From stellar semiconductor sales to the slowing migration of manufacturing to China, the electronics industry can expect several major developments in the coming months. Examine five of them:

2004 is shaping up to be a good year for the electronics industry. With semiconductor revenue growth forecasts in the double digits and capital spending staying strong, the industry is back in fighting form. But for how long will the upturn last? Below we explore the economic state of the electronics industry as well as other major trends:

1) Recovery is strong, but it may be short-lived.

Robust growth is expected in the electronics industry this year. In fact, in semiconductors—the highest tech segment of the industry—an overall growth of 27.5% is forecast for the year, with the possibility of going as high as 32.5% or as low as 20.6%, according to Arizona-based Semico Research, a leading industry forecaster. And purchasing managers have been upbeat for the past few months, as indicated by the monthly poll conducted by Electronic Business. Most expect steadiness or improvement in both capacity utilization and overall business conditions. Moreover, the positive growth outlook for the electronics market continues to register higher with each report of better-than-expected spending in key markets and countries. While the least optimistic forecasts peg 2004-2005 productivity gains at 2.4%, the most upbeat ones estimate productivity increases of 6%, which will mean that electronics markets will grow faster this year than at any time in the flourishing late 1990s. However, some believe that the recovery of semiconductors will likely be short-lived. Semico Research predicts that in 2005, semiconductors will experience another recession—albeit a mild one—because of the combination of capacity additions and slowing consumer and IT upgrade spending.

2) The move to China will slacken its pace.

Beginning this year and persisting through 2006, the rate at which electronic component production and system assembly facilities are relocated to China will decelerate. “OEMs (original equipment manufacturers) have transferred their big products,” Bill Mitchell, CEO of Arrow Electronics, tells Purchasing Magazine. “There aren’t any more cell phones or personal digital assistants or notebook computers to transfer.” Moreover, the country’s significant cost advantage has already started to decline, and this will help to slow the pace at which factories are moved there. But while the rate of migration will lose some speed, the massive shift of manufacturing capacity to China will still continue. Moreover, the Asian country will grab a huge portion of the additional manufacturing capacity that is expected to become available in the next few years.

3) Contract manufacturers expand logistics capabilities.

Over the past few years, the electronics manufacturing services (EMS) industry has quickly diversified its list of value-added services for OEM customers. As a result, they have veered far away from solely focusing on manufacturing, their longtime bread and butter. Now, EMS firms are beefing up their logistics offerings as well, providing a variety of outbound shipping services to OEMs that are loathe to build up inventory and are aiming to transport high-tech product to customers as fast as possible. In fact, EMS companies are putting such an emphasis on outbound logistics that most now have organizations devoted to marketing and managing outbound, customer-facing functions. According to Jim Molzon, vice president of global logistics at California-based EMS firm Solectron, EMS companies can now make an OEM’s product and then send it to the OEM’s manufacturing facilities or straight to its customers, reducing the number of touch points and the inventory in the OEM’s system.

4) Distributors provide more programs and services.

After being battered by the economic downturn, the electronics distribution industry is emerging with a more positive outlook and a new strategy. Distributors are upbeat about 2004—expecting a recovery and vigorous growth—and are optimistic about the long-term outlook for the industry. Many are planning to take a more customer-focused approach and will furnish more services. Acquiring more customers—including OEMs and EMS firms—has become a major priority, as well as strengthening relationships with current ones. Additionally, more distributors will offer more supply chain management programs and value-added services—even to smaller customers—as they seek to establish themselves as the most capable product and service providers. In short, they’re no longer just selling parts.

5) Collaboration is on the rise.

Semiconductor companies—both fabless and integrated device manufacturers—are teaming up more often and distributing the risks and rewards of designing and making their products, observe industry executives. Increasing chip complexity and the skyrocketing cost of semiconductor fabs (fabrication facilities) and mask sets are driving this trend. “The last few years has forced companies to look at things differently,” Robert LeFort, president of Infineon Technologies North America Corp., remarked during a recent conference held by Semico Research. “It’s better to partner with someone and share the risk than bear the burden alone.” Moreover, chip companies are realizing that different levels of the value chain can significantly affect each other, and in response, they’re broadening their chains beyond direct subsystem customers to include OEMs and eventually, end consumers.

Sources:

Next Downturn Not Far Away, Analyst Says
Brian Fuller
eetimes, March 17, 2004
www.my-esm.com/showArticle.jhtml?articleID=18400571

Steady as It Goes
Susan Mulcahy
Electronic Business, March 1, 2004
www.reed-electronics.com/eb-mag/article/CA386101?pubdate=3%2F1%2F2004

Hopes and Expectations Run High
Susan Mulcahy
Electronic Business, February 1, 2004
www.reed-electronics.com/eb-mag/article/CA376449?pubdate=2%2F1%2F2004

The Key to 2004 Growth
James Haughey
Electronic Business, February 1, 2004
www.reed-electronics.com/eb-mag/article/CA376448?pubdate=2%2F1%2F2004

Chip Makers Collaborate More as Costs Surge
Crista Souza
ESM, March 16, 2004
www.my-esm.com/showArticle.jhtml?articleID=18400391

Expect Distributors to Add More OEM, EMS Customers
James Carbone
Purchasing Magazine, February 19, 2004
www.purchasing.com

The China Migration Slows
Jim Haughey
Electronic Business, March 1, 2004
www.reed-electronics.com/eb-mag/article/CA386100?pubdate=3%2F1%2F2004

Contract Manufacturers Focus on Logistics Value Adds
David Hannon
Purchasing Magazine, February 19, 2004
www.purchasing.com

Resources:

Circuits Assembly www.circuitsassembly.com

EE Times www.eet.com

Electronic Business www.reed-electronics.com/eb-mag

Electronic Products www.electronicproducts.com

Silicon Strategies www.siliconstrategies.com