End of Summer — End of an Era?

Which is the way forward? New or renew?

Nepcon in Shenzhen Aug. 26-28 was “OK” in terms of attendance. Lots of prospects/”tire kickers” but very few buyers.

Japan’s high-tech PWB volume in June increased  8.6% over that of June 2013, but revenue declined 4.1% for domestic build-up types of multilayers — a typical sign of declining business, a maturing industry, cheaper foreign sources, and overcapacity. According to DKN Research, prices for these types of circuits used in cellular phones dropped 12% in Japan during the past year.

Japan manufacturers are also engaged in a price war with Taiwanese and Chinese competitors with double-sided and multilayer flexible circuits. Selling prices on these dropped more than 33% in the past year. Overall, the forecast for the Japanese circuit industry for 2014 is not better than 2013’s, which was the worst since 2008.

The world’s top 100 printed circuit makers account for approximately 80% of global demand.

Nothing is forever. The interconnect industry (PCB and PCBA) has had a good run and matured. It has progressed technically, shifted geographically, consolidated, thrived and suffered due to geopolitical shifts as well as technical advances. Some well-known domestic companies are undergoing inversions. Others are shrinking or struggling to regain a profitable (albeit smaller) status after squeezing suppliers, inventories and eliminating much of the R&D funding for future improvements. Renewing appears to be more difficult as competition for “more of the same” continues to increase and value differentiation declines. In fact, some of the cost reduction activities have actually removed value from many of the offerings making them less attractive in the long run.

Change is inevitable! We can contribute to it or be the “victims” of it. We can invest in the future or have no future. We believe that today’s survivors that are experiencing declining options for their current offerings must seek out new directions, new alliances, new wares, new  cooperative development activities and support for the future.

Opportunities do exist! 3D packaging has stalled due to both economic and technology issues. Mitsubishi Heavy Industry has started a new room temperature wafer bonding service for MEMs and biosensors for firms designing 3D packages and are unable to make them themselves. 2.5D appears to not be faring much better. New improvements in packaging appear to be filling some of the current needs and gaps. We can extend product life cycles with product/process improvements while developing new disruptive or not-in-kind technologies.

New flexible substrates with 14 micron thin cores and 9 micron Cu surfaces provide the reality of 25 micron line and space volume production and, along with new technologies, the opportunity of PCB and IC substrate makers, and their supply chains to work more closely with the packaging industry.

Future success will require a total reassessment of your company’s core values, mission statement and goals. It takes a new strategy and action plan. It will require you to question your managements’ styles. Procedures will have to be reviewed, too. Why were these established? Are they still needed? Should they be modified to meet today’s Lean manufacturing needs and technology requirements? Do they support speed to market? Should you change or create new areas of focus? Do all your managers feel the urgency?

What are you doing to ensure your future?

New cooperative activity. The newly established liaison between the IPC and the International Electrotechnical Commission’s (IEC’s) Standardization Management Board (SMB) should be a boon for the rapidly growing printed electronics industry. All concerned parties have something to contribute and something to gain from this collaboration to create international standards. One must, however, keep an open mind for new potentially disruptive technologies that could potentially bridge some applications of the areas encompassed by printed electronics, printed circuits, and other packages.

It’s time to get serious. The Taiwan Printed Circuit Association (TPCA) has asked for government support to help Taiwan’s PCB industry develop next-generation products to counter slowing growth rates. The nation’s industry (including output from its factories in Mainland China) will generate sales of $18.3+ billion this year. The TPCA is likely to receive a good audience from the government as the nation’s vice president has been a keynote speaker at the annual TPCA show’s opening ceremony the past few years.

Shortly after announcing a new $30 million share repurchase program this month Plexus held an opening ceremony for its $40 million 265,000 sq. ft. manufacturing facility in Guadalajara, Mexico. The company has stated that it is now actively recruiting to fill employment opportunities. Full employment at this facility is expected to exceed 700 workers.

The increasing costs in China and elsewhere, the stability and availability of a skilled and semi-skilled work force, locally established supply chains, and the proximity of five universities are all sure to have contributed to the decision.

SEMI announced another positive book-to-bill IC equipment order ratio for the month of July. Where will the equipment go? What types of chips with what nodes will it build? What industries will consume the added production? When will the PCB/packaging industries partake in the results?

Who is building the packaging substrates and where are they built? Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker, yesterday said its revenue hit a record high $2.16 billion last month up 7.6% from June and 24.6% higher than a year earlier. The company also forecast a sequential revenue increase next quarter because of its strength in 28nm and 20nm process technologies as well as strong demand for flat panel IC drivers and tablet power management chips.

United Microelectronics Corp. (UMC), Taiwan’s second-largest contract chipmaker, posted its lowest revenue in three months last month, down 7% to $380 million due to lower contribution from its solar business.

Conversations with several major circuit interconnect and packaging supply chain members in Singapore, Hong Kong, China and Japan indicate that business is “spotty” at best. KCE in Thailand is having record sales participating in circuits for the automotive after market, now the 2nd biggest in Asia. Unimicron Technology’s second quarter net profits were up 377% from the previous quarter to $9 million. Gold Circuit Electronics and M-Flex are still working to restore profitability. Viasystems lost money the second quarter of the year. The second half of 2014 looks promising for Taiwan-based circuit makers. Global Innovation has restored its Lone Star name with a statement that it will only provide domestically produced circuit boards.

SEMI has forecast double-digit growth for equipment makers for the next two years. What will the applications be? Will Intel’s new 14nm node be part of the surge, or will the cost/benefit ratio not be good enough? How much of an effect will “wearable electronics” have?Which substrate/board builders will benefit? When? Where?

Samsung’s smartphone market position in China has been supplanted by Xiaomi  and in India by “home-grown” Micromax in the 2nd quarter of 2014. The latter is offering a 6-inch screen with magnetic flip cover, 1.3 GHz dual-core Media Tek processor, and an Android 4.2.2 Jelly Bean operating system with a 5-megapixel camera and a 6-month movie subscription for $140 (8,500 rupees)!

How is your crystal ball? Are you monitoring and re-evaluating your attainable markets and shares? Are you redefining your businesses? have you found creative ways of extending product life cycles? Are you noting major shifts in supply chains and aligning your companies with the king (or prince) makers of the next few years? Are you redefining your markets and stepping “outside” the traditional boxes? If not, I suggest (re)reading Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne (2005, Harvard Business School Publishing, 2005).

As a supporting organization of the China Sourcing Fair Fall 2014, Electronics & Components, to be held on October 11-14, 2014 at AsiaWorld-Expo, at the Hong Kong Airport, the HKPCA is offering its members VIP Buyers’* privileges to this Fair.  These include:
– Free admission to the fair;
– Free transportation arrangements to the fairs;
– Coupons for F&B & shopping discounts at the Hong Kong International Airport area and AsiaWorld-Expo;
Exclusive use of onsite office suites to its invited VIP buyers (Wifi connection, office equipment, etc);
– A free Octopus Cash Card with HK$150 stored-value for transportation or purchases.

 

Does Rising Nationalism Pose Threat to Electronics Supply Chain?

The amount of geopolitical discord around the world at present is stunning: Thailand, Vietnam, Korea and other major electronics manufacturing hubs are seeing a rise in nationalism and severe internal tension over how to address foreign pressure.

Thailand in May endured yet another military coup — its 19th since declaring independence from its monarchy in 1932. Some observers feel the military wants a permanent seat in the national parliament, a move that could hinder its democratic movement.

In Vietnam, citizens are outraged at what it feels is Chinese strong-arm tactics. Its Northern neighbor has provoked many Southeastern nations over the past few years, often by occupying seaborne territory that others had staked claims to in the past. (The Philippines have a similar complaint dating to 2012, when China evicted Philippine fishermen from their long-held fishing grounds.) Lately, Chinese oil rigs took up in Vietnamese waters, leading to riots at Fittec, Foxconn and elsewhere, where domestic workers took aim at their Chinese* employers.

Korea is losing business to Vietnam, aided in part by its own OEMs: Korea is now the largest investor there, pumping in nearly 23% of all outside investments in the first quarter this year. As Samsung relocates its cellphone manufacturing there, Vietnam is on track to produce 250 million handsets this year, versus 200 million in China and just 30 million in South Korea. As the linked article indicates, as of March 2014, Samsung Electronics subcontractors had invested an aggregate $2 billion in Vietnam. Meanwhile, while Samsung buys a reported 53% of its parts from Japan, South Koreans now view Japan as their second-leading military threat, next to North Korea, and resentment from World War II is rising once again.

Indonesia is suffering through a contested presidential election, one that involves an ex-general and the possibility of an overturned ballot result.

Japan, my friend Dr. Hayao Nakahara tells me, has essentially stopped investing in new manufacturing sites in China, with the only new developments minor capacity add-ons to existing plants. The two nations have been at odds over everything from possession of uninhabited islands in the East China Sea to a rehashing of wartime atrocities.

Southeast Asia is home to the bulk of the world’s electronics production, and holds the majority share of products built for the consumer, industrial/instrumentation, telecommunications, PC and peripherals end-markets (not to mention the vast majority of the raw materials and components supply). We’ve absorbed several of nature’s bullets of late — flooding in Thailand, the typhoon in Malaysia and of course the 2011 earthquake and subsequent tsunami in Japan. I am told that the media reports have exaggerated what’s happening on the ground in Southeast Asia, and that on a day-to-day basis little dissent is noticeable. That may be true, and to be sure, the self-inflicted disruptions have thus far been held to a minimum. Given the number of countries involved — unprecedented in recent times — and the enormity of what’s at stake, we can’t help but feel it will take some luck if the next supply-chain breakdown is only as bad than the last.

*Fittec is based in Hong Kong, Foxconn in Taiwan, but most employees and manufacturing for both companies are in China.

1 Billion Reasons for Disbelief

Where do they come up with these numbers?

DigiTimes is now reporting that Foxconn will open a pair of R&D centers in Japan at a total cost of $1 billion. Unless Foxconn is planning to break into wafer fabrication — and it’s not — $1 billion is an otherworldly sum. It’s certainly far greater than would be needed for even the most statest state-of-the-art facility. (Not to mention all those Japanese OEMs that are looking to sell their own internal operations on the cheap.)

This comes on the heels of the proclamation that Foxconn plans to ultimately invest $10 billion in a large-volume production center in Indonesia. Again, given that there are only a handful of EMS/ODM companies that even do $10 billion a year in sales, and that the market for SMT manufacturing equipment is less than $2 billion worldwide, these estimates suggest land costs in Serang compare with those of downtown Tokyo. (They don’t, and even an operation the size of Foxconn’s reported vision — a 1,000 hectare [3.86 sq. mile] industrial city — would cost only a relatively affordable $1.1 billion for the raw land.)

Sorry, but either there’s some gamesmanship going on, or someone needs a new currency converter.

 

US Commitments

When I heard early this month that Foxconn (Hon Hai) chief Terry Gou offered to train Americans in electronic manufacturing I recalled one of Apple’s excuses for putting its production in Asia, much of which went to Foxconn which now has over a million workers. Apple stated that America just did not have a sufficient number of qualified and trained technicians and engineers (tens of thousands Apple said) available to build its products here.

Then I thought, why would Gou make this offer? He certainly has not shown himself to be a good Samaritan in the past. The only conclusion I could reach was that he was planning to establish assembly operations in the US and would need a qualified work force to achieve this. Note that production of iPad minis are behind schedule and market demand. Labor costs have risen rapidly and continually in the PRC over the past five years. Hon Hai has been plagued with labor problems and a high factory worker suicide rate in China during the past few years. Gou reportedly is reported to be conducting evaluations in cities such as Detroit and Los Angeles where there is a large available labor pool. It should be noted that Foxconn has debunked the stories associated with the possible establishment of a US manufacturing base. But then, is it possible that Mr. Gou has become a good Samaritan when it comes to helping the US’s manufacturing capabilities?

Meanwhile, Gou, at a recent public event, noted that the company is planning a training program for US-based engineers, bringing them to Taiwan or China to gain first hand experience in the processes of learning product design and manufacturing. He has already been in touch with MIT regarding the program. They will also be in an environment to learn Chinese.

All this begs the question: Where are the American companies, government agencies, and elected officials that claim that they want to bring manufacturing jobs back to the US? Where is the commitment? Where is the investment? What steps are being taken to entice American manufacturers to the table? What motivation is being offered? If a foreign company can find it attractive to do so, why can’t an American company find it so, too? Even more interesting is the question, “What is the U.S. government doing to keep its current manufacturing base viable and growing?”

Is Japan’s interconnect future on shaky ground? Third-quarter results from Taiwan’s leading board makers (suppliers to Apple, automotive companies, and tablet makers) indicate that the center of HDI manufacturing has already undergone a major shift from Japan toward Taiwan and China. Taiwan’s government has been extremely supportive of this and other high-tech activities and investment by its “native” electronic (and other) companies.

“Rumors” persist that Taiyo is attempting to buy Goo Chemical in Japan. Goo owns 51% of OTC, Taiyo’s leading solder mask competitor in greater China.

Troubled Waters Ahead

Disputes between China and Japan over ownership of several small islets, known as Senkaku in Japan and Diaoyu in China,  are increasing and threatening to draw the U.S. into a potential fire-fight and conflict between 2 of the world’s top 3 economies. Violent anti-Japan protests this past week are threatening the $300 billion annual economic ties between the two nations. A wide range of firms from electronics giants Sony and Panasonic to Japan’s big three carmakers — Toyota, Honda and Nissan — temporarily halted production at some or all of their China-based plants.

Japanese electronics (and other) manufacturers are reported to be making a beeline to the Philippines. These include Furukawa Electric, Murata Manufacturing, and Brother Industries. The Philippine’s Trade and Industry Undersecretary Cristino Panlilio stated that the government is also soliciting suppliers of these Japanese companies in order to nurture local supply chains.

Job creation. Foxconn’s newly announced venture near Sao Paulo, Brazil, is expected to create tens of thousands of jobs by 2016. One has to wonder whether Americans or Europeans will provide the basis of their necessary supply chain needed for the announced board, part, and device production. Or, will a new “home grown” series of material and specialty chemical suppliers be the end result? Will production assembly equipment come from Europe? America, China, or Asia? The numbers will be big!

Samsung toeing the mark? Following its recent loss IP suit loss to Apple, Samsung announced that it would audit working conditions at 249 Chinese subcontractors and suppliers, including 105 that produce goods solely for Samsung. This major decision, coupled with Apple’s main provider Hon Hai’s (Foxconn Technology Group) decision to tackle working condition violations among its 1.2 million workers assembling iPhones and iPads, are certain to change the way that Western and other “foreign” companies do business in China. Samsung stated that it would terminate contracts with suppliers that do not take corrective actions when found and notified of violations of Samsung’s labor and working condition policies.

Another Tidal Wave Hits Japan

Old friend Dominque Numakura comes back from the annual JPCA Show with a stunning announcement: Japan’s PCB industry seems to be on life support.

From a series of dull presentations to the outsourcing of manufacturing to a general lack of optimism, the mood is dour, Numakura says. More ominous, some veterans are comparing the trend to the decimation of the US PCB industry in late 2001.

As late as 2000, the US and Japan were neck-and-neck in annual PCB sales, with the US dominating the large board space and Japan leading in HDI. Despite the problems experienced in the US, Japan continued to be the technology leader in PCBs, leading some to surmise that its vast investment and wise decisions on which technologies to focus on made Japan impervious to the cost pressures that sunk the North American industry. Numakura’s essay suggest that’s not the case, leaving one to wonder what this means for the circuit board industry for the coming decade.

Time to Panic?

Anecdotal reports indicate some manufacturers are purchasing larger-than-needed amounts of raw materials and certain components out of concern for supply availability in coming months. This is all tied to the shortages brought on by the earthquake and tsunami in Japan.

In the near-term, I expect analysts will be a bit confused as to what’s real demand and what’s over-ordering. Something to watch.

 

Hedging Turmoil

By now you have surely heard of the devastating earthquake that hit Japan on Friday local time. The 8.9 Richter scale quake set off a surge of tsunamis that, as of this writing, were still threatening the Pacific Rim, Hawaii and even the Western coastline of  North and South America.

In Japan, several factories were closed as result of the quake. Sony, for one, closed three plants and evacuated all employees, according to published reports.

Added with the uprisings in the Middle East and Northern Africa, it’s been a cruel month for world stability. The former took several EMS and PCB plants, including those of AsteelFlash and Fuba, offline, while the uncertainty has given way to rapidly increasing fuel costs around the world.

Over 40% of the world’s NAND flash and roughly 15% of the world’s DRAM output are manufactured in Japan, according to Jim Handy of Objective Analysis, a semiconductor research firm. Then there’s the litany of major consumer and industrial product OEMs that call the island nation home. (Objective Analysis anticipates “phenomenal price swings and large near-term shortages” as a result of this earthquake.)

Like so many disruptions — be they natural or man-made — today’s events should serve as dramatic reminder not to put all your eggs in one supplier’s — or regional — basket. Hedge your bets; spread your risk.