Technology: Risk

Computers Industry:

After sagging 5% in 2009, global spending associated with information technology is expected to grow 4% in 2010. Late 2008, sector activity was quickly aligned with the decline in demand, thus avoiding a downward price spiral. By the 2009 second quarter, a gradual recovery then began to take shape, first in Asia, then North America, and finally Europe. This trend will doubtless stay on track in 2010.

Information technology equipment (personal computers, servers, data storage, game consoles, printers, and so on) was hit hard by the decline in corporate investment and household consumption late 2008. The weak progression in personal computer sales in 2009 actually represents the net result of a decline early in the year and a gradual recovery starting in spring with sales in the third quarter slightly higher year-on-year. The considerable disparities existing in the market before the crisis are still there. While sales in Asia, dominated by China (cf.aid for computer purchase in rural areas), hardly declined at all and quickly resumed strong growth, they fell sharply in developed regions then took much longer to begin to recover and resume relatively sluggish growth. Demand from households, meanwhile, proved to be much more resilient than demand from either companies or the public sector with sales consequently rising for mini-laptops and ordinary laptops, and declining for office computers. Production - 60% controlled by HP, Acer, Dell, Lenovo, and Toshiba - is not very profitable despite generalized recourse to Asian, mainly Taiwanese, subcontractors, which have, meanwhile, succeeded in establishing their own brands and enjoy a particularly strong position on netbooks and low-cost products. Price competition has been intense especially in emerging and developing markets that constitute the source of growth. Moreover, in value terms, the market could have dropped 10% in 2009. Efforts to diversify into services and smartphones are widespread in the industry. In 2010, sales, particularly of notebooks, will firm up thanks to the launch of a new operating system and the recovery of corporate investment in the second half. But prices will remain under strong pressure.

The server and data storage market, already coming to grips with virtualization and cloud computing, has suffered greatly from the drop in corporate investment, declining an estimated 15%. A recovery will be unlikely to develop before the 2010 second half, which will translate to stability for the full year.

Despite significant growth in demand from the financial, transport, and public sectors, smart card sales have slumped reflecting the decline in mobile phone sales, which still represent nearly three-quarters of their market. The expected sales rebound in mobile phone sales augurs a strong recovery in 2010.

Also contending with slumping demand, software publishers acted swiftly to adjust capacity accordingly, which generally enabled them to maintain good profitability despite the drop in turnover. Some publishers specialized in video games were nonetheless forced to file for bankruptcy. Sales are expected to be up slightly in 2010 thanks to the boom in security software, the launch of a new PC operating system; and the growing software needs of smartphones as they continue to develop. American publishers still dominate the sector, followed from far behind by Europeans. Trailing the few major players, a multitude of small-size actors are present in niche markets.

Services have demonstrated their staying power in the crisis, which has attracted equipment manufacturers seeking insurance against cyclical downturns and new sources of profitability. The outlook is bright underpinned by needs associated with restructuring programs and new financial sector regulations. Indian players specialized in providing remote services, after marking time, will resume their advance, to gain ground and plan on competing with the major American players in across-the-board IT system management system. Price competition will intensify with recourse to even less costly human resources in other emerging countries.

Electronic Components:

Sales collapsed late 2008 reflecting the fall in demand from user sectors, notably information technology, telecommunications equipment, and automotives.

The gradual recovery under way since spring 2009 is likely to continue in 2010.

Sales of electronic components collapsed in the 2008 third quarter in the wake of the downturns in all the capital goods and consumer goods markets on which they depend, with 60% of all components used in manufacturing computers and mobile telephones. The impact on volumes resulting from the drop in demand was compounded by a negative price effect that developed when adjustments in the supply were not made soon enough. Sales recovered gradually from the 2009 second quarter, initially due to restocking, then thanks to the revival of sales of IT equipment, sophisticated mobile telephones, and automotives followed by the recovery of their production, which was particularly strong in Asia. On balance, sales were down by over 10% in value terms in 2009.

The memory segments (25% of all components) and to a lesser degree the microprocessor segment (20%) suffered much more than did logic and analogue circuits and optoelectronics since their prices and profitability had already been trending down since 2007-2008 due to extensive overcapacity. In a second step, the capacity reductions and the disappearance of certain players (such as Qimonda) helped push up prices. Most actors have suffered, and some registered losses whatever their role, whether large manufacturer, subcontracted foundry, tester, assembler, packager, or distributor. The downward spiral ultimately led to factory shutdowns and mergers & acquisitions activity particularly in Taiwan (within Taiwan Memory under government aegis) and in Japan. Conversely, Korean players have passed the crisis without too much difficulty.

In 2010, sales are expected to be up 20% as a result of increases in sales prices and volumes alike. Earnings will improve significantly. Maintaining control over output will remain crucial to keep prices from sliding back. All regions, above all Asia, are expected to benefit. Although Europe, Japan, and the United States have doubtless suffered from the relocation of finished-product manufacturing to various Asian countries, they will likely consolidate their strength not only in components intended for land and air transport, the medical industry, military defense, but also basic constituents and other elements of component manufacturing.

After the global decline in consumption and investment in autumn 2008, information and communication technology-related spending by households, companies, and public administrations eroded in 2009. The earnings of actors in the sector were affected and losses sometimes incurred especially in some cases where the difficulties pre-dated the crisis and were exacerbated by unfavorable exchange rates. Sector companies were in general able to cope, however, thanks to large reserves built up in past years, reductions in many input prices, and also adoption of stringent cost saving measures.

Sector activity in Asia, the main region for the production of goods with electronic content (57% of global production), collapsed from September to December 2008 albeit with marked geographic disparities: Taiwan notably suffered much more than Malaysia. By the 2009 second quarter, however, ICT-related activity recovered to near pre-crisis levels. With the decline in activity late 2008 ultimately proving disproportionate to the drop in demand, the initial need was to replenish stocks, then to respond to resurgent demand. With the catch-up phase over, sector activity could slump in 2010, especially with a less-than-bright outlook for household consumption in the developed regions for which production is largely intended.

In developed regions, the improvement has been slim with local sectors more dependent on corporate spending, slower to recover than consumer spending. The recovery is thus expected to gain significant momentum in the 2010 second half.

The crisis has increased the pressure on prices for consumer products like flat-screen televisions, game consoles, still cameras, and sophisticated mobile telephones while sales volumes have paradoxically held up well. These products are comparable to ordinary mass-market products and increasingly subject to the same market rules. Often resorted to and mostly located in Asia, subcontractors have felt the effects of these trends.

The major players, particularly Japanese, with product lines ranging from home appliances to components to consumer electronics have undertaken extensive restructuring via mergers & acquisitions, alliances, and exchanges of activities as well as development of the use of regional subcontracting. Korean conglomerates have taken the lead albeit facilitated by favorable exchange rates.

Thanks to their considerable financial resources, the manufacturers (actually "designers" considering their massive reliance on subcontracting) of information-technology and telecommunications equipment and software have begun to diversify into less cyclical services, blur the line between IT and telecommunications via mobile Internet mobile, and develop their own distribution networks with competition expected to intensify in consequence.

Grading and description are forecasted for 2010. Updated on globalEDGE April 2010.