Custer Consulting Group at IPC APEX/Expo, San Diego February 27 to March 1

Custer Consulting Group will be in Booth 707 at the San Diego Convention Center for IPC APEX/Expo 2018 this week. See you in San Diego!


Flash February PMI Leading Indicators

IHS Markit released its “flash” February Purchasing Managers Indices for a few select countries (Chart 1). The USA PMI rose slightly (Chart 2) but Japan (Chart 3), the Eurozone (Chart 4), Germany (Chart 5) and France (Chart 6) saw PMI declines


Japan Update

The yen has been strengthening vs. the U.S. dollar since the beginning of 2018 (Chart 7).

JEITA just released December domestic Japanese electronic equipment, device and component production.

  • December 2017 electronic equipment production was up 6.4% vs. December 2016 (Chart 8).
  • Electronic component and device production both continued to grow but at slower paces (Chart 9).
  • Passive production slowed very slightly (Chart 10).
  • PCB production was little changed from November (Chart 11) as its 3-month growth rate rose slightly (Chart 12).
  • Chart 13 summarizes 2017 total component and device production for 2017.
  • IC production continues to rise while discrete semiconductor production is flat (Chart 14).
  • Semiconductor shipments to Japan remain well in excess of domestic electronic equipment production on a 3/12 growth basis (Chart 15).

Chart 16 summarizes the 4Q’17 vs 4Q’16 growth of the Japanese electronic supply chain.


Past High Growth Consumer Driven Markets have Flattened

Shipments of mobile phones, PCs, tablets and digital cameras have flattened (Chart 17) as we look to new high volume potential markets for future growth (Chart 18).

Source: Custer Consulting Group

Worldwide Smartphones Unit Sales Decline 5.6% y/y to 408 Million Units in 4Q’17 (Charts 19-21)

  • Huawei and Xiaomi were the only vendors in the top five to experience growth in the fourth quarter.
  • Global sales of smartphones to end users totaled nearly 408 million units in the fourth quarter of 2017, a 5.6% decline over the fourth quarter of 2016, according to Gartner, Inc. This is the first year-on-year decline since Gartner started tracking the global smartphone market in 2004.

"Two main factors led to the fall in the fourth quarter of 2017," said Anshul Gupta, research director at Gartner. "First, upgrades from feature phones to smartphones have slowed down due to a lack of quality "ultra-low-cost" smartphones and users preferring to buy quality feature phones. Second, replacement smartphone users are choosing quality models and keeping them longer, lengthening the replacement cycle of smartphones. Moreover, while demand for high quality, 4G connectivity and better camera features remained strong, high expectations and few incremental benefits during replacement weakened smartphone sales."

Samsung Retains No. 1 Spot in Fourth Quarter of 2017

Samsung saw a year-on-year unit decline of 3.6% in the fourth quarter of 2017, but this did not prevent it from defending its No. 1 global smartphone vendor position against Apple. Despite the start of a slowdown in sales of Samsung's Galaxy S8 and S8+, the overall success of those models has helped Samsung improve overall average selling price. Samsung is poised to announce the successors to its Galaxy series of smartphones at Mobile World Congress (MWC) this year. The launches of its next flagship devices are likely to boost Samsung's smartphone sales in the first quarter of 2018. Although Samsung's significant sales volumes lean toward midprice and entry-level models, which now face extreme competition and reducing contribution, its profit and average selling price may further improve if these next flagship smartphones are successful.

While Apple's market share stabilized in the fourth quarter of 2017 compared to the same quarter in 2016, iPhone sales fell 5%.

"Apple was in a different position this quarter than it was 12 months before," said Gupta. "It had three new smartphones — the iPhone 8, iPhone 8 Plus and iPhone X — yet its performance in the quarter was overshadowed by two factors. First, the later availability of the iPhone X led to slow upgrades to iPhone 8 and 8 Plus, as users waited to try the more-expensive model. Second, component shortages and manufacturing capacity constraints preceded a long delivery cycle for the iPhone X, which returned to normal by early December 2017. We expect good demand for the iPhone X to likely bring a delayed sales boost for Apple in the first quarter of 2018," added Gupta.

Huawei and Xiaomi — The Big Winners in Fourth Quarter of 2017

Huawei and Xiaomi were the only smartphone vendors to achieve year-on-year unit growth (7.6 and 79%, respectively) and grew market share in the quarter. With Huawei's new smartphone additions in the quarter, including Mate 10 Lite, Honor 6C Pro and Enjoy 7S, the vendor broadened the appeal of its smartphones.

Xiaomi's competitive smartphone portfolio, consisting of its Mi and Redmi models, helped accelerate its growth in the emerging Asia/Pacific (APAC) market. It also helped Xiaomi win back lost share in China.

"Future growth opportunities for Huawei will reside in winning market share in emerging APAC and the U.S.," said Gupta. "Xiaomi's biggest market outside China is India, where it will continue to see high growth. Increasing sales in Indonesia and other markets in emerging APAC will position Xiaomi as a strong global brand."

In 2017 as a whole, smartphone sales to end users totaled over 1.5 billion units, an increase of 2.7% from 2016. Huawei, ranked No. 3, raised its share in 2017, continuing to gain on Apple. At the same time, the combined market share of the Chinese vendors in the top five increased by 4.2 percentage points, while the market share of top two, Samsung and Apple, remained unchanged.

In the smartphone operating system (OS) market, Google's Android extended its lead by capturing 86% of the total market in 2017. This is up 1.1 percentage points from a year ago. "The competition in the smartphone market is unabated at this time of the year," said Gupta. "Ahead of MWC, several phone manufacturers such as Samsung, HMD (Nokia), Asus and LG have announced that they will launch new Android smartphones."


Global First-Tier Notebook Brand Vendors’ Combined Shipments Fell for Second Straight Month by 28% Sequentially in January, Although Volumes were up 11% Compared to Year Earlier

Global notebook shipments (Wintel-based models) by the top-five brands and top-three ODMs suffered declines on month in January due to seasonality, according to Digitimes Research.

The first-tier brand vendors saw their combined shipments fall for the second straight month by 28% sequentially in January, although the volumes were up 11% compared to a year earlier thanks to the late arrival of the Lunar New Year holidays in February this year.

Hewlett-Packard (HP), the top vendor, suffered the highest sequential decline in January shipments. However, the vendor's January figures still remained on the growth track on a yearly basis. Lenovo also saw its January shipments expand 40% on year and narrowed its gap against HP.

Dell was less affected by the seasonality with its shipments dropping a mild 7% sequentially in January.

Combined shipments from the top-three ODMs were down 26% on month in January. Compal Electronics' January shipments were lower than expected due to sequential declines in demand from HP and Lenovo, while Quanta Computer and Wistron were performing better than the industry's average in the month, according to figures collected by Digitimes Research.


Top 10 Semiconductor R&D Spenders Increase Outlays 6% in 2017 (Chart 22)

The ten largest semiconductor R&D spenders increased their collective expenditures to $35.9 billion in 2017, an increase of 6% compared to $34.0 billion in 2016. Intel continued to far exceed all other semiconductor companies with R&D spending that reached $13.1 billion. In addition to representing 21.2% of its semiconductor sales last year, Intel’s R&D spending accounted for 36% of the top 10 R&D spending and about 22% of total worldwide semiconductor R&D expenditures of $58.9 billion in 2017, according to the 2018 edition of The McClean Report that was released in January 2018. Chart 22 shows IC Insights’ ranking of the top semiconductor R&D spenders, including both semiconductor manufacturers and fabless suppliers.

Intel’s R&D expenditures increased just 3% in 2017, below its 8% average annual growth rate since 2001, according to the new report. Still, Intel’s R&D spending exceeded the combined R&D spending of the next four companies—Qualcomm, Broadcom, Samsung, and Toshiba—listed in the ranking.

Underscoring the growing cost of developing new IC technologies, Intel’s R&D-to-sales ratio has climbed significantly over the past 20 years. In 2017, Intel’s R&D spending as a percent of sales was 21.2%, down from an all-time high of 24.0% in 2015. In 2010, the ratio was 16.4%, 14.5% in 2005, 16.0% in 2000, and just 9.3% in 1995.

Qualcomm—the industry’s largest fabless IC supplier—was again ranked as second-largest R&D spender, a position it first achieved in 2012. Qualcomm’s semiconductor-related R&D spending was down 4% in 2017, after a 7% drop in 2016, and it was close to being passed up by third place Broadcom and fourth placed Samsung, whose R&D spending increased 4% and 19%, respectively.

Despite increasing its R&D expenditures by 19% in 2017, Samsung had the lowest investment-intensity level among the top-10 R&D spenders with research and development funding at 5.2% of sales last year. Samsung’s 49% increase in semiconductor revenue in 2017 (driven by strong growth in DRAM and NAND flash memory) lowered its R&D as a percent of sales ratio from 6.5% in 2016. Micron Technology’s revenues surged 77% in 2017, but its research and development expenditures grew 8%, resulting in an R&D/sales ratio of 7.5% compared to 12.5% in 2016. Similarly, SK Hynix’s sales climbed 79% in 2017, while its research and development spending increased 14% in the year, which resulted in an R&D/sales ratio of 6.5% versus 10.2% in 2016.

Fifth-ranked Toshiba and sixth-ranked Taiwan Semiconductor Manufacturing Co. (TSMC) each allocated about the same amount for R&D spending in 2017. Toshiba’s R&D spending was down 7% while TSMC had one of the largest increases in R&D spending among the top 10 companies shown in the figure. TSMC’s R&D expenditures grew by 20% as the foundry raced rivals Samsung and GlobalFoundries in launching new process technologies, while its sales rose 9% to $32.2 billion in the year.

Rounding out the top-10 list were MediaTek, Micron, Nvidia, which moved from 11th place in 2016 to 9th position to displace NXP in the 2017 ranking, and SK Hynix. Collectively, the top-10 R&D spenders increased their outlays by 6% in 2017, two points more than the 4% R&D increase for the entire semiconductor industry. Combined R&D spending by the top 10 exceeded total spending by the rest of the semiconductor companies ($35.9 billion versus $23.0 billion) in 2017.

A total of 18 semiconductor suppliers allocated more than more than $1.0 billion for R&D spending 2017. The other eight manufacturers were NXP, TI ST, AMD, Renesas, Sony, Analog Devices, and GlobalFoundries.


DRAM Grew 76% in 2017 and will grow 30% in 2018 (Charts 23 & 24)

DRAM revenue grew by 76% YoY in 2017, and is expected to increase by more than 30% in 2018, says DRAMeXchange

“PC DRAM prices set by the top three suppliers in January were on average $33, showing a 5% increase from the previous month,” says Avril Wu, research director of DRAMeXchange.

In the server DRAM market, the demand comes from Google, Microsoft Facebook and Apple as they buy servers for their data centers.

DRAMeXchange estimates that prices of server DRAM products will go up by 3-5% QoQ in 1Q’18.

In the mobile DRAM market, demand is being affected by weaker-than-expected smartphone sales and sliding NAND Flash prices.

Furthermore, China’s National Development and Reform Commission has intervened against further DRAM price hikes.

As a result, the price upswing in the mobile DRAM market has moderated. The latest analysis puts QoQ increase in the ASP of mobile DRAM at 3% for 1Q’18. DRAMeXchange expects the overall revenue to increase further by more than 30% in 2018, reaching US$96 billion.

In the 4Q’17 revenue ranking, Samsung was still the leader and again achieved a new record high. With a quarterly total of US$10.1 billion in DRAM revenue, Samsung registered a growth of 14.5% from 3Q’17.

Hynix and Micron were also in 2nd and 3rd place, respectively. Hynix’s revenue for 4Q’17 increased by 14.1% QoQ to US$6.3 billion.

Micron’s DRAM revenue for 4Q’17 totalled $4.6 billion, translating to a 13.4% QoQ increase and a global market share of 20.8%.

In operating margins, Samsung led with 64% followed by zhynix with 59% followed by Micron with 56%.


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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