Scottsdale, AZ—IPC kicked off its semi-annual TMRC Conference in sunny Arizona on October 13-14. Adding relevance to the topics of global competitiveness discussed during the conference was the fact that the third and final presidential debate occurred in Tempe on the same day, just a short drive away from the event. Dubbed, “Global Economic, Political and Technology Forces: Future Implications for the Electronics Industry,” the TMRC conference boasted approximately 130 attendees anxious to learn if the U.S. PCB industry’s modest growth will continue.

Attendees liked what they heard. The keynote speaker, economist Dr. Larry Chimerine, was optimistic about the future of the world’s electronics market. He said that the present modest expansion that the world is experiencing is due to President Bush’s tax cuts, record low interest rates, and low inflation.

Before discussing today’s business climate, Chimerine told the audience that it was necessary to look back at the 1990s, which has greatly influenced the economy’s present condition. He said the U.S. economy functions quite differently than it has in the past for several reasons. First, a dramatic shift has occurred in inflation dynamics. Put simply, inflation is no longer the problem it was in the past. Why? First, global competition prevents inflation; companies can no longer raise prices with impunity for fear of being punished by consumers. Couple this with the deregulation of major industries (telecoms, airlines, banks), and the dominance of large discount chains such as Walmart and Target, and one realizes this new economy resists price increases.

The second major difference between today’s economy vs. the traditional model is the bond market, and the role long-term interest rates play in the economy. Thirty years ago, long-term interest rates seldom changed until the Federal Reserve raised short-term interest rates. Not anymore. Today, the market predicts the Fed’s future actions, and sets interest rates accordingly. “It’s an automatic stabilizing device of the economy,” said Chimerine. “Basically, Walmart and the bond market are doing the Fed’s job for them.”

Fast-forwarding to today’s business climate, Chimerine said that while consumer spending is slowing, capital expenditures are growing moderately, with exports growing nicely. Adding to this growth is government spending on defense and homeland security. Overall, the U.S. economy is growing at nearly 3 percent this year.

When it comes to the rest of the world, global economic conditions are “okay,” according to Chimerine. Japan’s economic turnaround is “real.” China’s growth is slowing, but still strong. He cited China’s export market, domestic infrastructure and public works projects, and massive housing construction. The only under-performer is Europe. Chimerine said that Europe still lags behind the rest of the world because of its high interest rates and unrealistic fiscal policies, specifically its high taxes.

Another factor that Chimerine said has been crucial to America’s modest growth has been its “productivity explosion.” American workers are among the most productive in the world, said Chimerine, and that helps keep inflation down, stimulating the economy.

Going forward, the U.S. economy looks like its in good shape. A major factor supporting this view is the fact that there are few bottlenecks in the electronics supply chain currently. There is also an ongoing need for productivity growth. Add this to a weaker dollar relative to major currencies, and strong defense spending, Chimerine was confident the market will continue to get stronger.

But Chimerine said that there are some clouds on the horizon. The U.S. budget deficit is very large—and getting larger. Because of tax cuts and soaring spending, the U.S. budget deficit is now $550 billion, or approximately 5 percent of GDP. Chimerine said that if this problem is not addressed, it could grow to $800 billion in ten years due to health and pension entitlements as baby boomers retire. “We won’t have good economic growth if we don’t bring this into balance,” warned Chimerine.

Trade Imbalances

The U.S. trade imbalance with other countries (especially China) is aggravated by several factors. First, Asian countries such as China and Japan are still working to exclude American imports into their respective countries. Second, the region’s central banks continue to manipulate their currency exchange rates to give them a better trade advantage. Chimerine speculated that the Chinese RMB (yuan) is undervalued by 40 percent. “We are insane to keep accepting this,” said Chimerine. “The current [presidential] administration is not serious about addressing this. It should.” But he expects that the Asians will revaluate their currency this year by themselves, increasing it by approximately 10 to 15 percent. “But they won’t let it float,” he said.

Also at fault, according to Chimerine, is the WTO which refuses to recognize and address the unfair currency manipulations. “WTO monitors tariffs, but not currency imbalances. This has to change,” he said.

Finally, Chimerine cited instances where the Chinese government demanded that Western companies manufacture their products in China in order to sell to the country’s domestic consumer base. “Approximately fifty percent of our imports come from Western companies producing in China,” said Chimerine.

The Three Amigos

The next presentation consisted of three speakers—Ron Huston (CEO of Advanced Circuits), Jason Maupin (Enthone VP of Sales, America), and Steve Pudles (president and CEO of NuVisions Manufacturing) talking about what companies must do to meet global competition.

Huston discussed how his company, a small PCB prototype company located in Colorado, is thriving in a tough economic environment by focusing on a niche market of extremely quick-turn and high mix orders. While other PCB makers are trying to increase their order backlogs, Huston said his company is trying to eliminate it. “We don’t want a backlog, because that prevent us from building orders that we receive that day,” he said. Advanced Circuits has also been busy investing in its infrastructure, especially in CAM and Web use, where it provides quotes, ordering and tracking capabilities.

Maupin continued the discussion by revealing the various ways electronics companies can get “physically fit.” Why? Because the North American PCB shipments have dropped by 40% in the last ten years, forcing electronics companies to make similar cuts in their organizations. The different models include being a low-cost supplier, differentiator, niche market, customization, or a full-line supplier.

Finally, Pudles announced that his company has remained competitive by focusing on low to medium volume, high-mix, high complexity orders. In addition to its Springfield, Massachusetts facility, the company just opened its new Tijuana, Mexico plant (26,000 square feet) in October, and boasts an annual revenue of $62 million. The company has grown an astounding 500% in the last four years. “Sixty percent of our business is military,” explained Pudles. “Another 25% is from medical.”

Dunne’s Deal

EMS analyst Keith Dunne then spoke about “Strategic and Business Models in the Electronic Interconnection Industry.” He started by telling the audience that the stock of EMS providers should outperform their OEM customers. Why? Successful EMS providers have learned how to reduce manufacturing life cycle costs by 15-20% while generating attractive returns over a product cycle.

The average EMS provider grew 73 percent in 2003, while OEMs grew 52% during the same period, according to Dunne. EMS inventories fell three percent in March, dispelling the “inventory bubble” predicted by some analysts several months ago. “Economic stimulus, productivity, and low interest rates support investment,” said Dunne. The result? “Reasonable global demand will likely carry into 2005.”

This growth leads to a significant question: Will ODMs compete with OEMs? “It seems likely,” said Dunne, who cited Flextronics’ addition of 6,000 design engineers worldwide as evidence of the growing infrastructure among some EMS providers to potentially compete with their customers.

Despite the robust growth, wild cards remain. The impact of inflation, oil prices, and rising interest rates, OEM outsourcing deals, pricing power, and geo-political uncertainty are all potential pitfalls going forward.

PWB orders appear to be stabilizing, according to Dunne. Regarding PCB makers, Dunne said that successful PCB companies will diversify their customers and target markets. He cited TTM Technologies as an example of a disciplined and targeted company that has made money in the U.S. “If you know your core competency and execute it, you will prosper,” said Dunne.

Ed Henderson’s ‘Global Trends’

The U.S. economy appears to be back on track. In 2000 the economy grew at 4.1 percent. But by 2001, growth fell to 1.4 percent. This year, however, it is actually growing at a robust 4.3 percent. “The [global] recovery has largely been fueled by U.S. economic policy, and productivity in China,” said Henderson. However, he sees a slowdown coming in 2005, and almost zero growth in 2006. But the PWB industry will continue to grow again after that.

The impact had on the U.S. electronics equipment sector is obvious. The U.S. had strong growth in 2000, “then went into a huge ditch in 2001, driven by a slowdown in the economy and the dot-com explosion.” Though 2002’s performance wasn’t very good, the economy has accelerated. In 2004, the equipment market should grow by 10 percent. “However, because the U.S. dollar has been devalued, the sales you get from other countries, we will get a growth-rate bonus, making growth about 13.4 percent.” That being said, the global equipment numbers should cool in the next two years, coming in at 8% in 2005 and 5% in 2006, but still “softly” enough that it will not hurt the global economy.

Regarding global PWB trends, the industry should grow by 13.8 percent in 2004, almost double from 2003 growth. “A lot of this can be traced to flex, up about 19 percent this year, due to the popularity of TFT products and mobile products,” said Henderson. Looking ahead, China productivity advances and the U.S. fiscal policy are growth engines. However, these policies are less expansive. Western Europe and Japan are being “pulled” by these engines High oil prices drag down GDP, and oil prices should probably stay high through 2006.

The big challenge is the world economy’s reliance on oil. “If everything goes wrong in the pipeline, we’re in trouble,” said Henderson. Unreliable supplies in Iraq, Nigeria, Russia, and Venezuela add to this problem. According to Henderson, there is a “terrorist premium” of $10 per barrel. Of course, Asian economies are oil-intensive, with Chinese imports up 20-30 percent in 2004. And as Southeast Asia grows, it uses twice as much oil per dollar as the U.S. “Compounding the problem is slow oil field development,” he said.

Despite the economy’s modest growth, there are several potential problems that could adversely affect its improvement. Major terrorist attacks, a widening Iraq war, oil supply cutback, a hard landing in China (inflation is at 5% and the government is trying to lower this), a housing market bubble, and an Avian flu epidemic all pose threats to the economy’s improvement.

Around the World, By Region

Henderson said that Western Europe’s mild economic improvements can be traced to its exports. Still, the region continues to grow by a weak 1 percent per year. While the U.K. continues to grow rapidly, Germany remains a major drag on the European growth. Why? Its financial efforts to rebuild and modernize Eastern Germany appears is coming along more slowly than anticipated.

When it comes to Japan, its strong exports have lifted its GDP. Its nuclear energy also insulates it from the oil price hikes. Most important are the economic reforms being made by PM Koizumi, including reforming the loan criteria made by the country’s banks. As a result, Japan is expecting a 4.1 percent jump in 2004 GDP, with more modest growth in the next two years.

Turning to China, Henderson cited its quarterly GDP, which has been growing by roughly 8 percent, and that growth should slow modestly to seven percent in the next two years. “It has a voracious oil appetite, and is the world’s biggest consumer of steel, cement, and copper,” said Henderson. China uses 40% of the total supply of coal in the world. These demands have created inflation in China, and so “monetary brakes” are being applied, as bank loans are being rationed in some over-heated areas. Additionally, labor rates are rising as skilled workers are in demand. As a result, a soft economic landing is expected.

The U.S. quarterly GDP is expected to grow, but slower than in the previous quarter: approximately 3 percent. According to Henderson, the Bush administration’s economic stimulus is wearing off, interest rates are rising, and the U.S. budget deficit will be $450 billion in 2004. Henderson said that tax increases are likely in 2005. “Whoever wins the election has to deal with trade deficits and healthcare imbalances,” he said. “Taxes must be raised.”

The disturbing question: Will Asia continue to finance U.S. borrowing? If it stops picking up U.S. bonds, our interest rates will rise, and economic growth will slow.

Walt’s World

The final speaker of the day, electronics analyst Walt Custer, gave attendees encouraging news. In 2004, electronic equipment is up 10 ten percent, flexible circuits 14 percent, and semiconductor up 28 percent compared to 2003. “Shipments are orders are almost back in sync,” he said.

Packaging Structures

On the event’s second day, DuPont Electronic Technologies’ Daniel Amey presented “Technology Drivers Impacting the Fabrication of First and Second Level Electronic Packaging Structures,” which was assembled by Dr. Karl Dietz. Amey told the audience that ICs are driving changes in materials, packaging structures, and fabrication processes.

He summarized his talk by saying increasing I/O counts demand area-array packages with microvias and fine line interconnects. Second, increasing IC clock speed and high speed digital (off-chip) signaling requires planar capacitors close to chip, lower dielectric (impedance changes) along the signal path. Third, greater heat generation and higher temperature assembly steps require improved thermal management, thermal modeling, chemically and dimensionally stable materials, high thermal conductivity, thin layers, and filled vias. Next, ICs with low Dk, brittle dielectric impact interconnect reliability; CTE mismatch issues become more critical. And finally, impedance control requires uniform Dk, uniform dielectric thickness, and controlled copper conductor width.

Fair Trade vs. Free Trade

The second day ended with a debate on free trade vs. fair trade between Joe Fehsenfeld, the president of the USPCA, and Dan Feinberg, chairman of IPC’s Government Relations committee. About half of the attendees stayed to listen to the exchange, and those who did were glad to hear such a succinct debate on the timely issue.

Fehsenfeld accused China and other Asian countries of deliberately manipulating their currency, among other tactics, to gain the upper-hand in global trade. He said the topic of free trade vs. fair trade is always controversial, but that it also has added significance in today’s business climate. He first asked, “What is free trade? It’s an international exchange of good and services, free of government services, and free of any trade barriers.” The WTO system relies upon voluntary compliance, said Fehsenfeld. “The WTO is not a friend of the U.S.”

Citing NAFTA, as well as free trade agreements with Israel, Jordan, Singapore, Chile, Australia, and Morocco, Fehsenfeld argues that such deals ultimately hurt U.S. manufacturing because these “partners” do not demand the same standards of the U.S., creating an intrinsically unfair playing field. “Free trade is a theory that is never practiced,” he said. “The reality is that free trade has costs. Are we willing to pay it?”

Free trade promotes a race to the bottom in wages, working conditions, and environmental conditions, argued Fehsenfeld. He cited China as the primary example, the currency manipulations in China, government subsidies, tax incentives, low environmental standards, human rights abuses, no respect for personal property, and a reluctance to enforce IP laws in China. “The cost in IP alone is in the tens of billions of dollars,” he said. Supporting his claim, Fehsenfeld cited U.S. Exporter’s Market Share into China. In 2000, it was 7.2 percent; in 2003, 6.9%. Through May of 2004, it fell to 6.8%. And the top five exports to China? Tobacco, sheep, goats, ships and boats.

By comparison, China’s exports to the U.S. include a more formidable market: motor vehicles, iron and steel, knit apparel, railroad rolling rocks, magnetic and optical media. “China has five domestic major auto makers, and they are aggressively pursuing a competitor status,” he said.

The U.S. trade deficit with China now exceeds $10 billion per month, said Fehsenfeld. “And it’s not just China; India is coming on strong. Specifically, India has targeted the electronics industry as one that provides long-term opportunity and growth to sustain their economy. We as the U.S. have no concerted manufacturing policy, from a government standpoint, industry, academia, or employers standpoint, there is no evidence that we have a practical policy,” he said.

Closer to home, Fehsenfeld said that the U.S. PCB industry has dropped from 80,000 to 40,000 employees in the last four years. So what is fair trade? A level playing field. Fehsenfeld is convinced that the U.S. government should enforce compliance to trade laws, or WTO. Protect its IP. Recognize China’s human rights violations, and demand that it establish equivalent environmental standards. “If you’re not for fair trade, you must be for unfair trade,” he said.

When Fehsenfeld finished, it was Dan Feinberg’s turn to make the case for IPC’s stance. Feinberg said that he agreed with much of the empirical data presented by Feshenfeld regarding the lack of standards and resources used by U.S. trading partners. “But what is the alternative?” asked Feinberg. “Do we lobby for tariffs? For government protection of our industries? History has proven that that simply doesn’t work.”

Free trade and fair trade are two sides of the same coin, said Feinberg. “They’re codependent. You can’t discuss one without the other. There’s no panacea. Even in the same country, there’s no one solution for every company. IPC has supported the ‘Buy America’ Act, even when some OEMs and EMS providers—also members of IPC—were against it, as well as the DoD.”

Don’t confuse fair trade with protectionism, warned Feinberg. “Free trade is not always fair!” He cited the WTO, which is the primary international group charged with the promotion of free trade. “Though it’s often criticized, it has no power to change U.S. laws,” he said.

Feinberg cited several “urban trade myths.” First up, he said trade barriers are chiefly injurious to the countries imposing them. According to the U.S. Department of Labor’s own statistics, “protectionism” destroys eight jobs in the general economy for every one saved in a protected industry.

He cited lost jobs, higher prices, higher taxes, and a resultant debt crisis, if tariffs were to be enacted. Feinberg pointed at the audience, “You are the IPC Board! You tell us what you want.”

Finally, to read a more succinct presentation of Dan Feinberg’s argument, simply turn to his “Fein-Lines” column in this month’s issue.

A Sage Comment

After the both presentations were over, Feinberg asked for comments from the audience. Among those watching the debate was Mike Freda of Sun Microsystems. He said, “Ultimately, the consumers are driving outsourcing and free trade. We have many more material goods because of the cheaper prices. If you want to blame someone, it’s not the OEMs or EMS providers, the Chinese, or the rest of Asia—it’s us!”