European Update (Charts 1-18)
Recent European data have been released:
- Total Eurozone 28 industrial production increased in December but Germany’s declined slightly (Chart 1).
- Euro has strengthened considerably vs. U.S. dollar, rising to its highest level (1.23 $/euro) since late 2014 (Chart 2).
- Eurozone manufacturing PMI dipped slightly in January (Chart 3) as did Germany’s (Chart 4) and France’s (Chart 5). However they all remain solidly in expansion territory (PMI>50).
- European electronic equipment production reached an all-time high in December (Chart 6) as growth resumed on a 3/12 basis (Chart 7).
- Motor vehicle (Chart 8) and aerospace (Chart 9) production declined slightly in December.
- Production of “Instruments and Appliances for Measuring, Testing and Navigation” reached a record high in December (Chart 10) but electromedical equipment production remained erratic (Chart 11).
- Semiconductor shipment growth to Europe continued to move into balance with electronic equipment production growth on a euro-denominated 3/12 basis (Chart 12).
- Loaded board (electronic assembly) board production declined sharply in December (Chart 13) and wiring device (PCB) production eased (Chart 14).
- The ZVEI book to bill for PCBs produced in German speaking countries (primarily Germany, Austria and parts of Switzerland) rose in December (Chart 15) because bookings declined less than shipments (per green circle on Chart 16).
Chart 17 shows the 3/12 growth of the European electronic supply chain. It appears that growth has peaked and is now declining across the supply chain.
Chart 18 shows growth by sector for 4Q’17 vs. 4Q’16. 2017 was an excellent year but much less robust growth can be expected this year.
Sources: Eurostat, www.ZVEI.org, www.markiteconomics.com and research.stlouisfed.org/
Global Electronic Supply Chain 4Q’17 Growth Update (Charts 19-25)
As more companies have reported their calendar fourth quarter financial results we have updated our 4Q’17 vs.1Q’16 growth estimates:
- World electronic equipment sales grew 6.6% (Chart 19) based on data from about 85% of our sample. Some large companies (HP, Dell, and Medtronic) have yet to report. Note that this growth is U.S. dollar denominated. A weakening dollar effectively amplifies this growth as stronger non-U.S. currencies were converted to weaker dollars at monthly actual (not constant) exchange rates.
- The entire supply chain (except business and office equipment) showed strong fourth quarter growth (Chart 20)
- Passive component sales increased 16% (Chart 21).
- PCB-related process equipment revenues increased 28% (Chart 22), mirroring the strong growth (+32%) and volatility of SEMI equipment.
- PCB material revenue growth was +14% (Chart 23) and CCL (PCB laminate) sales increased 11% (Chart 24).
- Chart 25 compares the 3/12 growth of the global PCB supply chain denominated in U.S. dollars. Again exchange rates amplified this growth.
Source: Company financial reports analyzed by Custer Consulting Group.
European Semiconductor Distribution Market (DMASS) Concludes 2017 with All-time Record Sales (Charts 26 & 27)
- Semiconductor distribution ends highest fourth quarter ever with double-digit growth
- Central, East and South Europe lead the way
- Discrete, Power, Opto, Memory and High-End MCUs stand out
The European semiconductor industry ended 2017 on a positive note. According to DMASS Ltd., semiconductor sales as reported by the members in Q4/2017 ended with an increase over Q4/2016 of 11.6% at 2.01 billion euro, the highest-ever winter quarter since DMASS has existed. The full year 2017 ended 14.6% higher at 8.5 billion euro, also an all-time record.
Georg Steinberger, chairman of DMASS: “A combination of several factors led to this all-time-record year for DMASS members: high demand in all industries, long lead-times and price increases, new and exciting technologies, deeper penetration of existing applications with more semi technology. We see, however, a slight slowdown in the growth rate and a high order backlog, which in combination could mean a certain risk for 2018. The first quarter 2018 will show in which direction the year will go.”
From a regional perspective, Q4 turned out over-proportionally positive for Nordic, Benelux, Iberia, Italy, Eastern Europe, Turkey and Israel, with Germany sitting right on the average. For the full fiscal year, it really was the South and the East that drove the growth in semiconductor distribution. In Q4, of the major regions/countries, Germany grew by 11.7% to 597 Million Euro, Italy by 13.8% to 170 million euro, France (+9.8%) achieved 143 million euro and overtook the UK (+5.3% to 142 million euro). Nordic ended with +20.8% at 184 million euro and Eastern Europe with +12.4% at 316 million euro.
Georg Steinberger: “The long-term tendency of a production and thus market shift from the West to the East continues. Also Germany’s share of the European DTAM, which has been up to 34% in the past, came down to ~30% now.”
Product-wise, Q4 showed strong performance in Discretes, Power, Sensors, Opto and Memory, while Analog, MOS Micro and Logic in general (Programmable, Standard, Other) seemed to struggle. Analog components grew “only” by 8.5% to 571 million euro, MOS Micro by 9.9% to 424 million euro (mainly driven by high-end MCUs), Power by 23.9% to 209 million euro, Opto by 14.5% to 211 million euro, Memories by 18% to 170 million euro and Programmable Logic by 1% to 139 million euro.
Georg Steinberger: “Interestingly, the strongest product groups in the DTAM historically were also the ones that performed below-average in Q4 and the entire year – Analog, MOS Micro and Logic. Of the biggest single product categories, clearly the stars in 2017 were FETs and High-End MCUs.”
Global Smartphone Avg. Sales Price has Record Growth in 4Q’17 (Charts 28 & 29)
Global smartphone sales reached 397 million units in the fourth quarter of 2017 (4Q’17), a one percent increase year-on-year. Demand was primarily driven by Middle East and Africa, which experienced eight percent growth, and Central and Eastern Europe, where demand grew seven percent. Global smartphone average sales price (ASP) increased by 10% year-on-year to USD 363, its fastest quarterly growth rate to date.
Arndt Polifke, Global Director of PoS telecom research at GfK, comments, “Smartphone year-on-year demand growth moderated for the fourth consecutive quarter, rising only one percent to 397 million units in 4Q’17. However, sales value increased by 11% year-on-year in the quarter, which is exceptional growth for such a mature technology category. This came as the proliferation of smartphones with larger and bezel-less displays incentivized consumers to purchase more expensive devices.”
Highlights of GfK’s regional comments:
- Western Europe: Strong revenue development combined with a positive demand outlook
- Central and Eastern Europe: Strong recovery and highest value increase among all regions
- North America: Strongest demand growth in over two years
- Latin America: Strong recovery but outlook remains moderate
- Middle East and Africa: Egypt and Saudi Arabia drive strong growth in smartphone demand
- China: Despite demand decline, value growth was stellar
- Developed Asia: Demand weighed on by South Korea
- Emerging Asia: Suffers its first ever year-on-year decline in 4Q’17
Yotaro Noguchi, product lead in GfK’s trends and forecasting division, concludes, “The outlook for 2018 is positive as GfK forecasts global smartphone demand to rise by three percent compared to 2017, driven by Emerging Asia and Central and Eastern Europe. With saturation in developed markets, consumer retention will be a key focus for smartphone makers, which, alongside increased commoditization, will encourage greater innovation and differentiation in order to spur sales.”
MPU Market (Charts 30 & 31)
Though accounting for less than half of total MPU sales, data-handling cellphones, tablets, and MPUs for embedded processing applications to keep MPU market active through 2022.
Microprocessors, which first appeared in the early 1970s as 4 bit computing devices for calculators, are among the most complex integrated circuits on the market today. During the past four decades, powerful microprocessors have evolved into highly parallel multi-core 64-bit designs that contain all the functions of a computer’s central processing unit (CPU) as well as a growing number of system-level functions and accelerator blocks for graphics, video, and emerging artificial intelligence (AI) applications. MPUs are the “brains” of personal computers, servers, and large mainframes, but they can also be used for embedded processing in a wide range of systems, such as networking gear, computer peripherals, medical and industrial equipment, cars, televisions, set-top boxes, video-game consoles, wearable products and Internet of Things applications. The recently released 2018 edition of IC Insights’ McClean Report shows that the fastest growing types of microprocessors in the last five years have been mobile system-on-chip (SoC) designs for tablets and data-handling cellphones and MPUs used in embedded-processing applications.
The McClean Report also forecasts that 52% of 2018 MPU sales will come from sales of all types of microprocessors used as CPUs in standard PCs, servers, and large computers. As shown in Figure 2, only about 16% of MPU sales are expected from embedded applications in 2018, with the rest coming from mobile application processors used in tablets (4%) and cellphones (28%). Cellphone and tablet MPUs exclude baseband processors, which handle modem transmissions in cellular networks and are counted in the wireless communications segment of the special-purpose logic IC product category. A little over half of 2018 microprocessor sales are expected to come from x86 MPUs for computer CPUs sold by Intel and rival Advanced Micro Devices.
Cellphone and tablet SoC processors were the main growth drivers in microprocessors during the first half of this decade, but slowdowns have hit both of these MPU categories since 2015. Market saturation and the maturing of the smartphone segment have stalled unit growth in cellular handsets. Cellphone application processor shipments were flat in 2016 and 2017 and are forecast to rise just 0.3% in 2018 to reach a record high of nearly 1.8 billion units in the year. The microprocessor business continues to be dominated by the world’s largest IC maker, Intel (Samsung was the world's largest semiconductor supplier in 2017). Intel's share of total MPU sales had been more than 75% during most of the last decade, but that percentage is now slightly less than 60% because of stronger growth in cellphones and tablets that contain ARM-based SoC processors. For nearly 20 years, Intel’s huge MPU business for personal computers has primarily competed with just one other major x86 processor supplier—AMD—but increases in the use of smartphones and tablets to access the Internet for a variety of applications has caused a paradigm shift in personal computing, which is often characterized as the “Post-PC era.”
This year, AMD looks to continue its aggressive comeback effort in x86-based server processors that it started in 2017 with the rollout of highly parallel MPUs built with the company’s new Zen microarchitecture. Intel has responded by increasing the number of 64-bit x86 CPUs in its Xeon processors. Intel, AMD, Nvidia, Qualcomm, and others are also increasing emphasis of processors and co-processor accelerators for machine-learning AI in servers, personal computing platforms, smartphones and embedded processing.
ZTE Entered Japan's 5G Market with Low-cost Strategy (Chart 32)
Chinese equipment maker hopes to make up for limited US operations
Japan's mobile phone carriers are gearing up for massive investments in fifth-generation technology, and major Chinese telecommunications equipment maker ZTE wants a piece of the pie.
Chen Liangwen, ZTE Japan's chief technology officer, said Japan will become the world's showcase for 5G technology, which is expected to become commercially available in 2020.
Japan's three mobile phone carriers are expected to invest heavily in 5G infrastructure ahead of the 2020 Tokyo Olympics.
ZTE's Shenzhen head office sent Chen to Japan to ensure that Ericsson of Sweden and other European companies did not win all of Japan's 5G contracts.
Currently, ZTE Japan has about 400 employees, including maintenance staff, over 10 times more than when Chen joined ZTE from Japanese electronics maker NEC in 2009.
ZTE last year opened its Daimon R&D Center near Tokyo's Hamamatsucho Station, at a cost of 1 billion yen ($9.34 million). Over the past six months, representatives from nearly 40 companies from Japan, Chile, Peru, Indonesia and other countries have visited the center.
Chen said that even with the new facilities, ZTE does not have enough space to conduct many 5G-related tests and the company is looking for a bigger office in Tokyo. About 500-600 engineers, including those at its Shenzhen head office, will spend more than six months testing equipment for Japan's mobile service providers.
ZTE's strength lies in its ultra-low prices, which are about a fifth of those of its European and Japanese competitors. It is currently testing 5G infrastructure equipment with SoftBank.
Chen Liangwen, deputy chief technology officer of ZTE Japan It may prove difficult for ZTE to win contracts from NTT Docomo and KDDI during the initial stages, but the company has a chance to turn the tables as 5G investment is expected to last for at least 10 years.
ZTE delivers equipment to SoftBank and other carriers in the Japanese wireless infrastructure market. It mainly has dealings with Wireless City Planning, a unit of SoftBank Group and a provider of high-volume data transmission using the 2.5 GHz band.
Huawei Technologies of China, Ericsson and Nokia of Finland are in fierce competition to develop 5G.
ZTE, which ranks fourth in the global wireless infrastructure market, is likely to make a strong showing in the communications system known as time division duplex. It uses the same frequency to uplink from handsets to base stations and to downlink from base stations to handsets. The TDD system will make it easier to secure frequency more flexibly than frequency division duplex, which uses different frequencies to uplink and downlink; 5G will mainly use the TDD system.
TDD has been used in China since 3G cell phones were introduced, and ZTE's strength lies in its expertise in the system, according to Chen.
ZTE aims to win contracts for SoftBank's base station facilities. In the middle of last year, KDDI's technical executives visited ZTE Japan for a briefing on 5G technology.
The handset business is another key to building relationships with major Japanese mobile phone carriers. Docomo's M Z-01K for winter/spring 2018, a foldable smartphone with a dual screen, was developed with ZTE. The M Z-01K is the first product planned by Docomo in years and will be sold by AT&T of the U.S. and Vodafone of the U.K. as well.
Isao Hirakodama, general manager of ZTE's mobile handset business, played a key role in developing a dual-screen smartphone at NEC. Docomo's M smartphones enable users to, for example, watch a movie on one screen while writing text on another.
"We spent a year and a half – longer than usual – to develop it, and we want to propose a new way of using smartphones," Hirakodama said.
Docomo has already launched test marketing with European companies and ZTE's arch rival Huawei. A Huawei representative said it is a big step even if the tests do not lead to contracts. ZTE wants to take advantage of joint handset development to gradually deepen its relationships with mobile phone carriers.
Japan has become more important than ever for ZTE. The company was slapped with massive U.S. fines on allegations of illegally shipping banned communications equipment to Iran and North Korea, resulting in a net loss in the fiscal year ended December 2016. Founder Hou Weigui, who turned ZTE into a global company, was forced to step down as chairman.
For ZTE, which like Huawei is restricted in its business dealings in the U.S. due to security concerns, it is important to expand business in Japan and Europe, where massive investments in 5G are expected.
Founded in 1985, ZTE started developing telephone switchboards under the sponsorship of a research institute owned by the Shenzhen municipal government. State-owned ZTE Holdings is the company's biggest shareholder, and it has listed its shares in Shenzhen and Hong Kong.
ZTE is touted as a "state-owned and private-operating" company in China. Nevertheless, ZTE is far behind Huawei in terms of earnings, prompting the company to scramble to catch up in Japan.
In China, Huawei and ZTE are often likened to a fox and a cow. But now ZTE, the easy-going cow, is acting like a raging bull as it faces intense 5G competition in Japan.
Global and U.S. Industrial Production Growth (Charts 33 & 34)
Chart 33 gives monthly growth of industrial production for key global countries.
Chart 34 shows U.S. industrial production. It is near an all-time high.
Sources: www.economist.com and www.federalreserve.gov