03/29/2016 //
The fiscal year ending March 31, 2016, has proven to be an unusual economic year in the history of tracking the global capacitor, resistor and inductor markets worldwide. The market environment is succumbing to the impact of forces that are both internal and external to the supply chain and almost every company in the world selling electronic components took a beating in the markets in the last fiscal quarter, unless you were selling to specific manufacturers in China who in turn were building specific types of smartphones. The real crack in the armor came mid-March 2016 when a key industry executive asked me to do a quick analysis on nine month year-on-year sales cycles for components sold into the automotive industry, as there was conflicting information about just how hot the automotive end market really was; as every piece of literature (including my December MarketEYE article) promoted the positive market opportunities for passenger compartment electronics in the coming years. The conclusion of the research was that the market was growing and declining at the same time, growing in yen and declining in US dollars, because of the rapid frequency by which the yen has been weakened on a year-over-year basis. This is having a significant impact on the year-over-year changes in market shares at each granular level of passive component. However, the research also pointed to two additional criteria that were market driven that were having an even greater impact on shifts in global market shares. These included issues related to market access (product line, end-market, region) and specific customer access within segments in FY 2016.
Changing global market shares in the passive electronic component industry in FY 2016 can be attributed to the following criteria:
Figure 1.1: Reasons for Changes in Market Shares in The Passive Component Industry in FY 2016
The following chart shows the trend of three major currencies to the US dollar. The reader will note that the yen to dollar ratio has changed substantially. Annualized for FY 2015 the yen to dollar ratio was 106.8 and this shifted dramatically in FY 2016 to 121.6 (a 14% Y0Y increase in strength of the dollar to the yen- see Figure 1.2)-
The yen was weakened substantially between June 2013 and March 2016 when compared to the US dollar. In short, the value of the yen went from 99.1 yen to one US dollar in June 2013 to an estimated 118 yen to one US dollar in March 2016. The Japanese yen, and the rapidity and frequency by which it changes, is important to this the passive component industry because many of the top vendors of passive components in the world, including Murata, TDK, Taiyo Yuden, Nippon Chemi-Con, Nichicon, KOA, Sumida, and TOKO report their revenues in Japanese yen. In fact 54.8% of the world’s passive component manufacturers report their revenues in yen (up from 53.7% in FY 2015).
The New Taiwan dollar has remained remarkably stable between June 2013 and March 2016, however we note a new weakening in the NT$ in the March 2016 quarter and we expect this to continue into the June 2016 quarter- on a quarter-to-quarter basis. The New Taiwan Dollar is important to this report because two of the top vendors of passive components in the world- Yageo Corporation and Walsin Technology Corp. report their revenues in NT$.
The South Korean won has also weakened in the March quarter and we expect further weakening in the June quarter. Our primary sources in Korea site a significant setback in the re-evaluation of the China handset business for FY 2017. We are interested in the won valuation because Samsung Electro Mechanics is a major vendor of passive electronic components.
Another more important criteria that is impacting the vendor market shares in passive components in FY 2016 is related to product mix and market access.
There was also a criteria for increased market share in specific niche segments of rapid growth industries, such as decoupling microprocessors in Apple and Samsung smartphones. And this requires a strategy and level of planning that is not evident in all manufacturers of passive components. It also requires an advanced commitment to research and development. Another interesting finding of Paumanok research is that there is a direct correlation between market leadership and the percentage of revenues spent on research and development. For example, the vendors of high capacitance MLCC and discrete SMD chip coil inductors, which we noted as growth businesses in FY 2016, required a commitment in the advanced development of capacitance and nanohenries in exceedingly smaller components, and the ability to convince major customers in the smartphone supply chain (including semiconductor and plug in modules) that you have theories to move the technology forward to keep pace with the more important developments in active components. As a key passive component friend at Intel noted to me, “How can I plan to improve my product without a way to decouple it?”
The following describes my impression of each sub-segment of the passive component market-
Two conclusions can be drawn from my latest research on the impact of currency devaluation on market share, and there is 1) no question that one previous unknown impact of Japanese economic policy is that its companies gained market share in international growth markets because of weak currency. And 2) the strategy of weakened currency coupled with other market accelerators, such as having the right product at the right time for the right company in the right country; served to accelerate market share gains of certain Japanese companies who demonstrated multiple perspectives to strategy (and this it can be argued is why high capacitance BME MLCC markets grew in FY 2016 as did chip coils; because they were being channeled into the smartphone production factories in China).
But now it becomes even more important to forecast the future because the developments at each level of the supply chain are becoming more intense. Smartphone growth will slow and prior year-on-year growth rates for passives will also slow. The years of 50% unit growth in support of specific smartphones are over.
Vendors will most certainly look to either leverage their brands and promote additional products with access to new TAMs (Total Available Markets), or they will find specific customers within narrow growth portions of stagnant channels to boost their year-on-year performance. Eventually we see a significant opportunity for consolidation in the industry due to the massive cash reserves at some vendors and the desperate need for cash at other vendors. You put those two together and the future spells consolidation, attracted by the return on investment through the combination of SG&A.
Dennis M. Zogbi is the author of more than 260 market research reports on the worldwide electronic components industry. Specializing in capacitors, resistors, inductors and circuit protection component markets, technologies and opportunities; electronic materials including tantalum, ceramics, aluminum, plastics; palladium, ruthenium, nickel, copper, barium, titanium, activated carbon, and conductive polymers. Zogbi produces off-the-shelf market research reports through his wholly owned company, Paumanok Publications, Inc, as well as single client consulting, on-site presentations, due diligence for mergers and acquisitions, and he is the majority owner of Passive Component Industry Magazine LLC.