The shifting outlook: growth is expected this year, yet analysts remain cautious.

While the industry experienced some second-half slowing, overall 2006 was a great one. Thanks to the strong start, many companies saw their best times in five years. Consumer spending still drives shipments, and despite rising energy prices, demand for many products remains strong. However, higher semiconductor inventories and concerns about the possibility of inventory build in cellphone handsets are causing concern among analysts. Many semiconductor companies expect slower growth this year.

Hot spots. China's economy continues to expand. Low labor costs and a fast-growing domestic market will spur China's consumer electronics manufacturing to more than double by 2010, according to In-Stat (instat.com). "About two-thirds of China's electronics manufacturing revenue comes solely from foreign-funded or Sino-foreign joint ventures," said In-Stat. "The world's top 10 electronics manufacturers have all invested in China and consider China to be a key region in their global manufacturing facility layout."

China's electronics production continues to increase. Notebook PC shipments there reached 1.41 million units in the third quarter, up 39.5% sequentially, Nikkei Electronics Asia Online reported in November. (The five leading notebook vendors are Lenovo, Dell, Hewlett Packard, Asustek Computer and Acer.)

A total of 280 million GSM and CDMA handsets were produced in China during the period between January and August 2006, growing by 60.4% year-over-year, according to data from the Ministry of Information Industry. During the same period, 38.9 million digital cameras were produced, a 36% year-over-year increase. LCD production is also on the rise; by 2010 China is expected to account for 20 to 40% more of the global output of consumer goods, such as LCD TVs, digital media players, and mobile phones.

China maintains its funding of important research activities. For example, The National High-Tech Research and Development Plan, also known as the 863 Plan recently released by China's Ministry of Science and Technology, details 20 major RFID programs to which the government will allocate RMB128 million ($15.4 million) to support, EE Times reported in September. The programs, ChinaTechNews reports, include super frequency RFID anti-collision technology; middleware research; public service systems and framework design; tag and antenna design; system testing; information integration and management technology; and industrialization. (3)

India is poised to be the next manufacturing hot spot. While EMS companies such as Celestica, Flextronics, Jabil, Solectron and Sanmina-SCI--and many electronics appliance, computer and mobile phone makers--have already sited manufacturing facilities in India, the semiconductor industry is not yet fully established. Semiconductor companies such as AMD, Intel and others have announced plans to establish production facilities. What is holding up the plans? Most companies are waiting for the Indian government to sign a memorandum. A debate appears to be taking place over the merits of promoting growth of the local semiconductor industry. Contrast this with China's reported 47 wafer fabrication lines and plans for expansion by certain companies. Key to the growth of the semiconductor industry in India will be the infrastructure of equipment and materials companies, as well as semiconductor packaging and assembly.

Japan's economy continues to recover. The Japan Electronics and Information Technology Industries Association (jeita.or.jp) reported that electronics shipments increased 9.2% in October. The association reported strong demand for flat-panel TVs, portable music players, and audio products. In unit volumes, plasma TVs surged 50.7% and LCD TVs gained 25.9%.

Eastern Europe remains healthy in the EMS market, and other parts of Southeast Asia such as Vietnam are experiencing growth in electronics manufacturing.

The consumer driver. Growth projections for many consumer electronics products remain robust. Samsung projects that the mobile handset market will exceed one billion units in 2007, representing a 10% growth rate over 2006. The anticipation of Apple's new iPhone provides expectations of new service and features that could drive semiconductor content even higher.

Expectations for 2007. Expectations for 2007 vary among industry observers. The bubble in the housing market could lower consumer spending. Many analysts remain concerned about inventory in the semiconductor sector. Semiconductor equipment manufacturers are cautious with respect to growth in 2007. IC packaging and assembly subcontractors are also guarded as reflected in capital equipment purchase plans. Investment will continue to focus on advanced semiconductor packaging such as system-in-package, flip-chip and WLP. EMS companies appear to be in a cycle of equipment replacement, and companies providing surface mount equipment should see big sales.

Continued consumer spending, trends in energy prices, continued economic growth in China, and expansion in India and other growing economies will determine the final results for 2007.

E. Jan Vardaman is president of TechSearch International, Austin, TX; jan@TechSearch Inc.com. Her column appears bimonthly.

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