Technology Forecasters Inc. has issued a mid-year update, based on actual 2007 data, of its five-year growth predictions for electronics manufacturing, revising downward the forecasts for total available market (TAM) and EMS sector growth, and revising upward the forecast for ODM sector growth.

The economic drivers behind the numbers are a clear signal that the U.S. is in a recession, with no sightline to its end point. “I do think we’re in recession,” says Matt Chanoff, TFI Senior Economist, who issued the update at TFI’s recent Spring Quarterly Forum. “And I do think it will take a while to work out the weaknesses that are keeping the economy slow.”

Economic drivers identified as problems in the September forecast, including housing market troubles and high energy prices, have worsened. Chanoff doesn’t expect a drop in oil prices until the summer driving season ends – if then – and expects that the fallout from the burst housing bubble will take even longer to settle.

Housing bubbles are less volatile than other financial bubbles because many of the reasons that go into purchasing or keeping a home are not economic, Chanoff explains. These factors have helped with the long run-up in home prices, but they also mean that re-inflating the housing market will take time. Additionally, it wasn’t clear last September that the U.S. housing slowdown would spread internationally, but many countries, including Britain, Spain, and even some parts of China, are now seeing it, he notes.

Chanoff also identifies a new driver of economic woe that was not obvious in September. “Food prices are ridiculously high at the moment,” he says. “Some of the high price is energy driven. Some is due to decisions to focus on bio-fuels instead of food crops. But a lot of it comes from trade restrictions meant to protect domestic markets.” He notes that India and Vietnam, two large rice exporters, have restricted sales abroad to make sure they have adequate reserves to feed people at home.

How do food prices impact electronics? Higher prices can push would-be, first-time buyers to postpone purchasing cell phones, computers, DVD players and other consumer electronics because the disposable income they had planned to use must be spent to feed the family.

“As the economic boom continues, huge numbers of people have crossed the buying threshold for electronic gadgets in Asia in recent years,” Chanoff notes. “Now high oil and high food prices are raising the threshold.”

In the U.S., consumer confidence and consumer spending remain big wild cards. In his presentation at the Forum, Chanoff cited a recent report by the International Monetary Fund, which states: “The world economy has entered new and precarious territory. The U.S. economy continues to be mired in the financial problems … [that’s taken it] to the verge of recession … The effects on the rest of the world are likely to be significant.”

Chanoff’s assessment: “I imagine we’re going to bump along the bottom in terms of U.S. gross domestic product for a while, probably through the first quarter of 2009. We might rebound and see a strong end to 2009.” In contrast, he notes, most Wall Street analysts are more optimistic, envisioning a rebound toward the end of 2008.

His advice to the electronics industry: “If you accept my argument, you would be more cautious in your inventory and maybe more aggressive in focusing on markets outside the U.S. than you would be if you believe what Wall Street is saying.”

TFI’s revised average five-year growth rates, based on actual instead of estimated 2007 data, are as follows: TAM 6.1 percent, down from the 7.1 percent estimate in September; EMS growth rate, 11.2 percent, down from 13 percent; and ODM growth rate, 18.5 percent, up from 11.9 percent.

And here are the revisions to the 2007 numbers: TFI had forecasted a TAM of $1,241 billion in 2007, revised that to $1,166 billion, or 1 percent lower. TFI revised total outsourcing for 2007 from $276 billion to $292 billion, or 6 percent higher.

These numbers are based on actual 2007 year-end data from OEMs, EMS providers and ODMs, and update the projected figures in our September report, “EMS and ODM Manufacturing 2006-2011: Drivers, Market Sectors, and Geographies.”

The update only looks at the aggregate market, with no market segment or regional breakdowns. For a complete discussion of those, see the October report.

TFI will be examining the root causes of the increase in the ODM growth rate at the July Quarterly Forum breakfast to be hosted by Teradyne in Boston July 31. “ODMs ended up having a banner year in 2007 in top-line performance, with companies like Compal, Quanta, and Asustek seeing very large growth,” he notes.

Posted by Bill Roberts, May 2nd, 2008

Filed to Outsourcing, Supply chain management

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