Are We Headed for a Downturn?

The electronics industry is heading down in 2007—or…well…maybe not. In fact, 2007 may turn out to be a good year after all. And if neither of those scenarios come true, then it probably will just be flat to slightly up.

Those widely varying predictions are the collective output of the best minds in the electronics industry. Ever since Semico published its forecast last week of a downturn in early 2007, I’ve been asking questions about whether the research house is right. Downturns, after all, are big news in a cyclical industry. The answers I’ve gotten fall into three distinct camps: Yes, no and maybe.

At first, I assumed it was a matter of optimistic vendors vs. curmudgeon analysts. I assumed all vendors would talk about the opportunity ahead, because that’s always good for the market and their products. To some extent, that proved to be right, although for some rather complex reasons.

The big guys are typically optimists because they typically can afford to plow more money into new products and R&D. Intel may be cutting 10,500 employees, but it’s banking on its new multi-core chips and Microsoft’s new operating system to spur massive sales in 2007 and 2008.

Mark Frey, the CFO at Fairchild Semi, predicts strong sales around the globe in a number of different markets, while he sees slowdowns in others. The industrial sector is robust, for example, and consumer continues to be a key driver even though orders are slowing—particularly in handsets. In contrast, computers remain weak, although most electronics companies have diversified enough that this is no longer the all-important gauge of industry strength.

“My worry has been a general recession, but markets are so diversified that we’re not seeing cyclicality we have in the past,” Frey said.

What does that mean in real terms? The answer depends largely on the size and diversity of a company’s portfolio of products and target markets, which act as a hedge in anything but a general global downturn. Keith Horn, senior VP and COO at Fujitsu Microelectronics America—a company that plays in an even broader swath of markets than Fairchild—says Fujitsu expects 14 percent growth this year, with no sign of a slowdown in 2007 or beyond. “It may be because we’re introducing so many new products,” he says. “We have 90 nanometer designs in production.”

But there are caveats, too, which can impact margins along the way and affect one company or another, and in some cases all of them. This, after all, has become a global industry, and there are lots of factors that now have to be considered—too many, in fact, to come up with a clear picture at any single point in time. The price of silicon and copper are on the rise, for example. Will those commodity prices decrease? The answer  depends largely upon regional production capabilities. Horn says Fujitsu is working with its suppliers to try to manage those, but they may impact margins.

Handel Jones, chairman and CEO of International Business Strategies, predicts an industry margin squeeze in 2007, with growth in the 0.2 percent range. “If you track changes in global GDP with the IC market, you see a strong correlation,” Jones says. “Global GDP is slowing, specifically the United States. I expect a softening in consumer spending.”

He says 2008, however, will be a recovery year, led largely by the widespread adoption of Microsoft’s Vista, a presidential election in the United States, the summer Olympics in Beijing and a ramp of 3G deployments.

Gartner, meanwhile, believes the industry is still on track. Bryan Lewis, VP and chief semiconductor analyst at Gartner, believes the industry is still on track and fabs are still running at “reasonable” capacity. “We’re not predicting a significant demand slowdown,” Lewis says. “There’s always a question of when overcapacity hits, but we’re still looking for at least mid-single digits to high-single digit growth for next year.

Who’s right? Time will tell. But what’s becoming increasingly obvious is that the size of the market, the number of factors involved, and the constant interplay of economic data, political shifts, currency fluctuations and commodity shortages and surpluses will make any predictions from here on almost impossible to gauge accurately. Welcome to the age of globalization.

What do you think?

Ed Sperling
Editor in Chief, Electronic News