Weekly Global Update for July 27, 2016

2Q’16 Global Electronic Industry Growth

Second quarter company financial results are currently being released allowing an initial estimate of 2Q’16 electronic industry growth.

• Our very preliminary estimate of 2Q’16/2Q’15 global electronic equipment “growth” was minus 0.5%. This compares to minus 3.7% in 1Q’16 versus 1Q’15 (Charts 1 & 2).
• This improved dollar-denominated “growth” was due to a number of factors:
  • stronger smartphone shipments
  • a modest economic expansion in the USA and Europe
  • and most importantly a weaker U.S. dollar
• The dollar weakened relative to most currencies in 2Q’16 (Chart3). Since company financial results are calculated at fluctuating exchange rates, when stronger local currencies are converted to weaker dollars this effectively enhances the dollar denominated sales growth in Charts 1 & 2.
• U.S. EMS sales increased an estimated 2.3% in the second quarter based on a composite of six major domestic companies (Chart 4). This compares to a 2.1% 2Q’16 decline (in NT$) for 10 Taiwan-listed ODM companies (Chart 5).

These estimates are still preliminary and will be updated on a regular basis as more companies release their second quarter financial results.

Source: Company financial reports analyzed by Custer Consulting Group

July Leading Indicators - Flash PMI Results

Markit Economics just released its “flash” July purchasing managers’ indices for select countries.

• Chart 6 compares June versus July PMIsfor the six countries where flash results were reported. The UK was added this month – perhaps to monitor the effect of its Brexit decision.
• The USA showed a strong July rebound in manufacturing activity moving further into growth territory (Chart 7).
• The Eurozone continued to expand but at a slower rate (Chart 8).
• Japan remained in contraction but its rate of decline slowed (Chart 9).

Source: www.markiteconomics.com

North American Semiconductor Equipment Industry June 2016 Book/Bill=1.00 (Charts 10 & 11)

North America-based manufacturers of semiconductor equipment posted $1.71 billion in orders worldwide in June 2016 (3-month average basis) and a book-to-bill ratio of 1.00, according to SEMI.

SEMI reports that the 3-month average of worldwide bookings in June 2016 was $1.71 billion, 2.1% lower than May 2016 and 12.9% higher than June 2015.

The 3-month average of worldwide billings in June 2016 was $1.71 billion, 7.0% higher than May 2016 and 10.2% higher than June 2015.

“Although order activity slowed for the most recent month," said Denny McGuirk, president and CEO of SEMI. "Billings for equipment companies based in North America are at their highest level since February 2011.”

Source: www.semi.org

Worldwide Smartwatch Shipments Declined 32% y/y to 3.5 million units in 2Q’16 (Chart 12)

For the first time, the worldwide smartwatch market saw a year-over-year decline of 32%, according to preliminary data from International Data Corporation (IDC). Smartwatch vendors shipped 3.5 million units in the second quarter of 2016 (2Q’16), which was down substantially from the 5.1 million shipped a year ago. Apple held the top rank by shipping 1.6 million watches. However, it was the only vendor among the top five to experience an annual decline in shipments. In fairness to Apple, the year-over-year comparison is to the initial launch quarter of the Apple Watch, which is in many ways the same product offered in the most recent quarter with price reductions.

“Consumers have held off on smartwatch purchases since early 2016 in anticipation of a hardware refresh, and improvements in WatchOS are not expected until later this year, effectively stalling existing Apple Watch sales,” said Jitesh Ubrani, senior research analyst for IDC Mobile Device Trackers. “Apple still maintains a significant lead in the market and unfortunately a decline for Apple leads to a decline in the entire market. Every vendor faces similar challenges related to fashion and functionality, and though we expect improvements next year, growth in the remainder of 2016 will likely be muted.”

Perhaps one of the biggest omissions in the smartwatch market is the absence of traditional watchmaker brands among the leading vendors. “To date, only a small handful of traditional watchmaker brands have entered the smartwatch market, trailing far behind their technology brand counterparts,” said Ramon T. Llamas, research manager for IDC's Wearables team. “This seems to be changing, albeit slowly, as key vendors like Casio, Fossil, and Tag Heuer have launched their own models to the market. Still, participation from traditional watchmaker brands is imperative to deliver some of the most important qualities of a smartwatch sought after by end-users, namely design, fit, and functionality. Combine these with the brand recognition and distribution these brands already have, and it's reasonable to expect the smartwatch market to grow from here.”

“What will bear close observation is how the smartwatch market evolves from here,” added Llamas. "Continued platform development, cellular connectivity, and an increasing number of applications all point to a smartwatch market that will be constantly changing. These will appeal to a broader market, ultimately leading to a growing market.” IDC does expect to see the market return to growth in 2017 driven by the aforementioned market developments. Exactly when that rebound happens will depend heavily on when vendors drive a better use case.

Source: www.idc.com

Worldwide Semiconductor Capital Spending will decline 0.7% y/y to $64.3 billion in 2016 (Chart 13)

Worldwide semiconductor capital spending is projected to decline 0.7% in 2016, to $64.3 billion, according to Gartner, Inc. This is up from the estimated 2% decline in Gartner's previous quarterly forecast.

“Economic instability, inventory excess, weak demand for PC’s, tablets, and mobile products in the past three years has caused slow growth for the semiconductor industry. This slowdown in electronic product demand has driven semiconductor device manufacturers to be conservative in increasing production,” said David Christensen, senior research analyst at Gartner. “Looking ahead, it appears the second half of 2016 may see improved demand. However, following Brexit, semiconductor inventory levels may rise in the third and fourth quarters, which could lead to reduced production volumes.”

The PC, ultramobile (tablet) and smartphone production forecast for the second half of 2016 has been lowered from 2015, as the industry slowdown continues. These reductions have resulted in a forecasted 3% decline for the semiconductor market. Memory revenue growth for 2016 is also revised downward compared with the previous forecast, due to a weaker pricing outlook.

“While currency exchange rates are another reason for the ongoing revenue decrease, the aggressive pursuit of semiconductor manufacturing capability by the Chinese government and related investment companies is becoming a major factor," said Mr. Christensen. "This will dramatically affect the competitive landscape of the global semiconductor manufacturing in the next few years as China becomes a major market for semiconductor usage and manufacturing.”

Source: www.gartner.com

Global Smartphone Production Volume rose 3.2% y/y to 315 million units in 2Q’16 (Charts 14-16)

Worldwide smartphone production volume totaled around 315 million units in the second quarter, representing an 8.9% increase over the previous quarter and a marginal year-on-year increase of 3.2%, according to the latest report from the global market research firm TrendForce. Sales gradually recovered after the market endured the off season of the first quarter. Chinese brands in the second quarter continued to enjoy strong domestic demand generated by telecom operators' smartphone subsidies. At the same time, they also benefited from demand pickup in North America and the emerging markets. In sum, Chinese brands have become major growth drivers in global smartphone production.

“The combined production volume of Chinese brands in the second quarter reached 139 million units, up 13.8% from the previous quarter,” said TrendForce smartphone analyst Avril Wu. “For the second straight quarter, the combined volume from Chinese brands was larger than the combined volume of the two leading international brands, Samsung and Apple. Furthermore, the volume growth rates of respective Chinese brands are expected to be above the global average in the third quarter.”

Source: www.trendforce.com

Global Tablet Shipments (including slate and detachable) dropped 40% q/q in 1Q’16 (Charts 17 & 18)

As Tablet ODM Shipments Fall, Detachable Tablets Will Drive Future Market Growth

IDC reported that global tablet shipments overall (including slate and detachable) dropped a massive 40% from the previous quarter. However, looking deeper into this trend, there is a significant difference between slate tablets and detachable tablets.

• Global slate tablet assembly industry trends show slate tablet assembly shipments dropped by 41% from the previous quarter, and 20% from last year, impacted by demand for large screen mobile phones. Taiwan ODM vendors made up approximately 34% of the global shipments, while ODM assembly vendors on the Chinese mainland accounted for almost 50%.
• Global detachable tablet assembly industry trends assembly shipments dropped by 35% from the previous quarter due to an off-peak season. However, boosted by continuous new product launches by brand vendors and the replacement of traditional notebooks, detachable tablet shipments grew markedly, up by 154% from last year. Taiwan's ODM industry continued to take a share of over 80% of the total global assembly business, thanks to the support of orders from Apple, Microsoft and other leading firms. This made Taiwan the convincing champion of global ODM shipment.

According to Annabelle Hsu, Senior Research Manager at IDC, “Looking into 2016Q2, global slate tablet shipments will continue to drop slowly over time. By comparison, detachable tablet shipments are expected to grow over 30%, due to increased market demand and new models launched by vendors.”

Source: www.idc.com

U.S. Industrial Production up 0.6% in June (Chart 36)

Manufacturing in the U.S. in June had the strongest growth since January, a sign that domestic demand is improving.

Source: www.federalreserve.gov/releases/g17/table1_2.htm