Economic outlook for 2003: the outlook for 2003 is a bright spot in the current gloom resulting from 2002 economic woes.

With the global economy experiencing one of the most severe economic recessions in recent memory, many question when a recovery will occur. In the last year, economists have predicted a turnaround every quarter. While some improvement can be felt, much of the world's economy is still experiencing stagnation. Japan's economy has not seen improvement for 10 years and does not show any signs of a dramatic rebound. However, a few bright spots exist. China, even with slower growth in some segments, represents the hottest spot on the globe for manufacturing. Asia will be the key area to watch for the first signs of improvement, and positive signs can already be seen in Korea and Taiwan.

The North American Economy

In North America, unemployment continues to rise in the technology sector, and Americans seem to have lost confidence in corporate management and quarterly financial statements. The telecommunications sector is not expected to see a recovery until 2004, as spending remains flat. Most companies have a wait-and-see attitude concerning corporate information technology (IT) spending. The only segment showing major growth is the military, but this segment is not large enough to drive the entire economy. The North American economy can be compared to a slow train moving out of the station-any of three events (a war, a terrorist attack or an oil price shock) could derail the train.

China: Hot Manufacturing Spot

China is ranked as the world's fourth largest manufacturing country, producing 29 percent of the world's color television sets, 50 percent of the world's electric fans and cameras and 75 percent of the world's clocks and watches. (1) Official Chinese Ministry of Information Industry statistics show that exports of electronics and information technology products rose 40 percent during the first nine months of 2002. Production of mobile phones, in the first nine months of this year, grew 29 percent to more than 80 million units. (2) China is one of the major growth markets for domestic mobile phone sales. China's domestic mobile phone subscribers are expected to grow from approximately 190 million currently to 380 million by 2005.

China's domestic growth rate in PC shipments increased to 13 million units in 2002, and, for the first time, China passed Japan by becoming the world's second largest PC market. (3) Many companies are expanding operations through their own manufacturing operations or the use of contract assembly service providers.

Server production is also expanding in China--companies, such as Legend and Langchao, are manufacturing systems using Intel's Itanium processors. (4) Network system producers, such as Huawei and ZTE, have been major players in the country's domestic market and have now turned their attention to export markets. Huawei reported $2.4 billion in sales during 2001, has opened offices in North American under the name Future Wei and has won sales in Britain and Germany. (5)

With "China fever" reaching an epidemic status, a word of caution must be issued. While China's entry into the World Trade Organization (WTO) has reduced many barriers to entry, most companies have found a learning curve of at least a few years in establishing operations. Chinese buyers have a strong preference for domestic suppliers, and many outsiders find it difficult to sell into the local market.

While low labor costs of $100 per month for operators are often cited, other Asian locations may also provide low cost labor sources. Engineering talent is abundant and much lower priced than talent found in North America, Japan or Europe, which may be the key for future research and development (R&D) and product design, but eventually labor rates will rise.

While China has experienced higher growth rates than other nations during the economic recession, capital spending has fallen for some sectors, such as telecommunications. (6) However, China remains poised for future growth and remains an increasingly important region for electronics manufacturing.

Semiconductor Industry Outlook

IC Insights, Inc. projects that the integrated circuit (IC) market will be relatively flat through the first half of 2003. The company projects IC volume shipments will rise and fall with the health of the electronic system industry and the firm does not predict any future applications that will act as a market driver. A modest 12 percent growth in unit shipments is projected for 2003. (7) Advances in wireless products remain one of the biggest drivers for semiconductor makers.

Packaging and Assembly Technologies

Area array packages may be low volume but are higher revenue producing packages for 2003. While volumes for leaded parts remain far greater than packages, such as chip-scale packages (CSPs) and ball grid arrays (BGAs), these area array packages generate much higher margins.

Growth in mobile phone shipments remains a major driver for CSPs. In 2003, more than 5 billion units are expected to ship (not including wafer-level packages). With increased demand for small, form-factor packages at low cost, wafer-level packaging has emerged as the package of choice for many devices. An increasing number of devices, from diodes to dynamic random access memory (DRAMs), are shipping as wafer-level packages (WLPs). WLPs are growing in volume for a variety of low lead count (=100 I/O) applications, including power amplifiers, battery management devices, controllers, memory, integrated passives and a variety of analog devices.

BGA volumes remain driven by personal computers. Shipments of BGAs for 2003 are projected to be approximately 1.8 billion units. Dollar volumes are driven by the high pin count, higher margin parts typically found in workstation/servers and network system applications.

Flip chip remains a bright spot in contract assembly houses, materials and equipment suppliers and substrate makers. For many companies, the key to profitability lies in the ability to offer a vertically integrated solution of bump, assembly and test--gaining some margin in each segment of the process. An increasing number of new semiconductor products are being introduced with flip chip interconnect. (8) With a future of uncertainty, advanced packaging remains a potential bright spot for 2003.

References

(1.) Interfax, August 23, 2002.

(2.) Dow Jones Newswire, November 12, 2002.

(3.) Reuters, Tokyo, October 29, 2002.

(4.) Electronic Business News, October 25, 2002

(5.) Business Week, October 29, 2002.

(6.) Network World, November 11, 2002.

(7.) October Update of the McClean Report, 2002 Edition, October 2002; www.icinsights.com.

(8.) Circuits Assembly, November 2002, p.18.

E. Jan Vardaman is president of Tech-Search International, Austin, TX; e-mail: jan@TechSearchInc. com.