Taiwan's Q2 Electronic-component Production Up 7.6% QoQ

The electronic component industry in Taiwan turned out US$7.42 billion of products in the second quarter of 2011, a 7.6% quarter-on-quarter (QoQ) and 0.7% year-on-year (YoY) growth, according to the government-backed IEK-ITIS (Industry & Technology Intelligence Services) in Taiwan.

Impacted by an array of negative factors, including the sovereign debt issues in Spain, Italy, Greece and Ireland; the disagreement between the Democrats and Republicans over the debt ceiling, flagging housing market and high unemployment in the U.S.; disrupted supply chains and consumer sentiment caused by the massive earthquake in Japan; high inflation in China, India and other emerging markets, the overall market has been sapped of growth momentum. In addition, China's purchasing managers index (PMI) in July continued to decline for the fourth consecutive month to 50.7, showing stagnation in the manufacturing industry.

The traditional notebook PC and mini-note PC (netbooks) market has been encroached by the increasingly popular tablet PC, with conventional mobile phones share being undermined by smartphones, as well as replacement purchases of flat-panel TVs slowing down, all of which exacerbated 3C (computer, communication, and consumer electronics) sales in the second quarter. Fortunately sales of new 3C intelligent terminals as tablet PCs, smartphones, smart TVs, Kinect interactive game consoles have bucked the downtrend, turning them into main drivers of the global electronics industry.

For the third quarter, IEK-ITIS forecasts that strong demand for Apple iPhone 5 and iPad, coupled with back-to-school purchases, will raise Taiwan's electronic-component production.

Opto-electronic components made up US$783.9 billion of the overall production value in the second quarter, up 12.4% QoQ but down 9.1% YoY. The enhanced brightness of light-emitting diodes (LEDs) means fewer units are installed in liquid crystal display (LCD) backlights, IEK-ITIS says. Third-quarter demand for LED TV backlighting application is still lackluster, with, except for Japan, demand for LED illumination not growing clearly. So the opto-electronic component production value in the third quarter is forecast to grow 8% QoQ but to remain down 3.5% YoY.

Some US$1.1 billion in passive components were turned out in the second quarter, up 15.2% QoQ but down 1.1% YoY. The massive earthquake in Japan diverted many international orders for aluminum capacitors to Taiwan. For the third quarter, a traditional high season, the island's passive component production is forecast to grow 9.7% QoQ to US$1.2 billion, a relatively-low rise amid the peak period.

Strong demand for high density interconnection (HDI) printed circuit boards (PCBs) for tablet PCs drove up Taiwan's PCB production value by 6.9% QoQ to US$3.5 billion The third-quarter production growth is forecast to reach 8.7% QoQ due to continued demand for smartphones and tablet PCs.

Order Diverted
The Japanese quake drove most global customers to place rush orders to avoid parts shortage, some of which were diverted to Taiwanese companies that would usually go to Hirose or JSP of Japan. In addition, some connector makers in Taiwan have been aggressively developing parts for green-energy, medical, automotive and other industrial applications to further raise the connector production value, which in the second quarter totaled US$1.3 billion for the island, up 1.6% QoQ.

The third-quarter production value of the connector sector, the traditional high consumer-electronics season, is expected to further rise, with the whole-year connector production forecast to increase 7.7% YoY.

Almost all major battery-pack suppliers in Taiwan enjoyed QoQ revenue growth in the second quarter, due to increasing demand for tablet PCs and notebook PCs; while makers of battery cells saw fluctuating revenues due to e-bike customers transferring orders. Overall Taiwan's energy device production value grew 7.1% QoQ and 3.9% YoY in the second quarter to US$772.4 million.

The third-quarter growth is expected to continue as most local battery pack makers are major suppliers to big international brands, with ample uncertainties brimming in the consumer market in the traditional high season, and third-quarter production forecast to increase 2.4% QoQ to about US$789.7 million.

Adjustments
1. Weaker consumer purchases amid the gloomy global economy is reducing consumption of LEDs, exasperated by less LEDs being used in LCD TV backlights due to improved brightness of LED modules. Such trends motivate both major market research institutes and makers to reduce forecasts this year, and LED makers to accelerate deployment in illumination applications.

Fierce competition among Asian LED makers in the TV backlighting market last year have shifted to the LED illumination market this year. With Korean Samsung and LG pushing low-priced LED illumination products this year to grab bigger market shares, almost all Chinese players have jumped onto the same bandwagon, followed by Taiwanese packagers such as Unity Opto Technology Co., Ltd., Everlight Electronics Co., Ltd., Lextar Electronics Corp. etc.

LED makers can expect cut-throat competition in the LED illumination market due to increasing number of rivals, inevitable underselling pressure, and limited market growth.

2. Panasonic of Japan in June announced an investment of over 20 billion yen to construct a lithium-ion battery factory in Suzhou, Jiangsu Province of China by 2012, as well as planning to move its battery production lines to Suzhou and Beijing of China to more easily serve strong, local demand. By 2015, Panasonic's battery-cell production in China will rise to about 50% of the firm's overall output.

Such moves by the Japanese giant will impact local battery suppliers' shipments, because all the top-four suppliers in Taiwan currently purchase cells from Panasonic and Sanyo, which was acquired by the former in 2010.

Major Events
1. Taiwan's PCB makers Taiwan PCB Techvest Co., Ltd. (TPT) and Yeu Hwan Technology Corp. in the second quarter announced investing US$17 million to set up a PCB factory in Sichuan Province of China. In addition, Taiwan's PSA Group also plans to set up a production base in Chongqing of Sichuan Province in five years, with the under-construction plant of the HannStar Board Corp. of the PSA Group scheduled to kick off mass production in Feb. 2012.

Increasingly more Taiwanese PCB companies are moving production to China due to cost pressure and customers' requests. IEK-ITIS says that such migration is inevitable for the local PCB industry, but urges makers to heed related environmental-protection rules and return-on-investment, especially when such low-cost production is usually impermanent.

2. Global shipments of iPad tablet PCs reached 9.25 million units, up 101% QoQ from 4.6 million units in the first quarter, with the whole-year shipment of such hot seller estimated to reach 35 million units, and the market expected to be more accessible to other players.

Tablet PCs adopt relatively less connectors than traditional notebooks due to simplified architecture requiring less central-processors and memory sockets, hence making local makers worried about their prospects.

The IEK-ITIS says that local connector makers should be aware of the rise of the non-Apple tablet market in which the Android platform is providing access to other-branded players. Local makers should closely watch the development of non-Apple tablet models, while trying to find niche items with higher margins to evade decreasing sales volume.

IEK-ITIS forecasts Taiwan's electronic-component production in the third quarter to grow about 6.9% QoQ to US$8 billion, with the 2011 value projected to grow about 6.5% to US$30.5 billion.

Taiwan's Electronic Component Production Value Unit:NT$1 billion
	Q4,'10	Q1,'11	Q2,'11	QoQ	YoY	Q3,'11(f)	2009	2010	2011(f)
Opto-ele Device	21.2	20.2	22.7	12.4%	-9.1%	24.6	57.7	90.4	88.1
Passive Component	27.1	26.7	30.8	15.2%	-1.1%	33.8	101.9	117.2	129.6
PCB	98.6	95.2	101.8	6.9%	2.7%	110.6	282.9	390.8	416.6
Connecting Device	37.6	36.9	37.6	1.6%	1.6%	40.2	128.6	148.9	160.3
Energy Device	21.7	20.9	22.4	7.1%	3.9%	22.9	69.8	82.3	88.7
Total	206.2	200.1	215.3	7.6%	0.7%	232.1	640.9	829.6	883.4
Source: IEK-ITIS, Aug. 2011