'Irrational Exuberance' Ended in 2000-for Awhile, at Least
|Harvey S. Miller
"Irrational exuberance" were the words spoken by Alan Greenspan, the nation's chief economic advisor, in 1996.
In 2000 they came true with a vengeance. And in February 2001, the results surround us.
But let's face it: The electronics industry's gloom of today would have been called prosperity in 1975 or 1982 or 1992.
The downturn of 2001 is occurring about eight years into the up phase of a Kondratiev Long Wave. Down cycles are moderated by secular uptrends and intensified by secular downtrends.
The depression of 1930-1940 occurred after the irrational exuberance of the 1920s; it was the mother of all depressions, and its severity reflected many factors of a major secular downturn. The underlying long-term uptrend, however, is very strong today, even with the mother of all irrationally exuberant booms just behind us.
The dreams of 2000 took flight a bit too early, and some have crashed to earth. Greed drives innovation as old industries and companies are swept away by new ones. That's the purpose of the downturn.
The Charts Tell the Story
Three-year charts of the spectrum of electronic companies' stocks tell the story.
Web companies, even most of the viable ones, gave up all the value they gained in two years, after peaking at the very beginning of 2000. That was a signal, since they helped drive the demand for networking hardware.
Some telecom carriers soon followed them down the same old slippery slope. The stock market knew that capital was being stretched. Then solid networking hardware companies peaked midyear, and gave up (only) a year of gains.
In the "real" world, during this time, business was almost too good, marked by spot component shortages, which delayed output that would have been otherwise at capacity or beyond.
That situation slowed semiconductor demand to a mere 37% increase. Good business, sales and profits, however, didn't save semiconductor companies' stock prices. Price/earnings ratios in the 80s just could not be justified. Down they went 'til they reached p/e ratios in the mid to high 20s, still predictive of 15% to 20% growth rates-and that ain't bad.
The EMS Sector Emerges
This year one group of companies, the Elec-tronics Manufacturing Services providers (examples are Solectron, Flextronics, and Celestica), hardly know that the boom is over.
Their stocks are still near their highs, in spite of Flextronics' president Michael Marks trying to moderate expectations by telling analysts (in early February) that the business environment is "pretty crummy."
Ironically, this followed only by days the news that Ericsson awarded Flextronics all its cellular phone manufacturing, potentially $4 billion more business for his $12+ billion company.
Not a day goes by without OEM announcements saying that a certain OEM is selling its plants to EMS. The EMS group has expanded electronics manufacturing far beyond board stuffing to all electronics manufacturing services.
A recent amazing development is a trend by Japanese OEMs to turn over manufacturing to the group. Solectron was offered two Sony factories. Celestica, Jabil Circuits and SCI are also serving Japanese OEMs.
Will bumping against the total available market limit restrain EMS growth? The world total manufacturing market at factory level is estimated at $1 trillion for 2000, growing at 10%/year. By the end of this year, the EMS industry will be closing in on a $200 billion annual rate of growth. Growth, organic and by acquisition, is built in for some time to come. But watch the limit!
No-lead solder might affect EMS pro-viders adversely. About $600 billion of the manufacturing pie is board-level assembly. This amount requires over 20,000 lines of assembly equipment. Replacing or modifying surface mount ovens and wave soldering at an average price of $50,000 would represent an industry bill of $1 billion. It's impossible to assess the cost due to early equipment failures that will result from substituting old reliable tin-lead with unproven alloys. Process changes and training will add to the bill.
Consider that the net an EMS earns is typically less than 5%. (Like Costco they make money on fast turnover). The industry should question the economic rationale for no-lead solder.
Harvey Miller is a partner in Kirk-Miller Associates, Palo Alto, Calif., creators of the FABFILE database of printed circuit fabricators. [email@example.com]