Electronic Parts Makers See Lukewarm Demand in Q2, 2013

Sluggish PC sales and Apple product hit shipments in 3C segment

Demand for Taiwan-sourced electronic parts and components used in 3C (computer, communication and consumer electronic) devices cooled in the second quarter of the year for a variety of negative market factors, including a major product transition by Apple before September and slower-than-expected growth of ultrabook sales, according to Industry & Technology Intelligence Service (ITIS). Demand in non-3C segments ended the quarter in comparatively good shape, the market research unit added.

The latest ITIS report shows that the industry's overall output totaled NT$216 billion in the quarter, up 7.5% quarter-on-quarter (QoQ) and 3.5% year-on-year (YoY).

LEDs contributed NT$25.7 billion to the total, representing a 12.5% increase from a year ago, and a 26% from a quarter earlier, mostly thanks to strong markets for backlight and general lighting applications.

Output by passive component manufacturers reached NT$28.9 billion, soaring 13.8% QoQ and 11.1% YoY, mainly on stronger inventory draw by downstream manufacturers in the quarter, compared to the first quarter, especially in the sectors of communication devices, computers and information technology applications.

The printed circuit board (PCB) sector finished the quarter with a modest quarterly growth of 3.4% in output of NT$100.5 billion, to which ITIS attributes a tepid global consumer market that held back restocking by downstream manufacturers, despite some new smartphone model launches.

Due to Apple's reported product transition before September, as well as weaker-than-expected sales of ultrabook PCs, most Taiwanese connector manufacturers in this segment reported lackluster performance, ITIS said. By comparison, makers serving the electric vehicle, renewable energy, medical instrument and network devices enjoyed strong growth, helping the sector to maintain 3.1% QoQ growth in the second quarter.

Output of power supply components in the second quarter amounted to NT$25.1 billion, up 8.3% QoQ, but down 11.9% YoY, mainly due to delayed product launches by some U.S. customers.

Threats and Opportunities

ITIS noted that an increasingly competitive global market poses both treats and opportunities for Taiwan's electronic parts and components industry. Among emerging threats are the aggressive rise of Chinese firms, such as BYD Electronics (International) Co., Ltd. and Wanlida Group Co., Ltd., particularly in market for contract manufactured mobile devices.

BYD Electronics has expanded its contract manufacturing business recently, winning orders for mobile Internet devices from HTC, Nokia, Samsung, BlackBerry, Huawei, Sharp, Dell and Acer, while Wanlida has ambitiously grown in the low-to-middle-end market for local brand tablet PCs.

ITIS predicts that progress by Chinese firms will threaten the competitive standing of Taiwanese suppliers in the near future. If Chinese contract manufacturers continue to grow and forge closer ties with local world-class brands, such as Lenovo, ZTE and Huawei, Taiwanese companies could have little room to compete on a cost basis. ITIS adds that consolidating business ties among Chinese companies is expanding to the downstream sectors of connectors and other applications, stealing business from Taiwanese connectors makers.

More bad news came to Taiwanese manufacturers is an announcement made by Intel, the world's biggest maker of PC processor units and chipsets, that it would slash its revenue forecast for this year as PC demand dwindles.

Intel reported a revenue growth of only 2% in the second quarter of this year and expects sales to be flat for the year. The firm has also decided to cut capital spending for the year by US$1 billion to US$11 billion, raising concerns that the global PC market could worsen in the second half of the year.

ITIS notes that since Taiwan is world's major supplier of PC parts and components, including PCBs, passive components and connectors, the current gloomy climate following Intel expressing its pessimism about the global PC market will surely hit Taiwanese companies in the second half.

To counter the increasingly unfavorable competitive landscape and ensure sustainable development, ITIS advises Taiwanese connector manufacturers extend into non-3C product markets, such as automotive electronics and communication services. The market researcher also advises makers to acquire key technologies for RF connectors, antennas and fiber-optic connectors through buyouts and joint ventures to secure a competitive standing in segments with brighter prospects, such as internet of things and cloud applications.

ITIS sees another ray of hope for Taiwan connector suppliers in the global demand for enterprise-use cloud servers since server motherboards command a price premium over their lower-end PC counterparts.

Auto electronics is another lucrative market for Taiwanese connector makers. ITIS says that electronic parts and components used in cars call for higher specifications and involve longer testing and certification processes, resulting in better margins than comparable products for PCs.

In the power supply component market, ITIS expects local producers to benefit in future from the partnership formed by Bosch, GS Yuasa and Mitsubishi on June 16 to develop next-generation lithium batteries.

The three said enterprises will set up a joint venture in Stuttgart, Germany, to develop the next-generation battery, which will be mainly used in hybrid and electric vehicles. Bosch has a 50% stake in the venture, with GS Yuasa and Mitsubishi owning 25% each. The joint venture will provide technology and sales support to its parent companies and begin operating in early 2014 as part of Bosch and GS Yuasa's power battery business.

ITIS says that the joint venture is Bosch's second attempt to work on lithium batteries in cooperation with partners in Asia. The German firm pulled the plug on SB LiMotive, a four-year venture with Samsung, in September of 2012.

According to insiders, ITIS reports, research on next-generation lithium batteries is focused on electro-chemicals, needed materials and advanced battery management and production technologies to dramatically enhance the battery's energy density.

Uncertain Global Economy

As to the outlook for the third quarter, ITIS says it is still too early to tell if demand for budget-priced PC models in emerging countries can support growth momentum in the industry. A tapering of quantitative easing by the U.S. Fed signals a recovery of the U.S. economy but has seriously impacted emerging economies in Southeast Asia. On the plus side, Taiwanese parts suppliers are expected to enjoy tailwinds from the launch of new smartphone models by Apple, HTC and other global brands in the quarter, including a couple of middle-priced models targeted at emerging countries.

Amidst the mixed economic landscape, ITIS forecasts the industry's overall output to grow by 6.9% in the third quarter to NT$230.9 billion and post a moderate increase of 3.6% to NT$879.6 billion for the whole year. Over the longer term, however, slackening demand for PCs and a shift in smartphone sales growth to low-to-middle-end models will inevitably undermine the sector's profits.

Separately, the LED sector is estimated to see a 4.9% decline in output value in the quarter, due to shrinking market demand for backlight modules.

Despite a high season, the passive component sector's output is likely to show a lackluster growth of 2.5% in the third quarter, says ITIS, based on a sudden drop in Taiwan's export orders for June. The drop came despite an otherwise positive turn of major economic indicators for the month, including improvements in the industrial production index, manufacturing production index, exports, and imports of electrical equipment.

ITIS predicts that Taiwan's PCB output will grow by 6.1% QoQ to NT$106.7 billion in the third quarter, helped by back-to-school demand and inventory draw by downstream manufacturers preparing for the year-end sales seasons. The pace still falls short of the double-digit gains normally seen in the quarter.

ITIS also expects Taiwan's connector makers to post a 6.5% increase in output value in the third quarter, supported by new ICT products launches and stable global sales of consumer docking stations, hubs and embedded system applications.

In the power supply component segment, ITIS forecasts that makers will finish the third quarter with output value of NT$32 billion, up 27.8% QoQ, citing new ICT product launches as a major growth engine. For the whole year, ITIS has lowered its forecast of the sector's output to NT$121.9 billion, up 7.8% YoY.