Walt Custer Elaborates on his Annual IPC APEX EXPO Forecast Presentation
IPC APEX EXPO 2016 has come and gone, and this year, Walt Custer’s annual presentation forecasting the upcoming year for the industry was much anticipated, as always. I met up with Walt at the show to learn about his presentation and dig deeper into his findings.
Barry Matties: Walt, we are here at IPC APEX EXPO 2016 and you've just given another talk about what we can expect in the upcoming year. Why don't you start by sharing a little about what you discussed?
Walt Custer: Sure. As most people know, we follow the entire global electronics supply chain. We try to track the economy, electronic equipment demand, the active and passive components, EMS and ODM companies, materials and process equipment. Starting 2016 the U.S. economy is in a very modest growth mode. Europe is the same way.
Asia, especially China, S. Korea, Taiwan, and now Japan, are flat or shrinking. These Asian countries are large producers of electronic goods, so their downturn has greatly impacted the whole industry.
Looking forward we use leading indicators to predict what's going to happen and these indicators say that, globally, we're at zero growth right now, with North America and Europe expanding a little bit and much of Asia contracting.
Leading indicators predict business conditions two months to six months in advance and they currently suggest that early to mid-2016 will not be very robust. Hopefully demand will accelerate in the second half of this year but that is not clear right now. We monitor the leading indicators every month to see likely changes in business conditions.
Matties: I think you and I spoke last in Germany at productronica, and at that time you said that this was most likely the trend that was going to happen. It looks like it's really coming to fruition.
Custer: I don’t believe we've been too far off. The leading indicators are always going to be a three- to six-month guide, and so I always look at those.
Another key factor is currency exchange rates. The U.S. dollar is currently very strong versus other currencies, which means that our exports are more expensive and imports are cheaper. But of equal importance are exchange rates and their impact on global growth rate calculations. When weaker non-dollar currencies are consolidated to stronger U.S. dollars, effectively the dollar totals are effectively weaker. This exchange rate loss impact has been substantial lately for multinational companies that report their financial results in dollars. Last year this impact was negative, about -5%.
For the first quarter 2016 vs. 2015 this exchange rate impact may have degraded dollar growth rates by as much as 8%.
In addition to exchange rate effects, overall demand has weakened, especially in China. Normal post-Christmas holiday slowing of consumer good demand is one factor. In addition there was the Chinese New Year shutdown in February coupled with Apple cutting back orders for iPhones. So the first quarter in Southeast Asia started slowly, especially for high-volume consumer electronics.
Turning to the U.S. market, the major electronic equipment sectors are instruments & control, medical, defense and aerospace. Domestically we are not very dependent upon computers or cellphones. Because of the U.S. product mix, we're in better shape than places like China where volume market growth really weakened.
I think, as you look at the global end markets right now, there's no big driver. Last year smartphone growth was very robust and before that it was media tablets and PCs. This year, smartphone growth has slowed, media tablets have gone flat and PC growth is negative.
We're waiting for the next big market driver.
Automotive is still key with electronic content constantly rising and self-driving cars on the horizon. Other “next volume market” prospects include wearables, robots, virtual reality and the Internet of Things. You can make a list of them. They are emerging… but are still in their infancy.
Matties: They're on the horizon.
Custer: Right, they are not volume markets yet. I think 2016 is left without a volume driver worldwide. Fortunately, the local, non-consumer driven U.S. markets have held up better than the rest of the world, but no region is booming.
If you look at semiconductor shipment data, which is a good measure of electronic assembly activity, it was down 5.8% worldwide in January 2016 vs. January 2015. The leading indicators suggest that semiconductor shipments will continue to contract versus the same months in 2015, at least for the next couple of months. Electronic assembly will probably be soft through mid-year.
The printed wiring board market in 2015 was down a couple of percent, primarily because of currency effects –with $60.2 billion total in 2014 and about $59 billion in 2015. Currently North America and Europe are flat, Japan is contracting and China, Taiwan and S. Korea are no longer enjoying boom years.
If you sum it all up, semiconductor shipments look to be in a zero growth this year and, although electronic equipment sales are still expanding, they are not doing so very robustly. The outlook for PCBs for 2016 will be modest—maybe 1% growth. I know that's not what people want to hear, but that’s how we see it.
I just gave a “Market Outlook” talk at the show, as you said. Readers can send me an e-mail and I'll send my charts and the follow-up comments. Don't expect to be dancing on the tables when you see my forecast! However it's my honest opinion of what's happening.
Matties: Data is data, right? Do you think that the political climate in America is having a global effect on any of these markets?
Custer: I think a lot of people are looking at the U.S and wondering what the heck is going on. They are aghast at the current domestic political circus!
Matties: Does that leave uncertainty?
Custer: I don't think the USA is having that big of an impact on what's going on in China or Korea right now. However, the global political climate is very fragile especially as it relates to terrorist threats.
Matties: With talk of tariffs and all that kind of rhetoric coming out, it's got to have some sort of impact, I would think.
Custer: I'm sure it does, but I don't think that's the overwhelming driver.
Matties: Nothing that's manifesting in today's numbers.
Custer: I think this slowdown is more product driven. If we had cellphones and computers growing at 40% a year, you probably wouldn't see any of this downturn. The political unrest and political uncertainty is certainly an issue, but I don't think it's the top issue, personally. You may have a different view.
Matties: Typically, when you get into these cycles, though, there's tends to be a wait-and-see attitude because it will go left or right come November and the policies may be a lot different.
Custer: Yes it will. I hope we'll get out of this “do nothing” U.S. congressional mindset that we're in right now. That's really the thing that hurts. If one group was driving the train and kept it on the track going in one direction, that would be one thing, but when we stop at the station for a year, that's not very useful.
Matties: How do you see China?
Custer: If you look at their indicators, they're down dramatically, and they've been down for a year. They're not showing signs of recovery yet. It's probably going to take most of 2016 for China to stabilize.
Matties: So it's not great news, but it's not jump-out-the-window news, either. Walt, thanks for taking time to fill us in today. It’s always good to talk to you.
Custer: Thank you for the interview.
To reach Walt Custer and request a copy of the data presented in his yearly forecast, click here.