August Flash PMI Leading Indicators

IHS Markit just released its “flash” leading indicators for select countries/regions (Chart 1). The Eurozone, Germany, France and Japan saw an accelerated manufacturing growth. The USA slowed a bit but still remained solidly in expansion territory (PMI>50).


U.S. July Durable Goods Report

The U.S. Department of Commerce release preliminary July data on domestic shipments, orders and inventories.

  • The 3-month average electronic equipment book/bill edged up 1.01 (Chart 2).
  • Electronic equipment shipment and order growth remained weak on a 3/12 basis (Chart 3)
  • Both electronic equipment July orders and shipments improved slightly (Chart 4).
  • Defense capital goods orders jumped (Chart 5)
  • Commercial aircraft sales increased (Chart 6) but their orders dropped sharply (Chart 7).


4G Smartphone Demand in Emerging Markets Spurred Growth in 2Q’17 (Charts 8 & 9)

Shortage of Components Will Affect Sales of Premium Smartphones in Second Half of Year

Global sales of smartphones to end users totaled 366.2 million units in the second quarter of 2017, a 6.7% increase over the second quarter of 2016, according to Gartner, Inc. In the smartphone operating system market, Android extended its lead with 87.7% market share, while iOS accounted for 12.1%.

"Although demand for utility smartphones remains strong, there is growing demand in emerging markets for 4G smartphones, with more storage, better processors and more advanced cameras. This is translating into higher demand for midpriced [$150 to $200] smartphones," said Anshul Gupta, research director at Gartner.

Sales of all types of smartphone grew in the second quarter of 2017, compared with the second quarter of 2016. However, there is a concern about rising component costs, as well as limited supply, due to the reduced availability of critical components. "We expect a shortage of flash memory and OLED [organic light-emitting diode] displays will affect premium smartphone supply in the second half of 2017," said Gupta. "We've already seen Huawei's P10 suffer from a flash memory shortage, and smaller, traditional brands, such as HTC, LG and Sony, are stuck between aggressive Chinese brands and the dominating market shares of Samsung and Apple in the premium smartphone segment."

Samsung's smartphone sales grew 7.5%, year-over-year, after three consecutive quarterly declines. The company had been hit hard by problems with the Galaxy Note 7, but the Galaxy S8 and S8+ are bringing back high demand for Samsung smartphones. "Despite growing competition from Chinese brands such as Huawei, Oppo and Vivo, we expect Samsung to register growth in 2017," said Gupta.

Despite clearing the distribution channel of iPhone inventory amounting to 3.3 million units during the second quarter, Apple's sales were flat (down 0.2%), year-over-year. "Apple's sales in emerging markets are expected to grow as older-generation iPhones continue to attract buyers. The new iOS 11, which will include augmented reality, machine learning, an improved Siri and a new display design, will likely fuel strong iPhone sales in the fourth quarter of 2017, and help Apple increase its sales in 2017," added Gupta.

Vivo and Oppo achieved the best performances in the second quarter of 2017, with year-over-year sales increases of 70.8% and 44.1%, respectively. Vivo's smartphones with front-facing cameras have carved out a niche for themselves. "Vivo maintained second place in China and grew its sales internationally," said Gupta. Similarly, Oppo secured its leading position in China by offering dual rear-facing and front-facing cameras.

Greater China and Emerging Asia/Pacific Markets Accounted for Nearly Half of Smartphone Sales

Greater China and emerging Asia/Pacific markets drove sales of smartphones in the second quarter of 2017, with market shares of (27.7%) and (21.4%), respectively (see Chart 9).

Growing smartphone penetration of India, Indonesia and Southeast Asian countries drove a year-over-year rise in smartphone sales in the emerging Asia/Pacific group. However, smartphone sales in Greater China declined, year-over-year, primarily due to longer replacement cycles and as users prefer to buy better smartphones. "Large vendors continued to strengthen their positions by increasing their market share, while smaller brands lost ground in Greater China," said Gupta.

Sales in Western Europe returned to year-over-year growth, fueled especially by strong sales of Huawei and Samsung smartphones.


First-tier Notebook Vendors' Shipments Slowed in July with Top-5 Brands' Combined Shipments Dropping 31% on month and Top-3 ODMs' Combined Volumes down 22%

With inventory preparation for back-to-school demand reaching an end in June, first-tier notebook vendors' shipments slowed down in July with the top-5 brands' combined shipments dropping 31% on month and top-3 ODMs' combined volumes down 22%.

But top vendor Hewlett-Packard (HP), which enjoyed strong sales in both the consumer and enterprise sectors in the first half of 2017, still produced impressive results on a yearly basis. It has been pushing its notebook shipments aggressively in the second half of the year, and its shipments in July rose 33% on year.

Dell surpassed Lenovo for the second time in 2017 in July and went up to second place thanks to the expanding replacement trend in the enterprise sector, according to Digitimes Research's latest notebook shipment monthly update.

Lenovo's July shipments slid 15% on year and are likely to see weak performances for the rest of the second half of 2017. Asustek Computer's shipments also slipped dramatically in the month because of its business reorganization.

The top-2 ODMs' combined share of Taiwan's overall shipments went up in July. Compal Electronics and Quanta Computer both achieved around 20% on-year shipment growths in July because of orders from US-based clients, while Inventec and Pegatron Technology saw on-year shipment declines.


North American Semiconductor Equipment Industry billings expanded 32.8% y/y (3-mon avg basis) to $2.27 billion in July 2017 (Chart 10)

SEMI reports that the 3-month average of worldwide billings of North American equipment manufacturers in July 2017 was $2.27 billion1.4% lower than June 2017, and is 32.8% higher than July 2016 billings.

“We observed softening in the equipment billings in July following the strong surge in the first half of the year," said Ajit Manocha, president and CEO of SEMI. “However, overall, equipment billings remain significantly up year-over-year, with 2017 on-track to be a record spending year." The SEMI Billings report uses 3-month moving averages of worldwide billings for North American-based semiconductor equipment manufacturers.


Mobile DRAM Revenue Grew 14.8% sequentially in 2Q’17 and will Keep Climbing in 3Q’17 (Charts 11-13)

DRAMeXchange, a division of TrendForce, reports that the global mobile DRAM market experienced some recovery during the second quarter, though smartphone sales remained sluggish. Smartphone brands had lowered their annual production volume targets in the first quarter and in turn faced inventory pileup for memory components. However, the situation later improved in the second quarter and stock-up demand returned.

DRAMeXchange says that the global mobile DRAM revenue for the second quarter of 2017 rose by 14.8% compared with the prior quarter. Among the top DRAM makers, Samsung and Micron managed to score sequential growth of more than 10% for their second-quarter mobile DRAM sales.

According to the revenue market share ranking, the leader Samsung again took more than 60% of the global mobile DRAM market in the second quarter. SK Hynix saw its market share slipped by 2.2 percentage points but retained second place. Third-place Micron garnered a 15% global market share for two quarters in a row on account of its increasing emphasis on smartphone business following changes made to its business strategy.

On the revenue front, Samsung’s performance in the second quarter was the reverse of the lackluster performance of the prior quarter. The supplier’s mobile DRAM revenue for the period totaled US$3.82 billion, an increase of 20.7% compared with the first quarter. For the second quarter, SK Hynix posted positive revenue growth for its mobile DRAM business. However, the increase was moderate because SK Hynix’s eMCP and discrete product shipments were constrained by the company’s own limited output of NAND Flash.

As for Micron, the temporary suspension of Fab-2 (N2) owned by its subsidiary Micron Technology Taiwan is going to have impact on its mobile DRAM production during this year’s second half. The contamination at Fab-2 caused by malfunctioning gas system ruined 50,000 wafers that were mostly going to be processed into mobile DRAM products. Micron is increasing wafer starts to make up for the deficit, but its mobile DRAM and market share in the third quarter will be adversely affected by this event.

Taiwanese DRAM suppliers enjoyed strong demand for mid-range and low-end mobile memory components worldwide during the second quarter. However, the tight supply of NAND Flash for mainstream eMCPs limited the expansion of mobile DRAM shipments from Taiwanese suppliers. This was the case for Nanya, which saw lower than expected shipments of its mobile DRAM chips in the second quarter. Nanya has also scaled back the share of mobile DRAM in its product mix in order increase the share of consumer DRAM that offers a higher ASP. Due to the above mentioned factors, Nanya’s second-quarter mobile DRAM revenue fell by 6% compared with the prior quarter to US$79 million.

The other Taiwanese supplier Winbond also saw its second-quarter revenue dipped by 3.6% from the first quarter. Winbond’s mobile DRAM business has been affected by the loss of some clients. However, the company will see mobile DRAM sales returning to growth in the third quarter because of the advent of the busy season.

Top three DRAM suppliers will see further increases in profits during third quarter as the recovery of the smartphone market leads to an uptick in contract prices

According to DRAMeXchange’s third-quarter outlook, the global mobile DRAM revenue will keep climbing in the third quarter on returning demand in the smartphone market and small increases in contract prices. The top three DRAM suppliers – Samsung, SK Hynix and Micron – are expected to see expanding profit margins for their mobile DRAM products along with further revenue growth.


Global NAND Flash Revenue from Branded Manufacturers Grew 8% Sequentially in 2Q’17; NAND Flash Prices to Keep Rising in 3Q’17 (Charts 14 & 15)

DRAMeXchange, a division of TrendForce, reports that the NAND Flash market continued to experience tight supply in the second quarter. As a result, contract prices of various lines of NAND Flash products rose by 3% to 10% from the first quarter despite the seasonal headwinds. Going forward, NAND Flash suppliers are expected to post excellent revenue results in the third quarter due to small increases in contract prices of mobile products (i.e. eMMC and UFS) and SSDs. On the whole, 2017 will be a bumper year for the industry.

“Facing the limitations in the shrinking of the manufacturing node for 2D-NAND Flash (or planar NAND Flash), suppliers have successively shifted to 3D-NAND Flash (or vertical NAND Flash) design and manufacturing technology,” said Alan Chen, senior research manager of DRAMeXchange. “However, the industry has also experienced a substantial loss in production capacity during this transitional period. This in turn resulted in tight supply and rising contract prices.”

Chen added: “We expect supply to be under strain for the rest of 2017. Relief will come later in 2018, when the manufacturing of 64- and 72-layer 3D-NAND Flash reaches maturity.” Stock-up demand from smartphone clients will continue to put pressure on NAND Flash supply in the third quarter

The arrival of the third quarter also signals the start of the traditional busy season. Major electronic brands, especially those preparing to release their newest smartphones, are now stepping up their stock-up activities. At the same time, shipments of enterprise-grade SSDs are anticipated to expand rapidly due to the strong demand from data centers. Since NAND Flash prices continue to benefit from the persistent undersupply situation, suppliers will likely to keep producing impressive revenue and profit results this third quarter.


German Electronic Component Distributors Sales grew 12.2% to 904 million euros in Q2’17 (Chart 16)

The second quarter of 2017 was extremely positive for the German component distributors. From April to June sales by companies registered with the Fachverband Bauelemente Distribution (FBDi e.V.) in Germany grew by 12.2% to 904 million euros - almost equaling the record Q1 result. The order situation remains positive, with an increase of 17.7% to 946 million euros. The book-to-bill rate was 1.05. As a result, the first half of the year has seen a record-breaking performance with sales of 1.8 billion euros and orders valued at two billion euros.

Once again, the strongest growth in Q2 was recorded by the electromechanical products, which grew by 22% to reach 93 million euros, followed by semiconductors – by far the strongest product group with an increase of almost 18% to 637 million euros. Passive components, which rose 5.2% to 121 million euros, could not quite match this result. Smaller product areas such as sensors or power supplies grew by 18.7% and 16% respectively. The breakdown of component types remained virtually unchanged with semiconductors accounting for 70%, passive 13%, electromechanics10%, power supplies 3%, and the remainder spread across other components and assemblies.

FBDi Chairman of the Board of Directors Georg Steinberger remarked: Other than the risks previously outlined in May – product rationalization by the manufacturers, intermittent allocation, significant linecard changes, technical and environmental directives – continue to apply. Another problem whose impact on the components industry has so far been difficult to quantify is the crisis in confidence in the German automotive industry. A collapse in sales of new diesel cars is widely anticipated.


Worldwide Wearable Device Sales to Grow 17% in 2017 (Chart 17)

Sales of Smartwatches to Total 41.5 Million Units in 2017

Gartner, Inc. forecasts that 310.4 million wearable devices will be sold worldwide in 2017, an increase of 16.7% from 2016. Sales of wearable devices will generate revenue of $30.5 billion in 2017. Of that, $9.3 billion will be from smartwatches.

In 2017, 41.5 million smartwatches will be sold. They are on pace to account for the highest unit sales of all wearable device form factors from 2019 to 2021, aside from Bluetooth headsets. By 2021, sales of smartwatches are estimated to total nearly 81 million units, representing 16% of total wearable device sales.

"Smartwatches are on pace to achieve the greatest revenue potential among all wearables through 2021, reaching $17.4 billion," said Angela McIntyre, research director at Gartner. Revenue from smartwatches is bolstered by relatively stable average selling prices (ASPs) of Apple Watch. "The overall ASP of the smartwatch category will drop from $223.25 in 2017 to $214.99 in 2021 as higher volumes lead to slight reductions in manufacturing and component costs, but strong brands such as Apple and Fossil will keep pricing consistent with price bands of traditional watches," she added.

Smartwatches: A Market Divided Between Four Types of Providers

Apple will continue to have the greatest market share of any smartwatch provider. However, as more providers enter the market, Apple's market share will decrease from approximately a third in 2016 to a quarter in 2021. The announcement of a new Apple Watch expected in September may enable direct cellular connectivity for interacting with Siri, texting and transferring sensor data when the phone or Wi-Fi is not present. We expect other consumer electronics brands such as Asus, Huawei, LG, Samsung and Sony to sell only 15% of smartwatches in 2021, because their brands do not have as strong an appeal as lifestyle brands for personal technologies.

Two sub-categories that Gartner expects to perform well are kids' smartwatches and traditional watch brands, which will emerge as significant segments for smartwatches. Gartner expects kids' smartwatches to represent 30% of total smartwatch unit shipments in 2021. These devices are targeted at children in the two to 13 year-old range, before parents provide them with a smartphone.

The other sub-category, which will account for 25% of smartwatch units by 2021, is fashion and traditional watch brands. "Luxury and fashion watch brands will offer smartwatches in an attempt to attract younger customers," said Ms. McIntyre. A final sub-category is represented by the startup and while-label brands (e.g., Archos, Cogito, Compal, Martian, Omate or Quanta), which will account for 5% of smartwatch unit sales in 2021.

Bluetooth Headsets to Account for 48% of all Wearable Devices in 2017

In 2017, 150 million Bluetooth headsets will be sold, an increase of 16.7% from 2016. Sales will increase to 206 million units in 2021, meaning Bluetooth headsets will remain the most sold wearable device through 2021. The growth in Bluetooth headsets is driven by the elimination of the headphone jack by major smartphone providers. "By 2021, we assume that almost all premium mobile phones will no longer have the 3.5 mm jack," said McIntyre.

Head-Mounted Displays Remain in Their Infancy

Head-mounted displays (HMDs) account for only 7% of all wearable devices shipped in 2017, and will not reach mainstream adoption with consumers or industrial customers through 2021. "Current low adoption by mainstream consumers shows that the market is still in its infancy, not that it lacks longer-term potential," said McIntyre.

Near-term opportunities for virtual reality HMDs among consumers are with video game players. Workers will also use them for tasks such as equipment repair, inspections and maintenance, but also in warehouses and manufacturing, training, design, customer interactions and more. Theme parks, theaters, museums and sports venues will purchase HMDs to enhance the customers’ experience in interactive attractions or movies, and add information and supplemental images at sporting events.


Walt D. Custer

Walt Custer

Walt Custer is an industry analyst focused on the global electronics industry. Prior to forming Custer Consulting Group he was Vice President of Marketing and Sales for Morton Electronic Materials, a global supplier of specialty chemicals and process equipment for the PCB industry.

Custer has been a member of the IPC trade organization since 1975 where he received both the President's and the Raymond E. Pritchard Hall of Fame Awards. He is currently a member of the IPC Executive Market & Technology Steering Committee. Custer is also a Director of the EIPC European PCB trade organization.

He authors regular “Market Outlook” columns for Global SMT & Packaging magazine, the Journal of the HKPCA and the TTI MarketEYE website.

View other posts from Walt D. Custer. View other posts from Walt D. Custer.
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