Seasonal upturn in North America ­ but uncertainty remains

Citation

Custer, W. (1999), "Seasonal upturn in North America ­ but uncertainty remains", Circuit World, Vol. 25 No. 1. https://doi.org/10.1108/cw.1999.21725aab.031

Seasonal upturn in North America ­ but uncertainty remains

USA

Seasonal upturn in North America ­ but uncertainty remains

Keywords Electronics industry Market trends, Printed circuit boards, USA

After a difficult spring and early summer the North American PCB industry has now strengthened slightly, as the three-month average rigid board book/bill ratio reached 1.09 in August. The main driver for this modest recovery is believed to be a seasonal upturn in the personal computer industry as PC manufacturers stock the retail shelves for Christmas. Whether a particular PCB fabricator makes boards for the personal computer industry or not, overall board capacity utilisation has risen ­ filling order books and somewhat firming dismal PCB prices.

The $9 billion North American PCB industry is driven by a $400 billion dollar electronic equipment market. As per Ed Henderson of Henderson Ventures, the top North American electronics companies are listed in Figure 2. Of the top 34 companies listed, only three (IBM, Rockwell and Litton) produce PCBs (and Litton does not make any for its own use). The days of the OEM with captive PCB capacity are fading quickly. In 1970 60 per cent of the PCBs made in the USA were produced by the OEMs, today it is about 5 per cent.

However, the OEMs and contract assemblers remain the largest consumers of printed circuits. How should a PCB fabricator target the end markets? Fortunately Electronic Business Today maintains an excellent Web site http://www.eb-mag.com/registrd/issues/9807/0798topstats.htm, which lists the major OEMs in decreasing order of annual revenue by electronic equipment category. Figure 3 (instruments ­ test and measurement) and Figure 4 (industrial systems ­ automation, controls and security) are two examples but this Web site also lists consumer, automotive and military electronics, communication equipment, computers, computer peripherals and business and office equipment. The list of customers makes an excellent sales target list for merchant producers of PCBs.

As noted earlier the spring/early summer was a difficult time for North American PCB manufacturers. For many, earnings dropped dramatically as production operated well below break-even levels. In some cases PCB fabricators took this opportunity to pare back operations and restructure. Figure 5 shows the sales and net income (most recent quarter versus the same quarter a year earlier) for those North American PCB fabricators who publicly disclose their financial details. While all of these are North American-based companies these data also include their foreign operations where appropriate (ADFLEX, Hadco, Parlex, Praegitzer and Via Systems). A look at the most recent quarter's data reveals that the two most profitable companies (Sanmina and Altron) are those whose main businesses are assembling, rather than fabricating PCBs. Recently Sanmina and Altron announced plans for a merger (see below). The pure PCB fabricators had a difficult time financially last quarter. However, with improved order books and their major restructuring behind, hopefully next quarter's data will look better. Stock prices are already rising in anticipation of better times.

Part of the spring/summer PCB slowdown was due to a drop in end market exports, especially to Asia. Figure 6 shows US electronic equipment exports were flat first half 1998, compared with first half 1997. Exports to Asia were down, offsetting any gains in Canada and Europe. In particular computers and peripherals were hurt badly.

By mid-summer signs of life began to stir in the industry. In Figure 7 the National Electronic Distributors Association report that their members' inventory turnover rate bottomed in May and began improving into the summer. It is reported that the major "channel-oriented" personal computer manufacturers aggressively drove down inventories in mid-year. As the main retail buying season (Christmas) nears, personal computer inventories are smaller. Hopefully, this will mean that the major "post-Christmas" inventory that occurred last year will be less dramatic in late winter/early spring 1999. Much of the chaos we experienced last spring was due to the likes of Compaq shutting down production to flush excess inventories from the retail channels.

Figure 8 is instructive. On the positive side the rate of growth of PCB orders is finally in balance with electronic equipment. We are not over (or under producing) PCBs. However, the overall growth of electronic equipment has slowed to only 5 per cent, on a 3/12 (most recent three months versus same three months previous year) basis. What is especially troublesome is that all of the growth is in computers (pre-Christmas build-up?). Figure 9 shows the 3/12 rate of growth of communication equipment, instruments and controls and military electronics are all zero or below. Only computers (+ 23 per cent) is showing strong growth (and this is very seasonal).

Figure 2 Top North American electronics companies

Figure 3 Instruments, test and measurement

Figure 4 Industrial systems (automation, controls and security)

Figure 5 North American PCB manufacturers ­ public data

Figure 6 US electronic equipment exports (first half 1998 vs 1997 ($B))

The net result is that we are still in uncertain times. The recent US Federal Government's interest rate cuts should spur the economy causing communication equipment and instruments to again expand. Will this happen soon enough to offset a post-Christmas computer slowdown? Time will tell.

Recent activity in the North American PCB fabrication and contract assembly industries

Sanmina has agreed to acquire Altron in a stock swap valued around $219 million. The major consolidations continue!

Circuit Systems has entered into a non-binding letter of intent to acquire the assets of Silicon Valley Printed Circuits, Santa Clara, CA. SVPC is a manufacturer of "quick turn" PCBs for both prototype and low to medium volume orders. The estimated purchase price will be $7 million plus the assumption of certain liabilities.

The DII Group acquired Greatsino Electronic Technology, a PCB fabricator and contract electronics manufacturer with operations in the People's Republic of China. Greatsino was part of Universal Appliances Limited, a Hong Kong public company and maker of consumer, household electrical, and telecommunications products. The initial purchase price was $44 million, with a one-year earn-out not to exceed $40 million. The DII Group's wholly-owned subsidiary, Multilayer Technology ("Multek"), will operate the PCB operations as Multek China. DII's wholly-owned subsidiary, Dovatron International, will operate the CEM unit under the name Dovatron China.

The DII Group announced that Orbit Semiconductor will divest its wafer fabrication facility and adopt a fabrication-less strategy to complement its application-specific integrated circuit design, ENCORE! gate array, and mixed signal product lines.

SCI Systems acquired certain manufacturing assets from Ericsson in Leganes, Spain. SCI will provide manufacturing services to Ericsson from that location under a multi-year supply agreement and has offered employment to associated Ericsson workers.

Figure 7 Inventory turnover, annual rate

Figure 8 US electronic equipment versus PCBs

Figure 9 US PCB versus electronic equipment bookings

SCI Systems will assume all manufacturing of Intergraph's computer products under a multi-year supply agreement and will acquire some of Intergraph's manufacturing assets in the deal. SCI said it expects to generate more than "several hundred million dollars a year" in revenue from the Intergraph deal. SCI, one of the largest contract manufacturer of electronics in the USA, reported revenue of $6.81 billion for the fiscal year ended 30 June. Approximately 300 Intergraph employees will be offered employment by SCI, at their current salaries and tenure levels. SCI expects to lease Intergraph's plants for six to 12 months before moving the operations to SCI plants. The deal highlights a growing trend toward contract manufacturing in the technology sector. Contractors are facilitating the rise of the "virtual company", one that does little besides design and market a product. This move has been accelerated as more computer-related firms outsource manufacturing amid tough competition and shrinking margins.

Walt CusterMorton Electronic Materials