The migration of electronic-equipment production to regions with lower labor and infrastructure costs has transformed Europe’s high-tech manufacturing industry over the past several years, significantly reducing its size and altering the nature of its supply chain and products.
Europe’s major OEMs have transferred their production to low-cost areas or subcontracted it out completely to global electronic manufacturing services (EMSs) providers or original design manufacturers (ODMs). This transition is all but complete, leaving Europe with a 19% share of worldwide electronics equipment manufacturing in 2003. iSuppli Corp. estimates that Europe’s share of global manufacturing will decline to 15.1% in 2008.
The semiconductor content of European-manufactured electronic equipment is declining faster than production. Chips are expected to account for an average of 11.6% of electronic-equipment value in 2008, down from 17% in 2003.
The transfer of production of high-volume, high-semiconductor-content products, such as mobile phones, drives the exodus out of Europe. Locally manufactured equipment now predominantly has a high level of intellectual content, or is unwieldy and prohibitively expensive to ship globally.
The share of the distributor-served semiconductor market in Europe has grown as the number of large semiconductor-component contracts placed there has declined dramatically. This has forced suppliers to shift their support efforts from local, design-in activities to efforts in other locations.
Worldwide recovery elevates chip pricing
Globally, the long-awaited economic recovery has begun, bringing with it a greater level of market confidence. This translates into a general upward movement on global commodity semiconductor pricing, which is expected to continue through 2004.
Fig. 1 shows the cumulative percentage change in pricing since the beginning of 2003 for the major standard commodity semiconductor families.
The continual volatility of the dynamic, random-access memory (DRAM) market and shortages of NAND and NOR flashes has driven fluctuations in memory pricing. Both flash shortages were created primarily by supplier issues rather than by unforeseen demand increases, and should be corrected by mid-2004.
Purchasing Power Shift
The alteration in the European equipment manufacturing profile, and its impact on the size of the European semiconductor market, has allowed suppliers to raise prices in Europe more than other regions.
The greater size of the Asian market, and the resulting purchasing power of its very large OEMs, contract manufacturers and the global EMS/ODM companies that are buying parts in Asia, have allowed companies in the region to limit extreme price increases.
The only significant Asian price increases have been selective corrections in late 2003. Adjustments occurred with products sold at or below cost during a low cycle in mid-2003. However, Europe’s reduced purchasing power and its heavy supply through distribution channels have made it easier to raise prices.
Supply is tight, backlogs are filling, lead times are extending, prices are increasing modestly and spot shortages are escalating. However, suppliers remain very reluctant to declare that products are on allocation. The closest thing to allocation that suppliers are saying is, “controlled order entry.”
Suppliers’ reticence to declare allocation compels this analyst to speculate: Does this mean that the semiconductor market is maturing and is trying to resist the excesses of the past? Or does it signify a soft upturn?
Roger Banks is a market analyst with iSuppli’s Market Intelligence Group. Banks covers the electronic component market for iSuppli Corp.’s Component Price Tracker. This article summarizes Banks’ presentation at the 2004 iSuppli European Briefing Series in Amsterdam on April 29. Contact him at rbanks@isuppli.com. This article has been reprinted with permission from iSuppli/Stanford Resources.
