2001: A Year to Forget, A Year to Remember.

Some in the industry will not survive the recent economic downturn, but a recovery looms on the horizon for those who weather the storm.

As I write this month's column, we're just recovering from a profound, collective shock. Cruelly, the estimated toll in human lives lost in the attacks on New York and Washington, D.C. continues to rise. To fly the flag at half-staff one day for each of the nearly 6,000 victims would take 17 years.

Beyond this tragic-still incomprehensible-loss, the toll in property lost and damaged is only beginning to be calculated, as are lost wages and revenue. And, of course, the economic downturn has only been amplified as a result of the attacks. In the electronics industry, 2001 has been a year that many want to forget.

Semiconductor Industry

The past year has seen the most dramatic downturn in the semiconductor industry since the mid-1980s. Bill McClean, president of IC Insights (Scottsdale, AZ), projects that the annual worldwide integrated circuit (IC) market will decline 34 percent in 2001 to approximately $117 billion. However, the need for semiconductors will not recede, and the market will continue to grow. IC Insights expects a significant rebound in worldwide economic growth and electronic system sales beginning in mid-2002. A 14 percent increase in the IC market is still projected for 2002-based on the assumption of a rebound in worldwide economic growth and electronic system sales. According to IC Insights, no significant IC inventory overhang will exist to hinder growth in 2002.

IC Package Contract Assembly

The contract assembly business for IC packages has witnessed a major decline this year. For some companies, capacity utilization has declined to 40 percent or less. Consolidations have occurred and will continue to occur. Amkor acquired Toshiba's assembly operations in Japan, as well as Sampo and TSTC assembly services facilities in Shang Pao and Tai Hung, Taiwan. Amkor recently announced that it would acquire King Yuan Electronics in Taiwan, providing additional test capability and capacity in that country. Currently, the world's top four IC package contract assembly houses are Amkor, ASE, ChipPAC and Siliconware. These companies should remain as the major players in the near future and are likely to acquire additional companies. While 2001 will remain one of the worst years on record, many semiconductor companies will continue to outsource assembly-especially Japanese companies-and much of the growth in semiconductor assembly is expected to be focused on assembly service providers.

Board-Level Contract Assembly

Board-level contract assembly operations around the world have also witnessed an unprecedented drop in business this year. International Data Corp. (Framingham, MA) expects an additional 10 percent drop in the third quarter. However, major contract assembly houses, such as Celestica, Flextronics, Jabil, Sanmina and Solectron, continue acquisition plans. Recently, Sanmina acquired SCI Systems and Solectron acquired C-MAC-positioning each to be stronger in the emerging economy. Not only are the largest manufacturers expanding through horizontal integration, but vertical expansion is also occurring through purchases of PCB fabrication operations. The expansion of service offerings, in areas such as design capabilities, is also occurring in the contract manufacturing sector. Many companies are expanding global operations with facilities in geogrpahic regions such as China. In addition, expansion in new areas such as optoelectronics and wireless products is occurring. Demand for computer and telecommunications products will soon return, and manufacturers are expected to continue current outsourcing trends.

Optoelectronics Industry

Growth in the optoelectronics industry, as with other sectors, has weakened during the second half of this year. The need for greater bandwidth has stagnated, but will increase over the next several years. One challenge is packaging cost-estimated to be anywhere between 50 to 70 percent, or more, of the module. Typically, such packages have been hermetically sealed in metal cans, much like military products. Movements toward lower cost packaging options are under way, and the industry is expected to improve as demand grows and cost reduction targets are met.

Recovery

While these seem to be the darkest hours, a ray of hope exists. Our economy is cyclical and will eventually recover-the electronics industry will grow again. Yes, some companies will not survive, but this is what a market economy is all about. New markets will emerge, and spending on military electronics and security systems will increase. Economic fundamentals are beginning to show signs of improvement-oil prices have declined, interest rates have been lowered and additional tax cuts may be on the horizon. Building and investing for the future remains the key strength of America. Those who emerge from this downturn will prosper in the long run.

E. Jan Vardaman is president of TechSearch International, Austin, TX; e-mail: [e-mail].

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