Weekly Global Update for January 27, 2016

Business Outlook for the Global Electronics Industry (with emphasis on Europe)

This past week I had the honor of being the keynote speaker at the EIPC (European PCB trade organization) winter conference in Dresden, Germany. Approximately 60 delegates attended this two day meeting which also included a visit to Volkswagen’s Phaeton production facility.

See www.eipc.org/eipcevent/2016-winter-conference/ for the meeting program with the speakers’ names, affiliations and titles of their papers.

If you would like a copy of my charts e-mail walt@custerconsulting.com.

Japan Update

JEITA just released November electronic equipment, component and device domestic production data:

• Electronic equipment production declined 3.3% in November 2015 versus 2014 and was down sequentially in both October and November from the prior months (Chart 1).
• Semiconductor shipments to Japan remained similar to domestic electronic equipment on a 3/12 growth basis (Chart 2).
• Domestic IC production declined from October to November while discrete device production was unchanged (Chart 3).
• On a 3/12 growth basis both device and component production is still positive (3/12 >1) but device production growth has declined significantly (Chart 4).
• Passive component production dropped sharply in November, after spiking in October (Chart 5).
• PCB production also dropped in November (Chart 6) as 3/12 growth declined to +4.8% for Sep-Nov 2015 vs. Sep-Nov 2014 (Chart 7).

Source: www.jeita.or.jp/

January PMI Leading Indicators (Preliminary)

Markit economics just released “flash” January PMI data for the U.S., Japan, the Eurozone, Germany and France:

Chart 8 summarizes December 2015 actual versus January 2016 “flash” results. The U.S. rebounded, Europe growth slowed and Japan was little changed.

Further comments by Markit Economics:

USA (Chart 9)

U.S. manufacturers started the year with a rebound in output and new business growth from the lows seen during December. As a result, the headline seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index picked up to 52.7 in January, from December’s 38-month low of 51.2. The headline PMI signaled a moderate improvement in overall business conditions, but the latest reading was the second-lowest since October 2013 and weaker than the post-crisis trend (54.2). A moderation in manufacturing jobs growth to its lowest for four months was the main factor acting as a drag on the headline index at the start of 2016.

Commenting on the flash PMI data, Chris Williamson, chief economist at Markitsaid, “The U.S. manufacturing sector found a new lease of life at the start of the year, with growth of factory output and orders both picking up after the slowdown seen late last year.

“Producers appear to have shrugged off worries about China, helped by export orders showing signs of reviving. It looks like weak demand from China is being offset by improved demand for US-produced goods in other markets.

“The employment trend also remained reasonably buoyant, especially given the extent to which stock markets were spooked over the data collection period, suggesting that manufacturers have held their nerve in terms of hiring.

“It’s clearly too early to declare that recent slowdown fears are overplayed, but the sector’s resilience in the face of recent financial market volatility is an encouraging omen for growth and employment in the wider economy, especially as sectors such as transport and business services typically move in the same cycle as manufacturing.”

Japan (Chart 10)

Commenting on the Japanese Manufacturing PMI survey data, Amy Brownbill,economist at Markit, which compiles the survey, said:

“The start of 2016 was largely positive for the Japanese manufacturing sector, with latest data pointing to a solid improvement in operating conditions. Production rose at a rate little-changed from December’s joint 21-month record. In contrast, new order growth eased to a six- month low. Data suggested that the slowdown in total new order growth was mainly attributed to the domestic market, as international demand rose at a faster rate. Meanwhile, input prices fell for the first time in over three years linked to the declines in raw material costs, particularly oil- and metal-related items.”

Eurozone (Chart 11)

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said,

“The cooling in the pace of growth in euro area business activity at the start of 2016 is a disappointment but not surprising given the uncertainty caused by the financial market volatility seen so far this year.

“It would be wrong to get too worried. The survey data are consistent with GDP rising at a steady quarterly rate of 0.3-0.4% at the start of the year. Firms also appear to be looking to brighter times ahead, with business confidence improving, linked in turn to backlogs of work rising at the fastest rate since the spring of 2011. With plenty of orders-in- hand to work through, hiring remained encouragingly resilient at the start of the year.

“Discounting, linked to the 15% drop in oil prices in the survey period compared to a month ago, will also help boost sales, especially as the fall in households’ fuel bills should free up more income to spend on other goods and services.”

Source: www.markiteconomics.com

Worldwide Device Shipments to Grow 1.9% in 2016, While End-User Spending to Decline for the First Time (Chart 12)

• Businesses will Adopt Windows 10 Faster than Previous Windows Upgrades; PC Market to Increase 4% in 2017
• By end of 2016, 82% of Mobile Phones will be smartphones

Worldwide combined shipments of devices (PCs, tablets, ultramobiles and mobile phones) are expected to reach 2.4 billion units in 2016; a 1.9% increase from 2015, according to Gartner, Inc. End-user spending in constant U.S. dollars is expected to decline 0.5% for the first time. 

The device market in 2016 will continue to be impacted by country-level economic conditions.

“It’s clear that vendors can no longer market their products with the mind of only targeting the mature and emerging markets," said Ranjit Atwal, research director at Gartner. "Driven by economic variations the market is splitting into four categories: economically challenged mature markets, economically stable mature markets and the same for emerging markets. Russia and Brazil will fall into the category of economically challenged emerging markets while India will be stable, and Japan will belong to the economically challenged mature market.” 

Businesses Will Adopt Windows 10 Earlier and Boost the PC Market in 2017 The global PC shipment market is expected to total 287 million units in 2016, a decline of 1% year over year, but on pace to increase 4% in 2017. 

“Ultramobile premium devices are expected to drive the PC market forward with the move to Windows 10 and PCs built around Intel’s Skylake architecture,” said Atwal. “We expect that businesses will deploy Windows 10 faster than with previous Windows upgrades.” Gartner’s global survey of 3,000 business respondents conducted in the fourth quarter of 2015 across six countries (Brazil, China, India, France, U.K. and U.S.); found that nearly 80% of businesses are expected to have completed the testing and evaluation of Windows 10 within 12 months and over 60% within nine months. 

“Given the shorter testing and evaluation period, many businesses could start to migrate by the end of 2016,” said Atwal. “By the end of 2017, many businesses are looking to move as much as 40% of their installed base onto new Windows 10 devices, mainly driven by the appeal hybrid touch-screen 2-1. This will be the catalyst for growth in the PC market in 2017.

Smartphone Market Moves to Basic Phones

Mobile phone shipments are on pace to increase 2.6% in 2016. “Constant end-user spending on mobile phones is expected to increase by 1.2% in 2016, but its growth will not be strong enough for overall end-user device spend to achieve growth in 2016,” said Roberta Cozza, research director at Gartner. 

Smartphone shipments continued to drive growth, and Gartner estimates that, by the end of 2016, 82% of mobile phones will be smartphones, up 12% from 2015. “We are witnessing a shift to basic phones in the smartphone market,” Cozza said. “Users are also opting to replace within the basic smartphone category without necessarily moving to high-end smartphones, especially in China and some other emerging markets.” 

Local and Chinese brands are delivering more capable basic smartphones with appealing features at a lower price, which means that there is less of a need for users to upgrade to a premium smartphone. Instead, these more advanced and attractive basic smartphones fulfil user’s needs at a lower cost. 

“At MWC 2016, a number of Android vendors will, as usual, release the next generation of their smartphone flagships,” said Cozza. “We’ll hopefully see an increased focus on differentiation by enabling unique, but relevant experiences, expansion to new functionalities and better tie to key app and service ecosystems.”  

Source: www.gartner.com

Global Notebook Shipments Expected to fall 2.5% y/y from 157.4 Million Notebooks in 2015 to 153.5 Million Units in 2016 (Chart 13)

There were 157.4 million notebooks shipped globally in 2015, decreasing 9% on year, and the shipments will further slip 2.5% to 153.5 million units in 2016, according to Digitimes Research.

Among vendors, Lenovo will take up 22.5% of shipments in 2016, followed by Hewlett-Packard with 21.4%, Dell 13.8%, Apple 11.9%, Asustek Computer 10.2%, Acer 8.9%, Samsung Electronics 2.8%, Toshiba 1.7% and Fujitsu 1.1%, Digitimes Research indicated.

Taiwan-based ODMs will ship 125.23 million notebooks in total in 2016, accounting for 81.6% of global shipments. Quanta Computer will be the largest Taiwan-based ODM accounting for 31.3% of Taiwan's ODM shipments, followed by Compal Electronics with 29.5%, Wistron 14.7%, Inventec 7.5%, Pegatron Technology 7.2% and Foxconn Electronics 3.6%.

Source: www.digitimes.com

Worldwide IT Spending is Forecast to Grow 0.6% y/y to $3.54 Trillion Dollars in 2016 (Chart 14)

Worldwide IT spending is forecast to total $3.54 trillion dollars in 2016, just a 0.6% increase over 2015 spending of $3.52 trillion dollars, according to Gartner, Inc. 2015 saw the largest U.S. dollar drop in IT spending since Gartner began tracking IT spending. $216 billion dollars less was spent on IT in 2015 than in 2014 and 2014 spending levels won’t be surpassed until 2019.
"The rising U.S. dollar is the villain behind 2015 results," said John-David Lovelock, research vice president at Gartner. "U.S. multinationals' revenue faced currency headwinds in 2015.

However, in 2016 those headwinds go away and they can expect an additional 5% growth."
The Gartner Worldwide IT Spending Forecast is the leading indicator of major technology trends across the hardware, software, IT services and telecom markets. For more than a decade, global IT and business executives have been using these highly anticipated quarterly reports to recognize market opportunities and challenges, and base their critical business decisions on proven methodologies rather than guesswork.

The devices market (PCs, ultramobiles, mobile phones, tablets and printers) is forecast to decline 1.9% in 2016. The combination of economic conditions preventing countries such as Russia, Japan and Brazil from returning to stronger growth, together with a shift in phone spending in emerging markets to lower-cost phones, is overlaid with weak tablet adoption in regions where there was an expectation of growth.

Ultramobile premium devices are expected to drive the PC market forward with the move to Windows 10 and Intel Skylake-based PCs. Gartner has slightly reduced the speed of adoption over the forecast period, as buying in Eurasia, Japan, and the Middle East and North Africa moves away from purchasing these relatively more expensive devices in the short term, but expect them to revert back to buying in 2017 as the economic environment stabilizes.
Data center systems' spending is projected to reach $75 billion in 2016, a 3.0% increase from 2015. The server market is the segment that has seen the largest change since the previous quarter's forecast. The server market has seen stronger-than-expected demand from the hyperscale sector, which has lasted longer than expected. Typically, this segment has spikey demand which lasts for a couple of quarters before moderating. Demand in this segment is expected to continue to be strong through 2016.

The worsening economic environment in emerging markets has had little effect on the global enterprise software spending forecast for 2016, with IT spending on pace to total $326 billion, a 5.3% increase from 2015. However, key countries in emerging markets, particularly Brazil and Russia, face escalating political and economic challenges. Organizations in those regions must balance cost cutting with growth opportunities during times of economic concern.

Spending in the IT services market is expected to return to growth in 2016, following a decline of 4.5% in 2015. IT services spending is projected to reach 940 billion in 2016, up 3.1% from 2015. This is due to accelerating momentum in cloud infrastructure adoption and buyer acceptance of the cloud model.

Telecom services spending is projected to decline 1.2% in 2016, with spending reaching $1,454 trillion. The segment will be impacted by the abolition of roaming charges in the European Union and parts of North America. While this will increase mobile voice and data traffic, it will not be enough to counter the corresponding loss of revenue from lost roaming charges and premiums.

Gartner's IT spending forecast methodology relies heavily on rigorous analysis of sales by thousands of vendors across the entire range of IT products and services. Gartner uses primary research techniques, complemented by secondary research sources, to build a comprehensive database of market size data on which to base its forecast.

Source: www.gartner.com