The European electronics industry 2000 - 2005
by Marc Vodovar, DECISION Europartners, France
Dec 05, 2002
Both in 2000 and 2001, records were set across the world for the electronics industry. In 2000, production and sales of electronic equipment reached their highest historical level, setting a 20-year record in growth rates - computers and telecommunications were booming, and forecasts for 2001 were optimistic. But then in 2001, the industry recorded its first downturn in production and sales in its 50 years of existence.
This is not to say that electronics industry is unfamiliar with stop-and-go patterns. It has created, in recent years, a number of best-seller products (CTV, mainframe computers, PCs, mobile phones) that have enjoyed enormous growth in the two or three years following their take-off. The pattern has always been the same at first, these high-growth markets generate new entrants and over-optimistic anticipations, then growth slows, because of an economic downturn or just because the market is reaching some kind of saturation. Each time, inventories increased for months before manufacturers realise there was a downturn, and in turn slow down their production. By then it's too late, and the slowdown in demand is heavily amplified as you go down the supply chain.
What made 2001 different
In 2001 however there was a totally new turn of events that led to an unprecedented crisis:
- Brutal and excessive mistrust of the net-economy started around the end of 2000, following two and a half years of unlimited e-business euphoria
- Over-optimistic forecasts for the mobile phone market that were not realised for a number of reasons, including the fact that expectations regarding the success of GSM/WAP were not met and telecom operators were unable to find a satisfactory new business model, and the penetration rate of the mobile phone market has now reached the level where the number of new subscribers has reached its maximum
- A slowdown in world economies which started in mid-2001 in the USA, after a long period of overheating, and was largely caused by the deflation of the stock market bubble which began mid-2000 and is still going on
- Terrorist attacks in the USA, which, although they did not lead to the economic collapse which some had forecast, contributed to lengthen the period of uncertainty between crisis and recovery
- Last but not least, although the PC market is not yet saturated, at least in Europe, hardware and software manufacturers have not, this time, found the new applications that could have given sales a new boost
From a more general and structural standpoint, the electronics industry has entered, maybe without having totally digested the change, into the era of mass-production, which makes it more vulnerable than before to the macroeconomic environment. The new challenges for Europe brought about by this change include the fact that with market liberalisation and technology, many professional products have become consumer products, and this in turn means the following:
- less stable demand and demand growth
- need to focus on practical products, related services and price
- growing importance of functional innovation and design
- increased globalisation of products and markets, and increased mobility of production sites
- increased competition from large Asian and Japanese manufacturers
All of this is, of course, causing a lot of uncertainty for the electronics industry. In the short term, what will be the length and extent of the downturn? In the medium term, when will the recovery start, what will its magnitude be, and will the medium term growth trend change?
The sun will shine again
The end of 2001 and the first half of 2002 have continued to be difficult. The recession that started in mid-2001, the consequences of the terrorist attacks, and the Afghan war, all affected consumer morale. However, when examining the fundamentals of the industry, it is fairly clear that all the conditions are ripe for a market rebound and a return to the long-term trend for growth.
In the midst of the general turmoil, automotive electronics have come through well, thanks to the high growth of the electronics content in cars. For the other sectors, the following factors would tend to indicate a return to growth:
- A discrete but real demand for military equipment
- The gradual disappearance during 2002 of consumer inhibitions, and the recovery of purchasing for year-end celebrations
- The upturn in demand for mobile phones, boosted by the take-off of new services provided with GPRS/UMTS technologies
- The net-economy will start growing again, at more reasonable rates and with less illusions but much more strength
As a consequence, the electronics industry, after the 2001 recession, will resume growth. However, as the recovery will only take place during the later part of the year, the average growth in 2002 will not exceed 2% for the year. It will be necessary to wait until 2003 to reach or even exceed long-term growth rates.
Developments by sector
If we look in more detail at developments by market sector, it becomes clearer why the market will only show modest growth in 2002.
In the computer area, the slight recovery of the demand for equipment supporting e-business, such as routers, servers, etc. will not offset the still decreasing trend in basic computer equipment such as PCs and mainframes.
Mobile telephony (terminals as well as base stations) on the other hand, will recover strongly enough to allow some growth for the whole telecommunications sector.
It will be necessary, for the whole industry including components, to sit tight during 2002, at the same time as watching out for the recovery. When it comes, the acceleration in demand may be sharp, as it often is after a recession.
The quest for acceptable profits for shareholders is driving the demand for evermore optimisation and rationalisation of production, and to an increasing outsourcing of manufacturing and assembly. This used to be the domain of local small and medium companies that were somewhat dependant upon their large customers.
Today this is increasingly the domain of large multinational companies that systematically search for the most efficient methods, and the regions that will allow lowest possible production costs. Production outsourcing has now become a major industry in its own right, with the explosive growth of contract electronics manufacturers or electronics manufacturing services to show for it. In the end, we may well see OEMs retaining just R&D and design activities, and intellectual property (where the most value-added resides).
This will probably encourage a lot of re-localisation of production sites, as EMS providers are not bound by any sort of national "feeling" or bond, and are extremely mobile. Factories are built and equipped in a matter of a few months, and can go wherever low labour costs and market requirements take them. For the European marketplace, manufacturing in Eastern Europe and, to a lesser extent, Northern Africa have become attractive, as despite the siren call of extremely low labour costs in China, proximity to the European market remains a strongly positive factor.
About the European electronic industries report
The European Electronic Industries Report is a strategic tool for all decision-makers active in electronics markets. Published by Decision, a member of the Europartners partnership, this is a comprehensive survey with detailed estimates and forecasts, focusing on production, markets and issues of European Electronic Industries from 2000 to 2005.