Weekly Global Update for November 22, 2017

Productronica/SEMICON Europa Thoughts

Productronica and SEMICON Europa were collocated in mid-November in Munich, Germany. Attendance was very good and the mood was upbeat.

Europe is doing well. Its manufacturing PMI leading indicator was at over a 17 year high in October and was still climbing (Chart 1). Almost all sectors of the European electronic supply chain are expanding (Chart 2).

Europe is not alone in enjoying growth. Globally electronic equipment sales were up almost 5% in the third quarter (Chart 3) but the real surges are in semiconductors and SEMI and PCB capital equipment.

At Productronica Walt presented his “Business Outlook for the Global Electronic Supply Chain (with emphasis on Europe).” For a copy of Walt’s charts email walt@custerconsulting.com

Contract DRAM Prices Increased 5% in 3Q’17; Expected to Rise 10% in 4Q’17 due to Continued Tight Supply and Limited Bit Supply Growth (Charts 4-6)

3Q’17 DRAM Revenue Hit a New High with a 16.2% Sequential Increase; DRAM Prices to Rise by 10% on Average in 4Q’17

Revenue of the entire global DRAM industry climbed to a new historic high for the third quarter of 2017, reports DRAMeXchange, a division of Trendforce. Contract prices of various DRAM products jumped by about 5% on average in the third quarter from the second quarter on the back of the year-end busy season and limited bit supply growth. As the market still experienced tight supply, total DRAM revenue for the third quarter rose by 16.2% from the second quarter.

Avril Wu, research director of DRAMeXchange, noted that latest fourth-quarter DRAM market outlook indicates that the overall sequential price increase will average around 10%. “Most PC-OEMs have concluded negotiating their contract prices with DRAM suppliers for this fourth quarter,” said Wu, “Contracts with first-tier DRAM suppliers show that the prices of PC DRAM modules have now risen above US$30 and maintained around US$30.5 on average, amounting to a 7% hike from the third quarter. This price increase is mainly attributed to the influence of the booming mobile DRAM market, which is in turn fueled by the limited product supply and the releases of flagship smartphones during the traditional busy season of this year’s second half.”

Wu also noted: “A closer look at the mobile DRAM market has revealed the Samsung has noticeably raised the quotes of its products. To ensure sufficient inventory, smartphone makers generally have no choice but to accept the price increases. Depending on the capacity specifications, prices of mobile DRAM products could go up by 10% to 20% in the fourth quarter compared with the third. As for the server DRAM market, strong demand during the fourth quarter also will push up contract prices of memory modules by 6% to 10% from the previous three-month period.”

Leading South Korean suppliers took 74.5% of the global revenue market share for 3Q17; rising prices will help Micron narrow the market share gap in 4Q17

The DRAM revenue ranking for the third quarter again shows that Samsung, SK Hynix and Micron were respectively first, second and third. Samsung grew its revenue by 15.2% from the second quarter to a new historic high of US$8.8 billion. SK Hynix’s revenue advanced considerably by 22.5% from the second quarter to US$.5.5 billion. In terms of revenue market shares, Samsung and SK Hynix accounted for 45.8% and 28.7%, respectively, in the third quarter. Together, they captured 74.5% of the global DRAM market. Micron took US$4 billion during the third quarter, registering a sequential increase of 13.0% and maintained a market share of 21.0%.

Wu added: “SK Hynix’s ASP was higher than Micron’s during the third quarter, and therefore SK Hynix was able to widen its market share lead over Micron. However, the situation will reverse in the fourth quarter with Micron having the highest ASP and posting the largest overall price increase versus the top two Korean suppliers. We can also expect Micron to shrink its market share gap with second-place SK Hynix in the year’s final quarter.”

All three major suppliers saw further increases in their operating margins for the third quarter. Samsung crossed the 60% threshold to reach a new historic high of 62%. SK Hynix’s operating margin came to 56%, up from prior quarter’s 54%. Micron registered the most significant growth from 44% in the second quarter to 50% in the third. Micron’s gain was on account of the gradual stabilization of its 17nm production. Going into the fourth quarter, suppliers are again expected to raise their operating margins due to rising prices.

SK Hynix and Micron to focus on improving yields and technology migration as Samsung contemplates capacity expansion

With regard to technology and capacity planning, Samsung’s goal for 2017 has been the transition to the 18nm production. However, surging profits of the competitors over the recent quarters is starting to lean on Samsung, creating the possibility that the market leader may need to expand capacity to maintain its dominance. By increasing its output, Samsung will moderate the undersupply situation and constrain the price increases of its competitors. In sum, expanding capacity and maintaining a one- to two-year technological lead over its rivals will reinforce Samsung’s leadership in the long run.

SK Hynix has been focusing on improving the yield rate and expanding the deployment of its 21nm process. Its products based on the 18nm process on the other hand will roll out in small volumes at the end of this year. In terms of capacity planning, SK Hynix is currently building a second 12-inch wafer fab in Wuxi, China. The facility is expected to be in operation in 2019 at the earliest. As for Micron, its subsidiary – Micron Memory Taiwan (formerly Rexchip) – has been improving its 17nm process, which is expected to have a yield rate of least 80% by the end of this year. Micron’s other subsidiary – Micron Technology Taiwan (formerly Inotera) – is still producing mainly on the 20nm process. However, Micron Technology Taiwan is planning to migrate half of its production capacity to the 17nm process in 2018.

According to DRAMeXchange’s third-quarter analysis on the revenue results of Taiwan’s domestic DRAM suppliers, Nanya posted a marginal growth of 5.3% from the second quarter. Specialty DRAM products make up the majority of Nanya’s product mix, and the price increases for these products have not been as large as the increases for products from the major suppliers (that also have more complete product lines). In the future, Nanya’s room for profit growth will expand as its cost structure improves due to the increasing yield of its 20nm technology.

As for other Taiwanese DRAM suppliers, Powerchip actually saw its revenue fell by 3.6% from the previous quarter. Powerchip during the third quarter was willing to give up a part of its DRAM revenue as the company has decided that more profit can be made by doing foundry works for other memory companies such as ESMT and AP Memory. As a result, a part of Powerchip’s capacity that was originally for DRAM was then reassigned to make other products. Winbond’s third-quarter revenue rose 8.7% from the second quarter. Winbond has yet to offer a clear technology development plan. Therefore, the ASP trend will probably be the main factor influencing the company’s DRAM revenue in the future.

www.dramexchange.com

Server DRAM Contract Prices to Rise 6-10% Sequentially in 4Q’17 as Demand Continues to Outpace Supply

Server DRAM contract prices for the fourth quarter of 2017 are forecast to rise 6-10% sequentially as demand continues to outpace supply, according to DRAMeXchange. Major suppliers are set to see their server DRAM revenues reach the highest levels for the year in the fourth quarter.

"Shipments of server systems will remain brisk in the fourth quarter, aggravating the undersupply situation for server DRAM," said DRAMeXchange analyst Mark Liu.

Samsung Electronics, SK Hynix and Micron Technology generated a combined US$5.55 billion in server DRAM revenues in the third quarter of 2017, up 25.2% on quarter. Robust demand for data center applications in North America coupled with chipmakers' limited supply growth led to the memory ASP increases during the quarter.

Samsung saw its server DRAM revenues increase 28.4% sequentially to US$2.55 billion in the third quarter, DRAMeXchange said. The vendor held a 45.9% share of the market in the quarter.

Samsung mainly uses a 20nm process technology to make its server DRAM products, but a newer 18nm will become the main process for the company in the first quarter of 2018.

SK Hynix and Micron saw their server DRAM revenues increase 30.1% and 13%, respectively, on quarter to US$1.79 billion and US$1.21 billion, DRAMeXchange said. SK Hynix grabbed a 32.3% share of the market in the third quarter, followed by Micron with a 21.8% share.

SK Hynix manufactures server DRAMs using a 21nm process technology, and the company will start making the chips using a 18nm node around the end of first-quarter 2018, DRAMeXchange indicated. SK Hynix is expected to ramp up its 18nm server DRAM production after the second quarter of 2018.

SK Hynix has put increased focus on server DRAMs, which will account for more than 30% of the company's overall DRAM output at the end of 2017, DRAMeXchange noted. SK Hynix will also have its Wuxi, China fab transition to 18nm chip production for servers.

Micron has substantially improved its 17nm process yield rates for the production of server DRAMs, and has sent the chip samples to customers.

Besides, server DRAMs already accounted for nearly 30% of Micron's total DRAM output in the first quarter of 2017, and the proportion is expected to climb further by the end of the year.

www.digitimes.com

European EMS Market Analysis 2017 - Weiss Engineering

The new in4ma EMS market analysis Europe 2017 has many surprises. Whereas the production volume of the EMS manufacturers was at nearly 33.9 Billion euros in 2015 of which Western Europe had a share of more than 50%, in 2016 the production volume increased to 34.6 Billion euros (+2,1%) and Eastern Europe overtook the West.

There are many significant differences between Eastern Europe and Western Europe besides labor costs. Eastern Europe is dominated by three global EMS suppliers, Foxconn, Flex and Jabil. These big three hold more than 35% of European production, the majority of their factories being in Eastern Europe.

Many small and medium-sized EMS suppliers are located in Western Europe. In Eastern Europe it is much less and compared to the big three the majority of EMS companies in the East are insignificant Productivity, measured as revenues per head shows interesting differences also. The essential question though is, why does the in4ma EMS market analysis show a growth rate for Europe only 2,1% in 2016, whereas one reads one record message after the other about the EMS producers in the press?

Companies with good news want to get this into the public; companies with negative growth do not necessarily want to read this in the news. The EMS market analysis has a detailed answer to this by showing the growth rates for eight different revenue groups.

Detailed analysis was performed for 37 countries, 17 countries have a ranking of the TOP 5, UK, France and Italy have a list of the TOP 10 and Germany a list of the TOP 25. Trackers for these rankings are mentioned as well. More than 245 EMS companies are mentioned, either in the rankings or due to special events.

Source: Weiss Engineering, Dieter G. Weiss, in4ma@gmx.de)

Contact walt@custerconsulting.com for more details.

Worldwide Device Shipments to Increase 2% Y/Y to over 2.35 Billion Units in 2018 (Chart 7)

• Gartner Says Worldwide Device Shipments Will Increase 2% in 2018, Reaching Highest Year-Over-Year Growth Since 2015
• End-User Survey Reveals Even Split of Usage Between PCs and Smartphones

Worldwide shipments of PCs, tablets and smartphones are predicted to exceed 2.35 billion units in 2018, an increase of 2.0% from 2017, according to Gartner, Inc. This would be the highest year-over-year growth since 2015.

The misconception persists that the world has gone mobile and relies solely on smartphones. "However, our latest online end-user survey* shows that users depend just as much on PCs or tablets as they do on smartphones," said Ranjit Atwal, research director at Gartner. "Forty percent of respondents said that they use mostly a PC/tablet for certain daily experiences, such as reading and writing detailed emails or watching videos, while 34% mostly use a smartphone for its convenience while on the move."

Atwal added: "Users holding onto their PCs for longer remains a major issue for the PC market. In contrast, users continue to replace their smartphone quite frequently." Traditional PC shipments are forecast to decline 4.4% in 2018 while mobile phone shipments are expected to increase 2.4%.

Business PC shipments are estimated to return to growth by the end of 2017, driven by faster Windows 10 replacement in many regions, especially in Western Europe. "Despite the fact that prices have been rising due to higher component costs, Windows 10 replacements have kept the PC market relatively stable through 2017," said Atwal. "We estimate that the PC market (desk-based, notebook and ultramobiles) is set to return to 0.8% growth in 2018."

This upward trend is assisted by two factors. The PC market in Russia has been positively influenced by an upturn in the country's economic prospects, which has seen business spending on PCs increase by 5% in 2017. This growth will persist into 2018. Spending is primarily focused on desktop PCs, which are more aggressively priced than mobile PCs or hybrid devices.

The second factor is China, where the move to Windows 10 has been delayed due to security and privacy issues, leading to slow PC sales in 2017. However, Microsoft is now working with a Chinese government agency to develop a government-approved version. "The features of Windows 10 could be particularly useful for the Chinese Government that is looking to move from desktops and notebooks to ultramobile premium devices," said Atwal. "We expect this development to positively impact the PC market in 2018."

Smartphone Sales to Total More Than 1.6 Billion Units in 2018 Mobile phone sales are expected to return to year-over-year growth in 2018, with shipments totaling 1.9 billion units. Smartphones will represent 86% of total mobile phone shipments in 2018, up 6% from 2017.

Gartner expects Apple's iPhone X to be the sales driver in North America, China and Western Europe, despite its high price. "Given the late November availability of the iPhone X, we expect the iPhone's replacement cycle to flow more strongly into 2018," said Roberta Cozza, research director at Gartner.

Component shortages could lead to the inability to meet smartphone demand in the fourth quarter of 2017, further favoring unit sales moving into 2018. "Decrease in total mobile phone demand in 2017 is also expected to come from a weaker lower end of the smartphone market," said Cozza. "For this segment, local vendors continue to struggle against the shift toward top brands, while component price increases affect the ability of some Android vendors to compete more aggressively on price." While this is expecting to limit smartphone growth in 2017, the 2018 growth rate is accordingly estimated to be higher than previously forecast.

Source: www.gartner.com

U.S. Industrial Production Increased 0.9% in October as Industries Affected by Recent Hurricanes Resumed Normal Operations (Chart 8)

U.S. industrial output rose more than expected in October as industries affected by a string of recent hurricanes resumed normal operations, the Federal Reserve said on Thursday.

Overall industrial production increased 0.9% following a slightly upwardly revised 0.4% rise in September.

Industrial output data for the third quarter were also revised higher, with production declining at a 0.3% annual rate. That compared to the previous estimate of a 1.5% drop.

Economists polled by Reuters had forecast industrial output rising 0.5% in October. The central bank's measure of the industrial sector is comprised of manufacturing, mining, and electric and gas utilities.

The effects of Hurricanes Harvey, Irma and Nate, which battered the oil and gas industries along the U.S. Gulf Coast, had previously held back industrial output.

In October, as industries came back online, the effects of the hurricanes contributed 0.60 percentage point to the overall change in industrial production.

The manufacturing sector, which makes up about 12% of the nation's economy, rose 1.3% last month after an upwardly revised 0.4% increase in September.

With overall output rising, the percentage of industrial capacity in use increased 0.6 percentage point to 77.0% in October from an upwardly revised 76.4% in September.

Source: www.reuters.com