companies.

While most precious metals (silver, platinum, palladium, ruthenium) have seen their cost structures rise dramatically, those of the non-noble metals (nickel, copper, aluminum and tantalum) continue to have greater impact on cost structures to produce passive components because of their large volume use by the industry segments.

Tantalum prices are expected to now move-up after years of stability due to rising costs to extract the metal from hard rock mines in Western Australia. Price increases for tantalum capacitors began in June 2008 and are expected to rise throughout the year in anticipation of a higher cost supply chain.

Other materials consumed in passive component production, such as plastic film have also risen in price because plastics are a petroleum-based commodity.

Ceramic capacitors have seen little impact due to raw material price increases, although titanium dioxide materials did see price increases, as did nickel and copper costs (used for electrodes and terminations). Overall these price increases were not as onerous as price increases in other capacitor dielectrics (due partly to the high profit margins in ceramics compared to tantalum, aluminum or film capacitors). However, excess capacity to produce high capacitance ceramic chip capacitors in Japan, Korea and China brought on a severe price competition between the key manufacturers in these locations. And this caused the more profitable segment of the ceramic chip capacitor market to lose value in a global bid among Asian suppliers to gain more worldwide share during the 2008 calendar year.

Summary and Conclusions:

Overall demand looks good on a global scale for 2008. A small increase of about 6% in value is expected for the marketplace, with 10% to 15% increase in unit shipments. Price erosion will largely be limited to the high capacitance MLCC segment and the result of excess capacity and a bid for market share among Japanese, Korean and Chinese MLCC producers. Other passive component segments will either keep prices stable or (such as for tantalum) they will rise due to the impact of higher raw materials costs.

Regionally, the Americas will be down, Europe will be flat, but China and Southeast Asia, as well as a few emerging growth economies (Russia, Eastern Europe, Africa, Middle East, some South America) will be up. This will have an overall positive effect on global demand for passive components.

In terms of specific end-use segments; aircraft manufacturing remains strong (and will be so for at least 36 months); as will other specialty segments- medical, oilwell, mining, electric transport and renewable energy. In terms of portable electronics, once again the fundamentals remain sound due to higher passive component in many new designs in key segments (TV set, portable computer and advanced handset), thus higher volumes are expected regardless of global unit slowdown in the end-products produced.

Automotive production and heavy truck production will be the poorest performer in 2008, especially in North America where Ford recently announced their worst quarterly loss ever. European car production and Japanese car production are expected to be flat year over year, but China demand for cars will continue to grow, as will demand for automobiles in emerging markets- Russia, India, Viet Nam.