The European electronics industry to 2006
Jan 31, 2003
A Europartners reportAnybody who is active in the electronics industry knows that 2000 and 2001 were two record-setting years.In 2001, the electronics industry enjoyed a boom year and record-setting sales of electronic equipment. On the back of the extraordinary 2000 figures, forecasts for 2001 were extremely optimistic. And then the industry went into a nosedive. 2001 saw the first recorded downturn (both of production and sales) in the 50-year history of the industry.During the course of 2001, the prognosis that was generally given by industry observers and players was that 2002 would see an upturn. But the forecasts turned out to be more wishful thinking than reality – the expected recovery was patchy and did not last.Why?The state of play in 2002The 2001 recession was provoked by internal factors (the slowdown in mobile phone demand leading to a collapse of production, the relative saturation of the PC market, the disaffection with the net-economy, the cyclical downturn of civil avionics) as well as by external factors (the slow-down of the world economies, terrorist attacks). Far from disappearing in 2002, these factors were exacerbated by additional issues, including scandals around the financial and industrial sectors that kept stock market levels down, and the "war on terrorism" turning into threats of war against Iraq.The net result in Europe was further market shrinkage - the overall market decreased in 2002 by 1.2% while production dropped by 3.4%.Notable losses were seen in the audio-video, automotive, medical, railway equipment and military equipment sectors, which had recorded growth in 2001, saw continued growth in 2002, but at a slower rate. Worse off were the domestic appliances, industrial electronics and civil aerospace equipment sectors, all of which grew in 2001 but shrank in 2002. And the PC market was hit by faster shrinkage in 2002 than it had seen in 2001.It wasn’t bad for everybody, however; some sectors did see an upturn.- The telecommunications access segment saw accelerated growth thanks to ADSL- While they continued to shrink, the mobile phone segment (handsets and base stations), the computer mainframe, and the data communication equipment sectors did so more slowly in 2002To put Europe into context with the rest of the world, while Europe’s electronics production in 2001 was worth 306,5 billion euros, global electronics production was worth 1,122 billion euros.2003: return to growth for EuropeAt this time last year and even earlier, the factors that should have driven growth but failed to were identified as:- Strong demand for military equipment in spite of some hesitations- Renewed demand for mobile phones and new-generation network equipment, boosted by the take-off of the new mobile-Internet services provided thanks to GPRS and UMTS technologies- Growth of the net economy, but with none of the previous fervour and unrealistic forecasts, but with more consolidation and power behind the growth- Disappearance of consumer inhibitions, providing nothing goes wrong in the Middle EastThe good news for the electronics industry in 2003 is that these factors are still with us, and they are boosted by the following this year:- Business is feeling the need to resume investment in computer systems to replace equipment that was bought to prepare for the year 2000- Digital convergence is creating a momentum for renewed consumer demand- A technical rebound of demand can be expected after the heavy reduction of inventoriesBased on these factors and Europartners’ research, the consultancy believes that the electronics market will see a sound recovery in 2003, to the tune of over 5% growth, with two subsequent years of consolidation. It believes that the CAGR for the years 2001 to 2006 will be just under the 5% mark.Given the mass move of production to lower cost areas, the electronics production sector will see less growth, but it will nonetheless see growth, to the tune of 3.2% this year and as a CAGR for the 2001-2006 period. It foresees that the star performers in 2003 and the medium term will be the automotive, audio-video and mobile telephony markets.2006: a new Europe, and a new world The expansion of the European Union to include 10 new countries (of which 8 Eastern European countries) in 2004 will make Europe the world’s leading manufacturer of electronics in 2006, ahead of the USA in second place, Japan in third place and China in fourth place. China is expected to overtake Japan in 2010. Its emergence as a leading electronics player will not only affect mass-market products where China already is in a leading position on a number of segments, but also professional domains such as industrial electronics or aerospace and defence. China is a nuclear power and has a programme of manned space missions, and this will require a lot of sophisticated locally-developed electronics.A new distribution of activitiesThe electronics industry has entered into the era of mass-production, which makes it more vulnerable than before to the macro-economic environment and cycles.As a consequence, the unprecedented crisis that hit the electronics industry in 2001 and in 2002 has emphasised some major medium term trends for the European electronics industry:- The acceleration of outsourcing not only of production but also, increasingly, of design, is changing the face of the industry- A new wave of relocation towards low-cost countries and fast growing markets, especially Eastern Europe and China- A new diversity of market drivers: today, mass market drivers are digital consumer equipment (DVD, terrestrial digital TV, digital photo and video cameras, camera-phones, etc) and fixed and mobile Internet (high bandwidth networks, new services, new phones), hence, convergence will be a major growth factor for the industry: computers, telecoms and consumer products come together to provide compatible and sometimes integrated solutions to consumers (thus driving major changes in the background professional equipment), - The continued trend towards mass-market products. Consumer and professional markets also converge around similar products (PCs, mobile and fixed telecom terminals)- The semiconductor industry is at a crossroads, with the emergence of design houses, fabless companies, founders and a new type of product, the system-on-chip. The combination of these trends is profoundly changing the face of the Western European electronics industry, which is now close to maturity. The enlargement of the European Union to countries traditionally seen as "low-cost" areas, but where markets are far from saturated, will open new opportunities for players in the industry.