Busy Autumn but What Will 2006 Bring?

The “fall busy season” is centered in consumer electronics producing countries (Asia) but the “overflow” is global. Personal computers, cell phones, video games, and audio & video equipment all exhibit strong seasonality with production peaking in October or November. Each autumn busy factories cause temporary material and component shortages, price increases, longer lead times and, for North America and Europe, a temporary return of some business previously lost to SE Asia on price. Global supply balance and capacity utilization are key. All end-markets are ultimately affected--not just the consumer sector.

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With the end of each year’s “busy season” market dynamics can change dramatically. Empty factory owners seek added volumes though improved global market share, usually via price incentives. The first half of each year typically sees much more aggressive competition.

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Fall 2005 was amazingly busy in Asia. Chart 1 shows the combined monthly sales of 16 large motherboard manufacturers (plants in Taiwan and China). While many of these 16 companies produce other products (besides PC motherboards), they do represent the vast majority of the “first and second tier” suppliers. Their combined October revenue increase was massive. What caused it? Pre-holiday buildups and new products (Microsoft Xbox 360) were two drivers. The third was unplanned: replacement motherboards. Dell took a $300 million 3Q’05 charge for Optiplex motherboards with bad electrolytic capacitors. Apple, HP and Intel were also plagued with “bad caps.” My guess is that many “unexpected” motherboard orders surfaced to replace or repair faulty end-products.

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In response to strong consumer demand Taiwan/China PCB shipments enjoyed a similar surge (Chart 2). Global chip shipments provide another insight into current market dynamics. World semiconductor sales (a measure of electronic assembly activity) saw growth bottom in July and then improve in August through October (Chart 3). Because these SIA-reported sales are not “seasonally adjusted), they peak in the last month of each quarter (a 5-week month). September was a boom month (Chart 4). October had a noticeable decline exacerbated by the end of the “busy season.”

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Looking beyond seasonal effects, the SIA sees a bright future. Its November chip forecast was revised upwards from its summer 2005 predictions (Chart 5). Surging cell phone/PC/handheld demand from developing countries was projected to be a major driver.

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As we move into 2006, be wary of how seasonality affects your business--either directly or indirectly. See you at the IPC Printed Circuits Expo, APEX and the Designers Summit (February 8-10, 2006) at the Anaheim Convention Center. I will deliver the keynote talk (Market Outlook) on Friday.

General Business Conditions

Leading mobile handset makers such as Nokia, LG and Elcoteq are reportedly organizing an estimated $800 million investment to set up their manufacturing facilities in India in 2006.

SIA’s November forecast projected that world semiconductor sales in 2005 would increase 6.8% to $227.6 billion, followed by increases of 7.9% to $245.5 billion in 2006, 10.5% to $271.3 billion in 2007, and 13.9% to $309.2 billion in 2008.

Global wafer fab utilization rose for the second straight quarter in 3Q’05 to 90.1% from 89.1% in April-June.

DuPont economists Robert Shrouds and Robert Fry received the 2005 Lawrence R. Klein Award for Blue Chip Forecast Accuracy. Congratulations guys!

PCB Fabrication

Coretec is focusing on two key areas: time-critical PCB manufacturing and rigid-flex PCB concurrent design & production. It is also considering licensing its proprietary scripting technology that provides detailed material content reports in compliance with the European Union’s RoHS directive.

Meiko Electronics will expand its capacity 140% by constructing a new 11.6 billion yen, 88,000 sq. meter plant in Wuhan, China, with a production capacity of 240,000 sq. meters per month.

Moore Printed Circuits (Mira Mesa, CA) installed a state-of-the-art wastewater treatment facility after pleading guilty in February to discharging chemicals into the municipal sewage system. It paid a $43,000 fine.

Exception PCB (former DDi, UK) appointed Graham Temple technical manager.

Gold Circuit Electronics is expanding its China plant to a total monthly capacity of two million SF in 2Q’06.

Hon Hai Precision Industry expanded its PCB capacity via its subsidiary Pan International Industrial which started new rigid PCB plants in Shenzhen, Guandong, and Yantai Shandong, China and flex circuit maker Foxconn Advanced Technology, Yantai.

Ibiden will invest 3.6 billion yen setting up a second personal computer semiconductor packages manufacturing plant in the Philippines.

Innovex promoted Keith Foerster to Sr. VP, Development and Sales reporting to William Murnane, President and CEO.

Intel is reportedly seeking PBGA substrate suppliers in Taiwan through its domestic IC packaging and testing contract makers, as its IC substrate suppliers in Japan are shifting more capacity to flip-chip substrate production. Kinsus Interconnect Technology and Phoenix Precision Technology are likely beneficiaries.

Merix announced a re-filing of a class action complaint against Merix, its directors, four of its officers and the underwriters of its January 2004 public stock offering, alleging violations of federal securities laws.

M~Wave announced that an affiliate of a private equity group and current investor had purchased the revolving financing note from Silicon Valley Bank and intends to waive defaults, and continue its financing to facilitate restructuring of the company.

Multek continues to upgrade the Sheldahl plant (Northfield, MN) which processes almost 20 million square feet of single and double-sided flex circuits annually. It recently added a HMS Höllmüller etch and strip line for a roll-to-roll manufacturing.

Nanya PCB will list on the TSE in 2006 with capital initially set at NT$5.1 billion.

Parlex was acquired by Johnson Electric Holdings Ltd.

Photocircuits hired Triax Capital Advisors to assist in securing new equity capital.

Sanmina-SCI CEO Jure Sola will deliver the opening keynote address at IPC Printed Circuits Expo, APEX and the Designers Summit 2006.

Samsung Electro Mechanics has developed “the world’s thinnest (0.1 mm) PCB” for semiconductor chips.

Texas Prototypes is on the Dallas, TX 100 list of fastest growing companies.

Tripod Technology started pilot runs at its third Wuxi PCB plant including production of CSP substrates for DDR2 memory. It is planning construction of a fourth plant in the same region.

Unitech PCB expects mobile phone PCB demand will remain strong until 1Q’06. Its shipments of handset PCBs are expected to total 55-60 million units for total 2005.

Ventures-National d.b.a Titan General Holdings changed its name to Titan Global Holdings, Inc. with a new trading symbol (OTC BB: TTGL).

Materials & Process Equipment

The markets for nanomaterials, tools and equipment for nanoelectronics totaled $1,827 million in 2005 and are forecasted to reach $4,219 million by the year 2010, according to SEMI.

Cimnet Systems parent Capri Corp. merged with Made2Manage Systems with $5 million in cash less its transaction expenses paid to Capri.

Coherent will cut 81 laser power supply manufacturing and administrative jobs from its Auburn, Calif., operation and transfer the work to China and Malaysia in 2006.

Concoat Limited, UK's material business was purchased by the Chase Corporation. Concoat will be linked with Chase's HumiSeal business.

DEK published "Understanding Stencil Printing Requirements for a Lead-free Mass Imaging Process," a report detailing findings on screen printing using lead-free pastes that focuses on implications for stencil design rules.

DuPont-Toray will invest $95 million to increase overall capacity for Kapton polyimide film by approximately 25%. This new fifth production line will be constructed next to the current DuPont-Toray manufacturing plant in Tokai City, Aichi Prefecture, Japan. Production will begin in mid-2007.

Henkel AG acquired a majority stake in Huawei Electronics, Yiangsu, China, a manufacturer of epoxy molding compounds for semiconductors with 560 employees and sales of 18 million euros in fiscal 2004.

Mitsui Chemicals expanded its methyl pentene polymer (demoulding material for flexible printed circuit boards) capacity to13,000 ton/yr.

Park Electrochemical appointed Steven Peake president of its FiberCote Industries advanced composite materials subsidiary in Waterbury, Connecticut.

Rohm and Haas Electronic Materials, Circuit Board Technologies, Europe announced a 3% price increase across its range of PCB materials "in order to help offset the impact of unprecedented increases in the costs of raw materials, metals, energy and freight over the past 18 months."

San-Etsu Metals and the University of Tokyo have jointly developed eco-friendly lead-free brass for use in electronics equipment.

Electronic Manufacturing Services

APSM Systems joined with contract manufacturer The Offshore Group to provide manufacturing services in Guaymas, Sonora, Mexico in a 27,000 sq. ft. facility employing 100 workers.

Asustek Computer reportedly acquired a notebook PC contract from Dell and became the fourth largest contract maker for notebooks following Quanta Computer, Compal Electronics and Wistron. In addition, it is investing NT$ 300 million to set up a wholly-owned subsidiary Li-Shou Computer. Finally, it will reportedly spin off the manufacturing operation of its wholly-owned notebook subsidiary Asusalpha Computer by 1H-07.

AWS Electronics, UK installed a SMT production line to support lead-free processes at its Newcastle under Lyme plant.

Celestica acquired Displaytronix, a provider of repair services for flat-panel display devices. It will also set up manufacturing operations in Andhra Pradesh, India.

Cemtron, UK was sold to its management team for £1.95 million.

Cheng Uei Precision Industry, KYE Systems and Ji-Haw Industrial expected to see record earnings for 4Q-05 due to strong Christmas sales of the Microsoft's Xbox 360.

Compal Communications (design & front end assembly) and Flextronics, India (back-end assembly) will reportedly manufacture C115 cell phones for Motorola.

CTS shut its West Lafayette, Ind., site and auctioned its equipment.

Dell will take a $300 million charge to replace motherboards with faulty electrolytic capacitors in some of its Optiplex workstations. Reportedly PCs from H-P, Apple and other PCs using Intel motherboards have faced similar issues.

Delphi could cut up to 30% of its 2,200 U.S. parts suppliers as CEO Steve Miller sells and closes plants during Chapter 11 reorganization. Miller said that many, if not most, of those suppliers should expect business as usual because they likely will continue to supply the companies that buy Delphi operations.

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Elcoteq appointed Anssi Korhonen Sr. VP, Product Development Services for its ODM service offering, strategic partnerships and Terminal Products Business Area.

Flextronics will develop an industrial park near Chennai, India for vertically integrated services including plastic injection molding, PCB assembly, mechanicals and enclosure integration, distribution, logistics and repair services.

Foxconn acquired an 11.5% stake in broadband technology company CyberTan.

GSPK Electronics appointed Clive Matthews Business Development Manager for its contract assembly business.

Hewlett Packard cut 200 staff at Erskine, Renfrewshire, Scotland, shifting server production to Pardubice, Czech Republic.

Minnetronix is expanding its St. Paul, Minnesota facility (medical device contract design and manufacturing). This 24,500 sq. ft. addition will more than double its current space.

MiTAC began constructing its first assembly factory in Vietnam in Que Vo Industrial Park, Bac Ninh province. Initially, the major products will be consumer electronic items like printers, digital cameras, DVD players, mobile phone casings and components.

Motorola's best selling C-115 handset will be made in India by EMS partners. While Nokia is already building a manufacturing facility in southern India, Motorola says it would make a similar decision only after gaining a respectable market share in the country.

Note's founder and former CEO Erik Stenfors sold the major part of his company assets in to use the money, over 1 MEUR, for another project.

Samsung Electronics shut down its 100,000 units/year mobile phone plant in Tijuana, Mexico because "it was considered unprofitable." A plant in Brazil will produce mobile phones to be shipped to Central and South America.

Sanmina-SCI closed and auctioned its 65,000 sq. meter Villefontaine, France EMS center.

Shenzhen HYT Science & Technology will invest Between Rs 50 to Rs 60 Crore to build a mobile handset manufacturing facility in West Bengal, India.

Solectron received a 2005 Supplier Recognition Award from Teradyne for Solectron's collaborative approach and leadership in adopting supply chain management practices. It also signed a manufacturing and supply chain agreement with Photo-Me International, a supplier of photo processing equipment, photo booths and digital media kiosks.

Sparton will produce circuit card assemblies for the F15 AN/APX-114 Long Range Airborne IFF Interrogator System program of Raytheon-Network Centric Systems.

Sparton Technology was awarded $3.6 million in damages regarding unreimbursed costs from a manufacturing relationship with Util-LINK and National Rural Telecommunications Cooperative.

Valeo will transfer its production of a product line from Germany to a newly built plant in Veszprém, Hungary by January 2006.

Wistron is reportedly the biggest OEM manufacturer for the Xbox 360. Microsoft will reportedly spend over $1 billion manufacturing Xbox 360 units to be sold in 2005 and a similar amount in 1Q-06.