Consumer electronics reign supreme: Asian control of cell phone and IC substrate production propels growth.

For most companies in the PCB industry, 2006 was a terrific year in spite if the high cost of materials that negatively impacted margins. The growth came mainly from Asia, which is not too surprising. The PCB industry in the western world was steady but had no substantial growth, though a number of companies had a good year. Let us analyze the results of 2006 and attempt to make a forecast for 2007.

World PCB Production

Numbers tell the best story. TABLE 1 shows the world PCB output and forecast.

If this author's assessment is correct, the world saw a 14.5% growth in 2006, growing to almost $48.6 billion total production. China had nearly a 25% share, as predicted. Of 14.5% world growth, 3~4% is attributable to price increases for PCBs, garnered to offset higher material costs. Therefore, true growth in terms of material consumption may have been somewhere between 10 and 11%, which is more in line with the growth of the semiconductor industry. This makes sense because the main purpose of the PCB is to interconnect semiconductor devices, and therefore it is natural for the PCB industry to follow semiconductor trends.

Looking back on 2006, generally speaking, the first half was very strong. For example, Taiwan was growing at the rate of 35~37% in the first half. Then the pace of growth began to slow down and declined considerably in the last quarter. This is quite visible from Taiwan Stock Exchange data compiled by TPCA.

Equipment makers came into 2006 with several months of backlogs, but these backlogs were gradually depleted by the end of summer in line with the status of PCB business. The slowness in the fourth quarter is an annual event due to inventory building that always begins to pile up in November-December timeframe.

There were two main drivers of growth in 2006. The first was IC substrates and the second, cellular phones. The final figure of cell phone unit shipments is debated among various investigative organizations, but it is estimated that nearly one billion cell phone handsets were produced in 2006, up from 820 million units made in 2005--22% growth in unit shipment. TABLE 2 shows some examples of growth by IC substrate and cell phone board makers in millions of US$ sold.

Ibiden, Samsung and Unimicron are strong in both IC substrates and the cell phone board business. They were all profitable in 2006. The after tax income for some IC substrate makers in Taiwan, such as Kinsus, exceeded 30% on net sales.

There are many PCB makers not as visible as IC substrate and cell phone board makers that had strong growth in 2006 as well. They are engaged in the manufacture of PCBs for other applications such as automotive electronics (Viasystems, KCE, CMK and Hitachi Chemical Singapore), NB motherboards (Gold Circuit and HannStar Board), flat TVs (Meiko, CMK, etc.) and for memory modules (Tripod and Simmtech).

The main board used by a cell phone handset is usually called an engine board. Most engine boards include microvia build-up structures. FPC, rigid-flex boards and IC substrates are also used in cell phones. The average value of these PCBs per cell phone unit is estimated to be about eight dollars. Some handsets use less and others use more. One billion handsets therefore account for $8 billion worth of PCBs, or about 16.5% of total PCBs produced in 2006 ($48.6 billion).

TABLE 3 gives an estimated number of cell phone boards manufactured by the major producers (million pieces). The total number of engine boards made in 2006 is estimated to be about 1.2 billion pieces. Hence, the top seven cell phone PCB producers made about 74% of all cell phone boards. The capacities for engine boards added by Compeq, Unimicron, AT&S, Unitech, Multek and Ibiden are substantial to allow them to maintain their top spot as producers.

IC substrate usage is enormous. Intel alone may be using an estimated $1.6 to $1.8 billion in packaging substrates counting the sales by Ibiden, Shinko Electric, NTK, Nanya PCB and Samsung Electro-Mechanics in the form of MPU, graphics and chipsets, and also regular BGA. The demand for flip-chip package substrates is rising from 800 million pieces per annum to 1.6 billion pieces by 2009, according to Techsearch's investigation.

HannStar Board made 21 million pieces of notebook motherboards (unpopulated) and Gold Circuit Electronics (GCE) made 18 million pieces. Between these two makers, nearly 60% of world notebook motherboards were produced.

Japan slowed down moderately in the latter part of 2006, but had been very busy in the first two quarters that are traditionally Slow. Demand from flat screen TVs, cellular phones, digital cameras, games and various digital consumer products kept Japanese PCB makers busy. The recent introduction of number transportability that went into effect on October 1, 2006 in Japan made Japanese cell phone users go for newer and higher functionality phones. More than 95% of all cell phone handsets sold in Japan are now featuring 3G services, and the structure of engine boards for these handsets are quite complex. Some PCB makers in Japan have started to ship high density PCBs with buried passive and active components. Because the Japanese PCB industry is so large, a 10% percentage growth means an increase of $1 billion.

South Korea made strong forecasts for growth in the beginning of 2006. Unfortunately it was a disappointing year for Korean PCB makers that have been used to double-digit growth in the past. In this author's opinion, there are two major reasons for Korea's small growth compared to the growth in other Asian countries. While neighboring Japan and Taiwan produce more than $4 billion worth of PCB overseas, Korea doesn't produce a significant quantity of PCB overseas. For Japan and Taiwan, a good part of their growth comes from overseas investments. The second reason Korea had lagging growth in 2006 is due to the strong ties between PCB producers and their customers, particularly Samsung Electronics and LG Electronics, which is both good and bad. In general, PCB users in Korea, such as Samsung Electronics and LGE, have been paying higher prices to domestic suppliers than international standard.

Both Samsung and LGE concentrated on higher-end cell phones while the best sellers in 2006 were low-end products purchased in BRIC countries (Brazil, Russia, India and China). As a result, the market share of these two cell phone makers slipped considerably against Motorola and Sony-Ericsson. They decided to make what was considered more popular and lower cost models, resulting in their need to squeeze their suppliers to lower prices. It is rumored that the price of engine boards went down by 20% and flexible circuit boards by as much as 35% in Korea this past year. Not only did the buyers ask for lower prices, they began to purchase boards from Taiwan and Chinese manufacturers (actually Taiwan makers operating in China).

It is this author's estimate that nearly 55% of PCBs made in Korea are for cell phone handsets. This is a blessing in one way, but dangerous as well. When the growth of cell phone shipments is strong, Korean PCB makers benefit. However, when growth is not strong and OEMs purchase their PCBs from abroad to reduce cost, this negatively affects Korean manufacturers. In 2006 foreign purchases were also enhanced by a strong currency (Won) position. In 2005, the exchange rate was 1,024 Won vs. one U.S. dollar. In 2006, it was 950 Won vs. one U.S. dollar--more than a 10% upward appreciation. This makes foreign purchases an additional 10% cheaper, further supporting users' move towards offshore PCBs.

South East Asia (SEA) did very well in 2006, demonstrating strong growth. Japanese electronics companies have been pouring millions of dollars into SEA, particularly in Thailand, Vietnam and, to some degree, in the Philippines. Ibiden doubled its flip-chip package production in the Philippines. Fujitsu, Nitto Denko  and Sumitomo Bakelite all expanded their Vietnam plants. Meiko Electronics made an announcement last year that it has decided to invest more than $300 million in Vietnam.

CMK has been building a $110M plant in the eastern part of Thailand targeting the automotive industry and consumer electronics products. More than 60% of Fujikura's FPC output comes from Thailand today. Mektec built a second FPC plant in Thailand to offset increased demand from HDD industry. The total FPC and FPCA output by these two makers in Thailand now exceeds $1 billion per annum. All in all, Thailand now produces more than $1 billion worth of bare boards, twice the output of Singapore.

Overall Japanese PCB makers produce 55% of all boards made in SEA, and this ratio will increase as more Japanese are pouring into this region with megabuck investments. The Taiwanese are also considering the possibilities in this region.

China now has almost 25% of the world market share with $12.1 billion output. However, 95% of this is made by foreign transplants. Taiwanese producers account for roughly 39%, Hong Kong makers account for 30%, Japanese for 12%, the U.S. for 10% and other nations about 3%, which leaves only 5% for Chinese-owned companies. As we all know, PCB manufacturing is a very capital-intensive industry and, with a few exceptions, the large investments are coming from foreign transplants. At the rate of investments by Taiwanese makers in China, Taiwan will probably account for more than 50% of China's output soon.

North America had hardly any growth at all. There are a number of individual makers that had growth, but the absolute dollar gain is small compared to the amount made by the larger Asian counterparts. The gain made by several makers in North America is wiped out by the reduction of revenue of a few makers such as Photocircuits Corp. and exodus of production by Innovex and Parlex. On the other hand, U.S. overseas operations did very well in 2006 with about 22% growth from $1.8 billion to $2.2 billion.

The automotive PCB business is practically gone from North America. Instead, military electronics and medical electronics are strong. In 2000, the military required only $450 million worth of PCBs out of $11.5 billion total. After 9/11, the situation changed considerably. At about $900 million per annum, the PCB business for military/aerospace industry accounts for nearly 20% of the total market today. Networking and high-end computing industry supports North American volume PCB suppliers, but only a few makers benefit from this volume business such as TTM Technologies, Merix Corp. and Sanmina-SCI.

Large flexible PCB makers 3M, M-Flex and Innovex derive the major portion of their revenue from overseas operations. Parlex is no longer a North American company since it is now owned by Johnson Electric, a Hong Kong based company that builds electric motors for the automotive industry.

The backend process of FPC is very labor intensive. Therefore, every volume FPC maker in the world flocks to low cost countries such as China, Thailand and Vietnam. China is now becoming a powerhouse for FPC production with $1.5 billion in output.

It is said that more than 30% of European consumption of PCBs consists of imports from Asia and the amount of imports from Asia has been increasing steadily. The electronics industry is growing in Europe, but because of strong imports caused by price advantage, the European PCB industry has not been keeping pace with the electronics industry.

With the exception of automotive boards, volume production in Europe is practically gone. At one time, cell phone board production was high in Europe, but today, only two volume producers remain in Europe--Aspocomp of Finland and AT&S of Austria. These companies also have overseas operations. As cell phone production moves out of Europe, and over to Asia, the future of cell phone production is questionable.

Germany had solid growth in 2006, but the business cooled down in the last quarter of the year (FIGURE 1). The only volume PCB business remaining in Europe is automotive boards. The major producers (Ruwel, Fuba and Schweizer Electronics) are in Germany, but have been facing strong competition from Asian producers.

Eastern European countries such as Poland, Czech Republic, Slovenia and Hungary are a small part of European statistics. There seems to be about 50 to 60 PCB makers in these countries. Russia and Ukraine are said to have about 300 makers, but only about 30 are identifiable by this author. A large part of the Other Regions values come from companies in Israel ($150 million) and Turkey ($75 million).

If this author's prediction proves to be correct, Asia will have 85% of PCBs manufactured in 2009, a modest increase of its 82% enjoyed in 2006. The total output by Japanese manufacturers was about $15.1 billion in 2006. The total output of Taiwan makers (locations in Taiwan and China combined) is estimated to be about $11.3 billion in 2006. In 2006, the total North American output is estimated to be about $6.8 billion, inclusive of overseas production, while the U.S. is about $6.5 billion. Canadian manufacturers produced $300 million. Total production by South Korean makers was about $5.95 billion, also inclusive of a small overseas production. The top five countries for 2006 are shown in TABLE 4.

Back in 2000 the U.S. and Japan shared the top position with $11.5 billion. Now, the U.S. share is less than half of Japan. Maybe this provides a good study subject for the Harvard Business School.

TABLE 5 shows a preliminary list for the top 25 makers in 2006. 2005 output was converted from local currency into U.S. dollars by using the 2006 exchange rates (see the first page of this report) in order to see the growth in local currency. Hence, the reader may find different figures from NTI-93 list published in September of 2006. The final figures will be available in June 2007.

There are now seven members in "NTI-$1B-CLUB." There will be additional members in a few years judging from the investments being made.

2007 and Beyond

In the last few years, weak periods and strong periods alternated the span of one year like a sine curve. The first half of 2005 was lukewarm, but the last half became strong and continued into the first half of 2006. Then, the pace of growth slowed down in the last half, particularly in the last quarter of 2006. 2007 began with the last half of a "weak one year period," it seems.

In 2007, the driving force for growth is still IC substrates, cell phones and consumer electronics, particularly PDP and LCD TVs. The quantity of multilayer boards required by this industry will approach the size of the PC motherboard market. There are a lot of speculations about the growth of personal computers thanks to the introduction of the new Vista software by Microsoft, but the demand for PCs in not expected to exceed 10% growth.

Demand from infrastructure equipment such as networking, servers, base stations and storage devices will remain steady, but the overall growth in this field will be modest--as it has been in the last few years. The U.S. military circuit board demand stands at about $900 million, which, for U.S. PCB makers, is a sanctuary due to potential for security risks and IP protection.

With the advent of PDP and LCD TV, the demand for paper-based SSB has been steadily declining since the main board used by new flat TVs is either a 4-layer or a 6-layer board. Eventually, all main boards for flat TVs will be 4-layer. In response to this trend, Hitachi Chemical shut down the paper phenolic laminate plant in Malaysia completely. At peak time, the plant had a capacity of 1 million [m.sup.2] per month. Doosan Electronic Materials in South Korea reduced its paper laminate capacity from 2 million [m.sup.2] per month to 1 million [m.sup.2].

While PCB makers in the western world are eying India as a post-China investment site, the Japanese are investing heavily in Thailand and Vietnam. The growth of the PCB industry in these two countries will be substantial in a few years. Thailand will benefit from CMK's investment. CMK is scheduled to commence its operation at the $110 million Purachinburi plant in April this year.

Domestic growth of the Taiwanese PCB industry will be slowing down in reverse proportion to its activities in China. PC motherboard production went to China first. Now everything is ending up in China, from notebook motherboards, memory modules, build-up microvia cell phone boards and so on. Finally, IC substrate production will commence with Taiwanese makers in China. Nanya PCB, ASE, Tripod and Unimicron have been making BGA substrates in China in small quantifies. PPT and Kinsus will soon join them. As China gains momentum in semiconductor production, IC substrates will be in great demand. In Taiwan, growth will still be coming from cell phone boards and IC substrates as in 2006.

China will register 17% growth, considering almost 20% capacity expansion from 2006 to 2007. Thirty percent of the cell phone handsets produced is currently made in China. Microvia board makers will not miss this opportunity. Ibiden started to operate its second plant in Beijing in June of 2006, as mentioned before, followed by AT&S in Shanghai in August. Multek Doumen expanded its microvia capacity by adding building number 12 and its cell phone production capacity will reach 10 million pieces per month. Founder Zhuhai MLB has been building its microvia plant in Fushan Industrial Park in Doumen. Meadville Group is building a new microvia board plant in Guangzhou. DYnamic is also getting into microvia activities with collaboration from Korea's DAP. Unitech is expanding microvia capacity by filling its mothballed second plant with equipment. Meiko of Japan is also increasing microvia capacity in its Nansha plant. There are tremendous expansions taking place in China.

FPC production will exceed $1.5 billion in China this year. The biggest concentration of FPC manufacturing is found in Suzhou. For some reason, many world-class FPC makers end up there. Sony Chemical, Sumitomo Denko, Nitro Denko and Mektec of Japan, Career, Ya Hsin, Global Flex and Goda Technology from Taiwan, M-Flex of the U.S., and several lesser-known FPC makers are operating in Suzhou.

There is a dark cloud forming over future business prospects in China. Rising wages, shortages of skilled personnel and stricter environmental laws will have a significant impact in the coming years. Add to this the rising value of RMB against all international currencies and potential elimination of the generous tax break to foreign investors, and the cost of doing business in China may begin to lose its luster. However, it seems that none of these looming negative aspects of doing business in China are deterring investors in 2007 from new ventures and continued expansion.

There is a lot of hype in India. In this author's eye, it will be at least several years before India makes dents in the world PCB scene. The growth in Vietnam and Thailand will continue to outpace that of India for a while. The only chance India has is to invite a second and third Aspocomp.

The eastern block of Europe has been talked about for many years. Many Western European PCB makers tell this author that they do not have to go all the way to China to tap cheap labor. They say they can find cheap labor in their backyard. However, there has been hardly any investment by Western European PCB makers in Eastern Europe. Cheap labor is not the only factor for the success of the PCB business. Besides, the labor cost has already risen in Poland, Czech Republic and Hungary since these countries joined the European Union. More than cheap labor is needed in order to succeed in the PCB business. The situation in Eastern Europe resembles that of India. There is a lot of hopeful talk, but no action so far.

PCB business in other parts of the world is more or less for local needs. With a few exceptions, PCB makers in other parts of the world cannot compete internationally. Since their output is small to begin with, their status does not affect the entire picture.

We will still see growth in 2007, but at a reduced rate of 9%. One good thing is that the price of materials has now stabilized, and the price of the most talked about material, copper, came down to less than $6,000/ton from its peak of $8,700/ton. In a few months, the price of copper foil will come down, hopefully, and then we get back to the dogfight again between suppliers and buyers.

DR. HAYAO NAKAHARA is president of N.T. Information Ltd. and consulting editor to PCD&M. He can be reached at [e-mail].

TABLE 1. World PCB production.

REGION                2005   GROWTH %    2006   GROWTH %

Total America         4692        0.0    4718        0.6
N. America            4583        0.0    4624        0.9
S. America             109        0.0      94       -0.1
Total Europe          3605       -7.9    3660        1.5
Germany               1292       -6.1    1402        8.5
Other Regions          430       -0.1     437        2.1
Total Asia Pacific   33675       11.2   39738       18.0
Japan                 9995        3.4   11228       12.3
China                10060       23.2   12102       20.3
Taiwan                5980        8.8    7350       22.9
S. Korea              4890       13.5    5795        6.2
Other Asia *          2750        3.2    3263       18.7
World Total          42402        4.8   48553       14.5
China Share (%)       23.7               24.9

REGION                2007   GROWTH %    2008   GROWTH %

Total America         4803        1.8    4938        2.8
N. America            4707        1.8    4840        2.8
S. America              96        2.3      98        2.4
Total Europe          3697        1.0    3748        1.4
Germany               1458        4.0    1524        4.5
Other Regions          452        3.5     468        3.5
Total Asia Pacific   43969       10.6   49421       12.4
Japan                11733        4.5   12707        8.3
China                14195       17.3   17177       21.0
Taiwan                8268       12.5    8914        7.8
S. Korea              6200        7.0    6728        8.5
Other Asia *          3573        9.5    3895        9.0
World Total          52921        9.0   58575       10.7
China Share (%)       26.8               29.3

REGION                2009   GROWTH %

Total America         5051        2.2
N. America            4950        2.2
S. America             101        2.4
Total Europe          3786        1.0
Germany               1577        3.5
Other Regions          482        3.0
Total Asia Pacific   55107       11.5
Japan                13660        7.5
China                20440       19.0
Taiwan                9430        5.8
S. Korea              7145        6.2
Other Asia *          4432       13.8
World Total          64426       10.0
China Share (%)       31.7

In US$ millions (constant at 2006 exchange rates): For US$1, 2006:
Euro, 0.8; K. Won, 950; Yen, 115; RMB, 8.11; NT$, 32.5. For US$1,
2005: Euro, 0.844; Won, 1024; Yen, 110; S$, 1.64; RMB, 8.11; Thai
Baht, 41; NT$, 32.5. Source: N.T. Information Ltd, January 26, 2007.

* Other Asia includes Singapore, Malaysia, Thailand, Philippines,
Indonesia, Vietnam, India and Aus/NZ.

TABLE 2. PCB/IC substrate manufacturer growth 2005-2006.

                                  2005      2006
                    MAKER        REVENUE   REVENUE   % GROWTH

IC Substrate       Ibiden         1,444     1,790     23.96
                  Nanya PCB         839     1,280     52.56
               Shinko Electric      967     1,160     19.96
                   Samsung          957     1,187     24.03
                     PPT            329       460     22.27
                   Kinsus           204       367     79.90
                  Simmtech          241       308     27.80

Cell Phone         Compeq           606       700     15.51
                  Unimicron         930     1,250     34.40
                   Unitech          236       364     54.24
                    AT&S            440       570     29.54

In US$ millions. Source: Company reports.

TABLE 3. Top 8 cell phone PCB
manufacturers sales.

                         2005     2006

Compeq                    143      195
Unimicron                  95      160
Samsung                   100      110
AT&S                       85       95
Unitech                    65       95
Multek                     72       85
Ibiden                     60       80
LG                         55       70
Total                     675      890

In millions of PCBs (pieces)

TABLE 4. Top 5
countries' 2005 PCB
sales output.

Japan                    15.1
Taiwan                   11.3
USA                       6.5
S. Korea                  6.0
Germany                   1.4
Top 5 total              40.3
(83% of the world)

In US$ billions.

TABLE 5. Preliminary top 25 PCB manufacturers in 2006.

RANKING   MAKER                 NATIONALITY     2005     2006

1         Ibiden                   Japan        1381     1780
2         Nanya PCB               Taiwan         840     1280
3         Nippon Mektron           Japan        1210     1250
4         Uminicron               Taiwan         930     1250
5         Samsung E-M              Korea        1034     1187
6         Shinko Electric          Japan         944     1160
7         CMK                      Japan        1036     1096
8         KB PCB Group           Hong Kong       694      795
9         Young Poring Group       Korea         700      755
10        Compeq Mfg              Taiwan         606      700
11        Multek                    USA          620      695
12        Hitachi Chemical         Japan         645      685
13        Daeduck Group            Korea         637      651
14        Tripod                  Taiwan         466      632
15        Fujikura                 Japan         570      620
16        LG Electronics           Korea         484      579
17        AT&S                    Austria        466      566
18        Wus                     Taiwan         454      560
19        TTM Technologies *        USA          418      538
20        Viasystems                USA          480      520
21        Meiko Electronics        Japan         367      515
22        Sanmina-SCI               USA          460      515
23        Gold Circuit            Taiwan         365      490
24        PPT                     Taiwan         324      460
25        Panasonic E-D            Japan         345      423
Top 25 Total                                  16,476   19,702

In $US millions, 2005 figures converted at 2006 exchange rates.
Source: N.T. Information Ltd. * TTM inlcludes Tyco PCB both in
2005 and 2006. KB includes E&E, Techwise, Glory Faith, etc,
Young Poong includes KCG, which includes Interflex.

FIGURE 1. Germany book-to-bill ratios.

Oct.  '05   1.03
Nov.  '05   1.30
Dec.  '05   1.19
Jan.  '06   1.18
Feb.  '06   1.02
Mar.  '06   1.09
April '06   0.99
May   '06   1.10
June  '06   0.99
July  '06   1.16
Aug.  '06   0.88
Sep.  '06   0.89
Oct.  '06   0.82

Note: Table made from bar graph.