A doctor, an economist, and an architect were debating this question: Whose profession is oldest?
The doctor noted that Eve was created from a rib, and therefore surgery came first. The architect countered that first God had to create the world, and as such design is oldest. To which the economist replied, "Before Creation, there was chaos."
Chaos theory, of course, attempts to explain the fact that complex and unpredictable results can and will occur in systems that are sensitive to their initial conditions. In short, it is possible that a minute occurrence can yield unpredictable and sometimes drastic results by triggering a series of increasingly significant events. Seven months into the Great Manufacturing Recession of 2001, chaos is what we are experiencing. Welcome to 2001, the year we went from virtual reality to harsh reality. And if the foremost question on business leaders' minds is "When will the cycle swing up?" then a close second is "Why did it happen?"
Second question first. If the consumer boom cycle of the past five years-surging stock prices fueling greater spending, leading to fantastic corporate profits and in turn driving stock prices even higher-was an example of "The Wealth Effect," then perhaps what the PCB industry is now experiencing should be called "The Cisco Effect." There are no shortage of fingers aimed at Cisco Systems, the OEM that drove sales (and profits) for dozens if not hundreds of board fabricators and suppliers during the run-up, only to suck the life (and profits) back out of those same suppliers during the first half of this year. Indeed, many of those in attendance at the Technology Market Research Council meeting in May seemed more than willing to blame John Chambers and company for their latest round of woes. But is Cisco deserving?
The United States makes about 45% of the world's electronic equipment.1 Historically, PCB sales track those of electronic equipment, so when the 12-month rolling average of one gets out of sync, a correction can be expected. Electronic equipment orders grew mildly, yet PCBs were up 18%. See Figure 1.
Communications and Internet infrastructure drove the industry and they are in trouble: personal computers, after slowing from 21 million units shipped worldwide in 1999 to 16 million in 2000, are down this year in the U.S.2 Census statistics show that communications equipment 12-month bookings have fallen from a peak annual run rate of about $13 billion in mid-2000 to under $10 billion as of March. Now, with shutdowns and layoffs rampant, the industry is experiencing the chaos.
The causes
According to industry analyst Walt Custer, the reasons for the rise and fall are clear: overbookings, double and triple bookings, and inventory build-up among CEMs. Outsourcing of assembly continues to climb at high rates, adding links to the supply chain that weren't there the last time a slowdown occurred.
"Everyone starts building inventory in good times," Custer says. That's because, Sanmina CEO Jure Sola said in April, the industry bases its capacity and order build on forecasts, not P.O.s. So while the domestic industry was purportedly growing 18% last year, it was, in Custer's words, "a phony year." Analyst Bill Cage, director of equity research at First Union Securities, says inventory is historically held about 67 days by OEMs. In the past quarter, this jumped to 88 days. Looking for a quick fix? Save your prayers. In March '96, when the last big spike occurred, it took six months for inventory levels to retreat.
How did this happen, given the myriad models-not to mention the abundance of complex supply chain management software aimed at preventing precisely these kinds of fluctuations? Speaking at TMRC, IBM economist Phil Swan said the industry didn't predict the extent for two reasons. First, President-elect George H. Bush in November announced-inaccurately-that the U.S. was in a recession. Second, the decline in the stock market impacted economic behavior and consumer confidence in dramatic way (although, he added, the total impact in spending is yet to be seen).
Kevin Maney, the USA Today columnist and TMRC keynoter, says it's a matter of innovation outpacing demand: "We got way ahead. People haven't been able to digest (the amount of new technology)."
The effects
Others say the causes lie closer to home. Solectron reportedly noticed Cisco was double-booking orders. "Build it," Cisco is said to have replied. Clearly, amid all the technology, there remains a human element that, as always, is prone to error. Therein may lie a most depressing thought. As before, orders will eventually bounce back.
But at what cost this time? The two largest board factories in North America-Viasystems-Richmond and Multek-Austin-have closed. According to one source, as much as 12% of the U.S. PCB workforce has been laid off. As Jerry Bouska, vice president of technical marketing at Isola Laminate Systems, points out, "The industry is losing good people and we won't get them back." And how does one measure the loss of knowledge, either technical or historical?
Some smaller fabricators are increasingly worried that the departure of high-volume board shops will cause their suppliers to flee en masse. Many fabricators with which PC FAB spoke seem less preoccupied that equipment companies will disappear, noting that most of the larger ones already maintain a global presence. Instead, concerns center on potential retraction by materials suppliers.
Certainly, the shift will force U.S.-based vendors to establish sales offices and operations offshore. Take Milwaukee, WI-based RBP Chemical, whose Chemelex Division supplies process chemistries. It is setting up a blending facility in Korea-RBP Asia-with a local partner. And while RBP has been one of the "lucky" ones in that it didn't have much business at the shuttered plants (and therefore didn't have much to lose), president Mark Kannenberg told PC FAB that if more high-volume manufacturing moves offshore, "those of us who are North American-based will lose."
"We've committed to supplying Asia through dealers and partners, in which we supply the technology and they supply the hands. (But) we're not big enough to make a major presence (abroad). For the next five years I can't imagine anywhere but North America being the base of our operations."
Of course, many vendors are already entrenched abroad. According to one source, the current events were to some degree inevitable and that suppliers have been planning for them. Many of the recent closures were plants formerly owned by OEMs and ill-prepared for today's marketplace.
"They never made the transition to low-cost, high-tech operations," says the source. Nevertheless, he says, "If Sanmina starts taking plants down, or if Multek were to take down Roseville-plants that have been independent for some time-then it becomes a different picture."
Bouska was among several who noted that, even at $9 billion, the U.S. market is much larger and geographically in better position than Europe to compete with Asia. "The U.S. is where the high growth and high-tech products are developed and produced, at least initially in their life cycles."
Still, IBM's Swan spies potential for problems on a macro level. In tough times, he says, governments look inward, which could further upset the supply chain. "Most legislators tend to be provincial when push comes to shove. Only 40% of the U.S. Congress has a passport. They're not in touch with the rest of world any more than they have to be. The majority haven't served in a war and don't have that experience. It wouldn't take a lot for them to shut the door and (hurt) economic globalization."
Can plant shutdowns be prevented? Not while plants look to save pennies, some say. And nearly everyone PC FAB spoke with said that even if they were aware of overbookings, they wouldn't turn down orders for fear of losing the customer. Yet an industry is the end-user, not a fabricator, or a laminate or dry-film supplier. And to that end, the industry lacks a forum where OEMs discuss supply-chain management with suppliers. Again, that's where loss of personnel with knowledge of how the cycles work can hurt.
The last big dip in PCBs was in 1995. (The Asian currency crisis fueled a smaller dip in '98, but actual sales stayed level with the previous year.) This time it's a different set of OEMs driving it.
"All the signs were there. (But) different players each time drive these cycles. Companies like Juniper, Nortel and Cisco would be eager to avoid this again," says Bouska. " It comes down to supply chain control: When inventory is starting to increase, there has to be a discussion of what's happening. We have to communicate, ask questions and listen. We have to (make OEMs) aware: here's what happened, and here's some ways to prevent it."
One possible solution, Bouska suggests, is to outline the process for the supply chain "from sand to router."
"We should to look at this and try to keep (the demand-supply cycle) a little more stable. I think North American companies would want to do so because...markets like these drive companies out of business. If the industry is going to do something, whether it be inventory stops, or a communications device-and I think it's the latter-the sense of urgency is to do it now, rather than in a few months when the market is up." Bouska suggests a real-time reporting system at the organization level might help.
"When the flags go up, we reevaluate," Bouska says. "The other thing is commitment; we need professional organizations looking for out the industry in general."
The recovery
If the seers at TMRC are on the money, the worst is behind us. Most felt June would be the worst quarter, as the supply chain burns inventory backlogs. Year to date, North America has lost 8% to 10% of its capacity. The market for flex is faring no better-down 9% in Q1. And while no market segment seems poised as savior, most are inching forward.
Following back-to-back years of record unit sales, automotive is taking a breather but remains stable, and cars have increasing amounts of electronics. Consumer markets have remained solid, with demand for some products, such as digital cameras and desktop boxes, growing. Instrumentation and controls are up, too. As for communications, the number of Internet users is now 414 million-32% of which are in the U.S.-and rising. Sun Microsystems reportedly predicts the Internet will be 2,000 times larger in five years. That bodes well for ...Cisco.
Custer calls Cisco's $2.4 billion inventory write-down a blessing in disguise. "Cisco knows its technology is aging and needed to move on it. It wouldn't surprise me to see all those companies who are sitting on this stuff taking their licks (in the second quarter) and moving forward. I have high faith that these markets will recover, and in a big way."
So the sharp spike down for PCBs means everyone should feel the bounce up. Says Custer, "Components have done the same thing. In 1995 components outpaced electronic equipment, and came back fairly quickly. I think (PCBs) will too. In January the bottom fell out for IC shipments, but February was up and March was ahead of March 2000. It could be we've (already turned the corner)."
First Union's Cage, however, anticipates it will take nine months to clear out the shelves, because demand is off peak levels. "We could be down to 67 days (of inventory) as we end December," says Cage.
IBM is bullish for the remainder of 2001. Swan forecasts 2.7% growth, with the slowing due in large part to big companies making fewer investments. A turnaround will likely be unleashed by Q4 and will continue into next year, he says. In fact, he points out, this is primarily a manufacturing recession. But while production has declined seven straight months, the services sector (which makes up the bulk of the U.S. economy) is doing well.
"Time was, innovation led to change," Swan says. "I would argue that globalization is a continuous and longer-term process, because we have a steady stream of inventions. It works both ways. Technology drives us globally, we all become connected and we find better ways to take advantage of the technology."
Custer predicts negative growth for PCBs this year, despite a 4% to 6% uptick in the second half. Semiconductor fabrication is still down, however, and he anticipates it will not come back until next year.
"Short term, it's probably the worst we've ever seen. People who make equipment will feel it in Q2; material suppliers will do so late (in Q2) or in Q3. I see 7 to 8% growth in electronic equipment. In a perfect world, PCBs will grow that much too."
Let's hope. Otherwise, will the last one to leave the U.S. PCB industry please turn off the lights?
