China/Taiwan Update

China/Taiwan had an unseasonably strong November, probably thanks to Apple’s iPhone X.

  • OEM electronic equipment sales in November 2017 were up 15% compared to November 2016 and up 10% sequentially compared to October 2017 (Chart 1).
  • ODM sales were also strong as Foxconn Hon Hai recorded NT$569.60 billion (US$18.99 billion) in consolidated sales in November; its highest-ever monthly revenue due to rising shipments of the premium iPhone X (Chart 2).
  • Network equipment (Chart 3) and industrial computers (Chart 4) were also strong.
  • Wafer foundry revenues continued to grow (Chart 5) although their 3/12 rate of change is near zero growth relative to the same three months in 2016 (Chart 6).
  • Package and test sales were flat from October (Chart 7) as were memory (Chart 8), passive components (Chart 9) and solar/photovoltaic revenues (Chart 10).
  • Printed circuit shipments have risen to their long term trend line (Chart 11) and rigid CCL laminate sales are following PCB revenues (Chart 12).

Source: Company financials

Component Demand for iPhone X Weakening

Despite having enjoyed a surge in orders for the iPhone X in September and October, sources from the upstream component supply chain saw their shipments for iPhone devices weaken in November and are likely to drop further in December.

With demand for key component not growing as strong as expected, the sources are concerned that Apple may reduce its iPhone X shipment target for the first quarter of 2018. The sources pointed out that Apple's component orders for the iPhone X in November were around 30% lower than its earlier forecast. The weakening in component demand comes as the yield rates for the production of the iPhone X have improved, shortening the waiting period for pre-orders from 5-6 weeks to 1-2 weeks, indicated the sources.

Apple's key component supplier Largan Precision saw its November revenues grow a mere 0.05% from a month ago and expects its December revenues to decline on month as its clients may weaken their efforts on pulling in orders.

Other Apple suppliers also experienced a similar scenario. Chassis maker Catcher Technology saw its November revenues drop 10.4% on month, while touch panel supplier General Interface Solution (GIS) also suffered a 15.53% sequential decline in November revenues. GIS had originally expected its sales momentum to continue into 2018.

For the first quarter of 2018, the sources expect iPhone X shipments in January and February to be at the comparable level as that seen in November 2017 and will decline sharply in March. Overall iPhone X shipments are expected to be down by around 30% sequentially in the first quarter of 2018 because of seasonality and fewer working days caused by the Lunar New Year holidays.

However, the sources believe Apple's iPhone shipments in the first quarter of 2018 may still be better than those recorded in the same period of 2017. With the recent market rumors indicating that Apple may release a new 6-inch iPhone with a design similar to that of the iPhone X and also featuring the face recognition function in 2018, market observers believe that some consumers may decide to delay their purchasing plans to wait for the new device.


Global Semiconductor Sales Increase 21.9% in 2017; Industry Forecast Revised Upward (Charts 13-18)

The Semiconductor Industry Association (SIA) announced worldwide sales of semiconductors reached $37.1 billion for the month of October 2017, an increase of 21.9% from the October 2016 total of $30.4 billion and 3.2% more than last month's total of $36.0 billion. October marked the global industry's largest-ever monthly sales total. All monthly sales numbers are compiled by the World Semiconductor Trade Statistics (WSTS) organization and represent a three-month moving average. Additionally, the latest WSTS industry forecast was revised upward and now projects annual global market growth of 20.6% in 2017 and 7.0% in 2018.

"The global semiconductor market continued to grow impressively in October, with sales surpassing the industry's highest-ever monthly total and moving closer to topping $400 billion for 2017," said John Neuffer, president and CEO, Semiconductor Industry Association. "Market growth continues to be driven in part by high demand for memory products, but combined sales of all other semiconductor products were up substantially as well, showing the breadth of the market's strength this year."

SIA today endorsed the WSTS Autumn 2017 global semiconductor sales forecast, which projects the industry's worldwide sales will be $408.7 billion in 2017. This would mark the industry's highest-ever annual sales, its first time topping $400 billion, and a 20.6% increase from the 2016 sales total. WSTS projects double-digit year-to-year increases across all regional markets for 2017: the Americas (31.9%), Asia Pacific (18.9%), Europe (16.3%), and Japan (12.6%). Beyond 2017, growth in the semiconductor market is expected to moderate across all regions. WSTS tabulates its semi-annual industry forecast by convening an extensive group of global semiconductor companies that provide accurate and timely indicators of semiconductor trends.


Worldwide Semiconductor Equipment - Record Quarterly Billings of $14.3 Billion (Chart 19)

Quarterly billings of US$14.3 billion set an all-time record for quarterly billings, exceeding the record level set in the second quarter of this year. Billings for the most recent quarter are 2% higher than the second quarter of 2017 and 30% higher than the same quarter a year ago. Sequential regional growth was mixed for the most recent quarter with the strongest growth in Europe. Korea maintained the largest market for semiconductor equipment for the year, followed by Taiwan and China.


German Component Distribution Growth Continues in 3Q’17 (Charts 20 & 21)

The dynamic performance of the German component distribution industry shows no sign of slowing down. After 6.3% growth in Q1 and 12.2% in Q2, sales in Germany by companies registered with the Fachverband Bauelemente Distribution (FBDi e.V.) soared by 17.6% to 937 million euros in the third quarter of 2017 - an all-time high. Incoming orders grew 24.5% to 993 million euros, yielding a book-to-bill rate of 1.06. Total sales during the first nine months amounted to 2.75 billion euros.

Whereas semiconductor product sales climbed 17.5% to 659 million euros and passive components grew 14.3% to 126 million euros, electromechanics took it to a new level, with sales jumping 30.7% to 96.5 million euros. Other product areas: Power supplies grew by almost 20% and sensors by 8%, while sales of displays contracted by 10.7%. The breakdown of sales remained virtually unchanged: semiconductors 70%, passives 13%, electromechanics 10%, others (power supplies, sensors, displays, assemblies) 6%.

FBDi Chairman of the Board of Directors Georg Steinberger remarked:

“There is nothing new to report on the shortage front. For semiconductors as well as for passives, we are seeing long lead times and higher prices, but also a cyclical increase in demand from customers across almost all industrial segments. This strength lead us to believe that Q4 will be excellent. Total sales for 2017 should finish at around 3.6 billion euros.” How things will continue and, above all, how issues relating to distribution policy will evolve, says Steinberger, is another story altogether:

“Gigantic mergers and the resulting pressure as well as the global trend for ‘exclusive’ distribution contracts may help individual companies, but not the industry and certainly not the customers whose choices are being eroded as a result.”


IC Insights Projects Good Increases in IC sales for Medical Electronics, Wearable Systems, Cellphones, Servers, and Gov/Mil Applications (Chart 22)

Integrated circuit sales for automotive systems and the Internet of Things are forecast to grow 70% faster than total IC revenues between 2016 and 2021, according to IC Insights’ new 2018 Integrated Circuit Market Drivers Report. ICs used in automobiles and other vehicles are forecast to generate worldwide sales of $42.9 billion in 2021 compared to $22.9 billion in 2016, while integrated circuit revenues for Internet of Things (IoT) functionality in a wide range of systems, sensors, and objects are expected to reach $34.2 billion in four years compared to $18.4 billion last year, says the new 358-page report.

Between 2016 and 2021, automotive and IoT IC sales are projected to rise by compound annual growth rates (CAGRs) of 13.4% and 13.2%, respectively, compared to 7.9% for the entire IC market, which is projected to reach $434.5 billion in four years versus $297.7 billion last year. Strong five-year IC sales growth rates are also expected in medical electronics (a CAGR of 9.7% to $7.8 billion in 2021) and wearable systems (a CAGR of 9.0% to $4.9 billion).

Cellphone IC sales—the biggest end-use market application for integrated circuits, accounting for about 25% of the IC market’s total revenues—are expected to grow by a CAGR of 7.8% in the 2016-2021 period, reaching $105.6 billion in the final year of the new report’s forecast. Meanwhile, weak and negative IC sales growth rates are expected to continue in video game consoles (a CAGR of -1.9% to $9.7 billion in 2021) and tablet computers (a CAGR of -2.3% to 10.7 billion), according to the 2018 IC Market Drivers report.

Sharply higher average selling prices (ASPs) for DRAMs and NAND flash are playing a significant role in driving up dollar-sales volumes for ICs in cellphones and PCs (both desktop and notebook computers) in 2017. Cellphone IC sales are on pace to surge 24% this year to an estimated $89.7 billion, while PC integrated circuit dollar volume is expected to climb 17.6% to $69.0 billion. For both the cellphone and PC market segments, 2017 will be the strongest increase in IC sales since the 2010 recovery year from the 2009 downturn. The 2018 IC Market Drivers report’s forecast shows cellphone integrated circuit sales rising 8% to $97.3 billion next year and PC IC revenues growing 5% to $72.6 billion in 2018.

The new report estimates that automotive IC sales will rise 22% in 2017 to about $28.0 billion after increasing 11% in 2016. Automotive IC sales are forecast to increase 16% in 2018 to $32.4 billion. Meanwhile, IoT-related integrated circuit sales are on pace to grow 14% in 2017 to an estimated $14.5 billion after increasing about 18% in 2016. In 2018, integrated circuit sales for Internet of Things end-use applications are expected to rise 16% to about $16.8 billion, according to the 2018 edition of the IC Market Drivers report.


2017 – Record Year for Semiconductor Industry (Charts 23-25)

PCs have long been a critical demand driver of the semiconductor industry, with smart phones becoming an integral part during the last decade. More recently, the number of new applications for the industrial, automotive, medical, and consumer markets has exploded, fueling unprecedented demand for semiconductors. This strong demand coupled with improved device pricing, especially for memory, will propel the semiconductor market past the US$400 billion mark for the first time this year – a mere four years after it reached the $300 billion milestone. By way of comparison, it took 13 years, starting in 2000, for the semiconductor market to grow from $200 billion to $300 billion.

In addition to record device revenues for this year, both the equipment and materials markets are also expected to exceed their historical peaks set in 2000 and 2011, respectively. The chart below plots total semiconductor equipment and materials revenues. Early on in the industry, both markets were roughly equivalent until the mid-1990s, when the equipment market increased dramatically during the 200mm ramp and the run up to Y2K, when the market peaked at $48 billion. The equipment market has been highly cyclical since but has failed to top the peak set 17 years ago.

By contrast, the materials market surpassed its 2000 peak in 2004 and went on to experience record revenues for the next three years. Since then, the materials market has had its share of ups – peaking in 2011 – and downs. But, compared to the equipment market, those cycles have been much more moderate.

A key factor negatively impacting materials market growth is the intense downward pricing pressure on materials, especially silicon. Despite record silicon shipments, total silicon revenues are nowhere near their 2007 peak. Even though silicon pricing has recovered somewhat this year, aggregate silicon pricing remains just over half of what it was in 2008, despite 300mm representing over 60% of silicon shipments by volume year-to-date compared to less than 40% in 2007.

On a regional level, the industry has seen the migration of semiconductor manufacturing from Japan to Asia Pacific. Over the past 14 years, we have seen tremendous gains in Asia Pacific, driven by TSMC in Taiwan, Samsung in Korea, and multiple players in China. In 2003, Japan was the largest market for equipment and materials due to its large installed fab base and strong packaging materials presence, while the market in North America was more fab focused. By 2017, Taiwan, Korea and China accounted for 61% of the total equipment and materials market, up from 33% in 2003.

Taiwan in 2009 claimed the largest market share from Japan in this combined market. The following year, Korea moved up in the rankings to second, displacing Japan to the third position. Last year, China claimed the third spot from Japan. This year, Korea is expected to surpass Taiwan, while China will retain the third position.

As mentioned earlier, this year is shaping up to be a record in terms of device, equipment and materials revenues. SEMI will issue its Year-end Equipment Forecast at SEMICON Japan but a quick analysis of year-to-date trends reveals that the equipment market will see record-setting double-digit growth for the year. Korea will be the largest market for semiconductor equipment this year due to Samsung’s record investments, followed by Taiwan, and then China. The total semiconductor materials market is expected to increase at seven percent this year, with all regions that we track experiencing growth. However, the materials market in China will grow the strongest. Looking at 2018, SEMI currently sees growth continuing in both the equipment and materials markets as the industry meets demand generated by mobile, automotive, storage, industrial, medical, and consumer electronics.


Hon Hai Ranked 2nd-largest Global Smartphone Assembler in Q3

Hon Hai Precision Industry Co., the world's largest contract electronics maker, ranked as the second-largest smartphone assembler in the global market in the third quarter of this year, according to International Data Corp. (IDC).

The IDC said the position of Hon Hai, which is believed to serve as the sole assembler of the premium 5.8-inch iPhone X for Apple Inc., was unchanged from a quarter earlier.

Market analysts said Hon Hai is expected to get a boost from shipments of the iPhone X, which has seen solid global demand due to a significant specification upgrade, including 3-D facial recognition technology.

Apple unveiled three iPhone models, including the iPhone X, in September with the signature model's global sale kicking off in early November. With technological bottlenecks resolved, Hon Hai is speeding up the pace of delivery of the iPhone X to meet demand, according to a recent research note released by Taipei-based KGI Securities.

Another Taiwanese contract electronics maker, Pegatron Corp., which is said to share orders with Hon Hai in rolling out the smaller 5.5-inch iPhone 8 Plus and 4.7-inch iPhone 8, took fifth place in the rankings during the July-September period, up one notch from a quarter earlier, the IDC said.

Inventec Corp., a Taiwanese contract notebook computer maker, fell one notch from a quarter earlier to sixth place in the third- quarter smartphone assembly rankings, the IDC said.

The IDC said the change in rankings resulted from the launch of new models from international and Chinese brands such as Apple, Xiaomi and Lenovo Group.

According to the rankings, Samsung Electronics Co. of South Korea retained its title as the largest smartphone assembler in the world, ahead of Hon Hai and China's Oppo, which was unchanged in third position.

Vivo Communication Technology Co. came in fourth, followed by Pagatron (No.5), Inventec (No. 6), Huaqin Telecom Technology Co. of China (No. 7), LG Electronics Inc. of South Korea (No. 8), U.S.-based Flextronics International Ltd. (No. 9), and China's ZTE Corp. (No. 10).

According to the IDC, due to an increase in production costs and the need to adjust inventories, smartphone production worldwide rose only 2.1% from a year earlier and gained only 6% from a quarter earlier.

The IDC said that on expectations of the launch of new models with advanced specifications in screens in mid-2018, many consumers may put their purchase plans on hold, so the advisory firm said it is cautious about smartphone shipments for the fourth quarter of this year.


Worldwide Enterprise Storage Systems Factory Revenue Rose 14.0% y/y to $11.8 billion in 3Q’17 (Charts 26 & 27)

Dell leader for external systems but with revenue declining

Total worldwide enterprise storage systems factory revenue was up 14.0% year over year and reached $11.8 billion in 3Q’17, according to the International Data Corporation.

Total capacity shipments were up 22.4% year over year to 72.5EB during the quarter.

Revenue growth increased within the group of original design manufacturers (ODMs) that sell directly to hyperscale datacenters. This portion of the market was up 54.8% year over year to just under $2.7 billion.

Sales of server-based storage increased 8.7% during the quarter and accounted for $3.5 billion in revenue.

External storage systems remained the largest market segment, with the $5.6 billion in sales represented an increase of 4.1% year-over-year.

"The enterprise storage market finished the third quarter of 2017 on a positive note, posting strong year-over-year growth and the first double-digit growth in several years," said Liz Conner, research manager, storage systems. "All-flash, software-defined, and converged/hyperconverged systems continue to be the driving force for traditional storage vendors. Meanwhile, hyperscalers once again saw event-driven storage requirements lead to strong growth in this segment during the third quarter."

3Q’17 Total Enterprise Storage Systems Market Results, by Company
HPE/New H3C Group held the number 1 position within the total worldwide enterprise storage systems market, accounting for 20.2% of spending. Dell Inc held the next position with a 18.8% share of revenue during the quarter. NetApp finished third with 6.0% market share. IBM and Hitachi finished in a tie* for the fourth position, capturing 4.3% and 4.0% of global spending, respectively. As a single group, storage systems sales by ODMs selling directly to hyperscale datacenter customers accounted for 22.7% of global spending during the quarter.

3Q’17 External Enterprise Storage Systems Results, by Company
Dell Inc. was the largest external enterprise storage systems supplier during the quarter, accounting for 28.8% of worldwide revenues. NetApp finished in the number 2 position and HPE in the number 3 position with 12.5% and 11.4% of market share, respectively. IBM and Hitachi rounded out the top 5 in a tie* with revenue shares of 8.7% and 8.3%, respectively.

3Q’17 External Enterprise Storage Systems Results, by Company
Dell Inc. was the largest external enterprise storage systems supplier during the quarter, accounting for 28.8% of worldwide revenues. NetApp finished in the number 2 position and HPE in the number 3 position with 12.5% and 11.4% of market share, respectively. IBM and Hitachi rounded out the top 5 in a tie* with revenue shares of 8.7% and 8.3%, respectively.


Ethernet Switches and Routers Show Surprisingly Strong Growth in 3Q’17 (Charts 28 & 29)

The worldwide Ethernet switch market (Layer 2/3) recorded $6.75 billion in revenue in the third quarter of 2017 (3Q’17), an increase of 7.4% year over year. Meanwhile, the worldwide total enterprise and service provider (SP) router market recorded $3.91 billion in revenue in 3Q’17, increasing strong 9.4% on a year-over-year basis. These growth rates are according to results published in the International Data Corporation (IDC) Worldwide Quarterly Ethernet Switch Tracker and Worldwide Quarterly Router Tracker.

From a geographic perspective, the 3Q’17 Ethernet switch market saw strong performance across the globe. The Central and Eastern Europe (CEE) region saw the best results in 3Q’17, growing 16.6% year-over-year. Within CEE the best performing countries were the Czech Republic (up 47.3% year over year) and Hungary (up 40.2% year over year). Asia/Pacific (excluding Japan)(APeJ) and Western Europe both increased more than 12% year-over-year (12.6% and 12.4%, respectively) in 3Q’17. Notable country results within APeJ and Western Europe include China with a strong 19.4% increase, Germany (up 23.2%), and India (up 18.2% year-over-year). On the other hand, United Kingdom (UK) continued to be impacted by uncertainty surrounding Brexit and declined 3.2% year over year in 3Q’17. Japan grew in double digits and was up 11.4% year over year in 3Q’17. Latin America's solid 7.7% increase was on par with the overall market. Somewhat lagging the overall Ethernet switch market was North America with its 3.4% year-over-year increase. The only region that experienced a decline was Middle East & Africa (MEA) this quarter, going down 1.2% year-over-year.

"Strong application-related infrastructure and services requirements at the edge and core are continuing to complement significant cloud buildouts, keeping the demand side humming for network infrastructure," said Rohit Mehra, vice president, Network Infrastructure at IDC. "In parallel, connecting the edge to the core and cloud requires upgrades to WAN connectivity for which we continue to see increasing demand across enterprises as well as service providers, leveraging the architectural disruptions from areas like SD-WAN and mobile backhaul."

100Gb Ethernet switch revenue continues to grow rapidly as adoption by hyperscale and other cloud providers, as well as large enterprises, continues to accelerate. 100Gb shipments reached almost 1.2 million ports and $608 million in revenue. 100Gb now accounts for 9.0% of the total market revenue, up from just 3.6% in a quarter a year ago. 25Gb/50Gb Ethernet switch products are starting to gain traction as well, and in 3Q’17 shipments exceeded 750,000 ports and $85 million in revenue. As expected, the growth in 25Gb, 50Gb, 100Gb is negatively impacting the 40Gb segment. 40Gb shipments decreased 36.7% year-over-year and revenue was down 20.0% year over year in 3Q’17. 10Gb experienced solid results in 3Q’17 with shipments growing 49.6% year-over-year and revenue increasing 5.2% year-over-year.

Meanwhile, 1Gb as the primary connectivity technology for enterprise campus and branch deployments continues to account for a majority of the Ethernet switching market. 1Gb port shipments reached 105.9 million ports after growing 10.6% year over year and now accounts for 66.6% of all ports shipped in 3Q’17. In terms of revenue, 1Gb increased 2.4% year-over-year and accounts for 42.6% of revenue.

The worldwide enterprise and service provider router market grew 9.4% on a year-over-year basis in 3Q’17 based on a strong 14.8% increase in the larger service provider segment and a 6.3% decrease in enterprise routing. This will be a market to watch closely over the coming quarters as software-defined architectures start to take hold across the WAN, with the potential for SD-WAN to disrupt traditional routing architectures and WAN transport services markets especially at the network edge.

The combined enterprise and service provider router market saw a varied regional performance in 3Q’17, with APeJ recording the strongest growth (up 31.7% year over year). MEA also performed well, growing 8.9% year over year in 3Q’17. CEE, North America, and Japan all saw mid-single digit growth in 3Q’17, up 5.6%, 4.8%, and 4.8%, respectively. Western Europe declined 4.7% on an annual basis, while Latin America decreased 15.9% year-over-year in 3Q’17.

Company Highlights

Huawei continued to perform well in both the Ethernet switch and the router markets on an annual basis. Huawei's Ethernet switch revenue grew 14.1% year over year in 3Q’17 for a market share of 7.7%, up from 7.2% in 3Q’16. Huawei's enterprise and SP router revenue increased 44.0% over the same period to finish with 21.9% of the total router market in 3Q’17 compared to 16.6% in 3Q’16.

Hewlett Packard Enterprise's (HPE) Ethernet switch revenue increased 7.5% year over year in 3Q’17 and its market share stands at 5.5%, down from 5.6% in 2Q’17 but flat on an annual basis. (Note: HPE and H3C are tracked separately as of 2Q’16).

Arista Networks performed well in 3Q’17 with its Ethernet switching revenue rising 49.6% year over year and earning a market share of 5.6%, up from 4.0% in 3Q’16.

Juniper's Ethernet switching decreased by 4.2% year over year in 3Q’17 bringing its market share to 3.2% versus 3.5% in 3Q’16. Juniper also saw a 5.6% year over year decrease in combined service provider and enterprise router revenues, with market share of 15.0% compared to 17.3% in 3Q’16.

H3C's Ethernet switch revenue, which is fully coming from the PRC and Hong Kong markets, grew 37.3% year over year in 3Q’17. H3C is finding success both in the enterprise as well as with the PRC cloud providers. H3C's enterprise router business also performed well and increased 50.9% year over year in 3Q’17.

"Among the major regions, North America was the outlier this quarter with somewhat weaker growth, whereas some key countries and regions outdid the market with a significantly high growth uptake in the switch and router segments respectively," said Petr Jirovsky, research manager, Worldwide Networking Trackers. "There are opportunities for emerging OEM and ODM vendors to gain share while challenging more established vendors to rethink how they compete."

Walt D. Custer

Walt Custer

Walt Custer is an industry analyst focused on the global electronics industry. Prior to forming Custer Consulting Group he was Vice President of Marketing and Sales for Morton Electronic Materials, a global supplier of specialty chemicals and process equipment for the PCB industry.

Custer has been a member of the IPC trade organization since 1975 where he received both the President's and the Raymond E. Pritchard Hall of Fame Awards. He is currently a member of the IPC Executive Market & Technology Steering Committee. Custer is also a Director of the EIPC European PCB trade organization.

He authors regular “Market Outlook” columns for Global SMT & Packaging magazine, the Journal of the HKPCA and the TTI MarketEYE website.

View other posts from Walt D. Custer. View other posts from Walt D. Custer.
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