MarketEye: Market Worsens for Passive Component Industry

02.09.2009 // Posted by: Dennis Zogbi // Posted in: Articles, Passives

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Fiscal Year Ending March 2009 Forecasts

Passive component revised forecasts for the 2009 fiscal year ending in march denote an 18% drop in global value. Capacitor revenues declined by 18.4%, resistor revenues dropped 15.5%, and inductor revenues declined by 18.3% for the fiscal year beginning in March 2008, according to a new study from Paumanok Publications, Inc. titled “Passive Electronic Components: Global Market Outlook: 2009-2014.”

The global passive component market was down slightly for the September 2008 quarter due to price erosion and regional competition among MLCC makers in Korea, China, and Japan. In November month-to-month decline in revenues were the worst in decades, and the November to December month-to-month declines were even more dismal in both value and volume shipments. This carried through to January 2009, mitigating the entire fourth quarter of the fiscal year and causing an 18% overall drop in year-over-year revenues.

Not Only Price Erosion, but Lower Shipment Volumes

The declines in November 2008, December 2008, and January 2009 in the passive electronic component industry are revealing because passive components are ubiquitous in their use in all electronic devices. They are a litmus test for the health of the global high-tech economy. The decline in passive component shipments from manufacturers was so swift in dollar value and brought an initial price erosion. This was compounded by the loss in volume shipments in the December quarter, signifying excess product in the supply chain and a backlog of unsold product.

The loss of volume demand from the customer, especially for MLCC and thick film chip resistors in the December quarter, caused available capacity to increase. This encouraged downward pressure on price, and effectively drove much of the value out of the industry for the second half of the fiscal year.

No Components are Spared Decline

The components tracked in the “Passive Electronic Components: Global Market Outlook: 2009-2014” study include ceramic capacitors, tantalum capacitors, aluminum capacitors, DC and AC film capacitors, thick film chip resistors, resistor networks and arrays, wirewound resistors, metal film and foil resistors, tin oxide and carbon linear resistors, chip inductors; ferrite beads, array inductors, and wirewound inductors. All passive components experienced a sharp revenue decline in the December quarter. While the U.S. automotive sector received global attention because of the financial crisis of the big three U.S. automotive companies, the real impact on passive components was the backlog of inventories in handsets, computers and TV sets, which now clog the end markets. These three markets account for more than 70% of passive component revenues in 2009. Working through those inventories will be the task of the retailers and wholesalers in 2010, and this will be at the expense of net new sales of passive components.

Most World Regions Hit Hard

The downturn in the high-tech economy for the fiscal year ending March 2009 will be most pronounced in Western Europe, the United States, and Japan. The emerging economies known as the BRIC (Brazil, Russia, India, and China) are slowing down as well. The slowdown in China is truly an economic bellwether. This means that all economies are still inexorably tied together. No single economy, regardless of an initial growth surge, can withstand the loss of the industrialized economies as trade partners. The industrialized economies lose valuable export dollars when emerging economies slow down. This creates a negative spiral of value loss for all countries and the global economy.

In 2009 we note that Western Europe had the largest global decline in passive component sales in the December quarter (compared to other regions), followed by the United States and then Japan. Both the United States and Europe are relatively small markets for passive components and the double-digit declines in these regions are significant. However, they do not have as great of an impact as the slowdown in China, which is evident in the December quarter as well.

Most Major End-Markets Affected

The slowdown in China, although single digits year over year, had a substantial impact on losses in the passive component markets because of the large size of the overall passive component demand in that country. Ultimately a slowdown in demand for passive components in China (for handset, computer, and TV businesses) caused the greatest negative impact on the market for the fiscal year ending March 2009. These three segments account for more than 70% of passive component revenues worldwide. The deepest declines were reserved for those markets that were most dependent upon consumer credit for the chain to operate properly. This includes automobiles and large home appliances. Passive component sales in these segments is minimal compared to the high volume markets in handsets, computers, and TV sets.

In the wireless handset market it now appears that too many high-end advanced wireless phones were built for industrialized nations and not enough were sold. This left a large backlog of global inventory at the retail and wholesale level. Lower end cellular phones, which had enjoyed excellent sales volumes in the beginning of 2008 to the emerging economies (BRIC), suddenly slowed down and decelerated. This caused a drastic slowdown in demand for high volume passive components such as the MLCC, chip resistor, and chip inductor. In flat panel television sets there was significant production, but demand began to stagnate and backlog in November and December 2008, and January of 2009. The supply chain woes of consumer electronics were compounded by the loss of Circuit City stores in the United States to Chapter 11 Bankruptcy. This has dried up a direct channel to the consumer.

In automotive electronic subassemblies, which represent 12% of global passive component revenues (dropping to only 10% in 2009), demand will be hard hit for traditional passive components like the MLCC, thick film chip resistor, tantalum capacitor, and coil inductor. New platforms, requiring electrification of the powertrain (hybrid electric vehicle), will hold great opportunities for manufacturers of large can power film capacitors, large can aluminum electrolytic capacitors, large can double layer carbon supercapacitors, specialty class ceramic capacitors, wirewound resistors, thin film resistors, specialty wirewound inductors, and metal oxide varistors. The new programs remain viable while traditional platforms remain uncertain going forward. Large home appliances were also hit hard by the global economic downturn and this impacted the motor run and motor start capacitor segments. It also negatively impacted the specialty wirewound resistor and inductor markets. The large home appliance market and the automotive market combined account for no more than 12% of the global passive components market worldwide. Although, for manufacturers with substantial exposure to these hard hit segments, 2010 will be a difficult year.

Long Term Outlook

From a mid- to long-term perspective, the markets for passive components still look bright. The fundamental concept of high passive component content per handset and computer and TV sets will continue to drive up unit demand over time. Greater quantities of passive components will be used in next generation electronics for capacitance, resistance, inductance, and circuit protection. The market decline in FY 2009 will have reverberations that will cause supply chain woes in 2010. However, the 2011-2014 outlook is robust because more products with greater functionality and higher passive component content will be available at that time. For example, only 16% of handsets produced in 2008 were next generation phones requiring upwards of 400 MLCC. By 2011 this should be 30%.

In the 2010 fiscal year, it will be more difficult to find good business. However, there are some signs that there will be pockets of growth opportunity affecting a small portion of the industrial segment of the market. Even though these opportunities remain small in 2010, they mean new revenue streams for some well-positioned passive component manufacturers. Certainly in 2009 there will be growth in defense and medical electronics as these two segments continue to defy any attachment to events in global economies.

In industrial ad infrastructure markets for passive components, demand also seems fit for growth in 2009. The economic stimulus packages in the United States, China, and Western Europe total an astonishing $1.43 trillion USD. These global economic stimulus packages have much in common as they all relate to spending on infrastructure. A substantial amount of investment will go to upgrading the existing power grid to make it more efficient, while integrating renewable energy systems into the existing power supply chain (windmill power and solar energy collectors).

This basic global concept is by far the most opportunistic for passive component manufacturers in 2009-2014. A significant impact is expected for large can power film capacitors, metal oxide varistors, thin film resistors and wirewound resistors and inductors. The best peripheral opportunities for passive components in this global infrastructure build will be in outdoor lighting, runway lighting, and bridge and barge lighting. These peripheral markets will do well in an infrastructure build out, and require primarily lighting ballast capacitors for their operation. This is all outdoor lighting and this segment will do well. Other growth markets can be found in electric transport (trains and electric rail) systems primarily in Europe and Japan.

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