The outlook for the electronics industry is not cheery. It’s not grim, either. Forecasters say the market will grow in the very low single-digit in 2016. They are also not expecting a sharp upswing in 2017 or soon thereafter. The electronics industry seems to have entered a multi-year period of lackluster growth that will end only when “revolutionary” products start hitting the market sometime in about 4 to 5 years, according to analysts.
There’s a perfectly logical reason behind this unsettling assumption. The industry has numerous products in the pipeline but none at the moment that can deliver the huge volume shipments which PCs, mobile phones and digital TVs recorded once they reached critical mass adoption. Instead, most of the products introduced by manufacturers in recent years have been “evolutionary” in nature, building upon previous innovations and failing to ignite passionate demand in the consumer market, according to Dale ford, chief analyst at IHS Inc.
Until OEMs and other players in the electronics market start introducing “must have” products, the industry will continue to experience piddling growth, much like it did in the recently ended year, Ford said in an interview.
“My outlook is that we are going to see shallow, weak growth in the electronics and semiconductor industry for an extended period of time until around 2020 to 2022,” Ford said. “The products that are coming into the marketplace are ‘like to have’ products rather than ‘need to have.’ Nearly 70 percent of semiconductor sales is driven by consumers as opposed to corporations and governments so in a tight economy with products that are ‘nice to have’ we are going to struggle.”
The global economy performed poorly in 2015 and this trend looks likely to continue in 2016, noted Christine Lagarde, managing director of the International Monetary Fund (IMF) in an article published late last year in Germany’s Handelsblatt business daily. Not only will the global economy show poor growth in 2016 but even the 3.6 percent expansion projected for the year will be “disappointing and uneven,” according to Lagarde.
The problems that plague the global economy include high emerging market debts, financial worries related to the strong dollar, a slowdown in China and the resulting drag on raw material pricing offset by continuing strength in the U.S. and steady, albeit still relatively weak performance, in the European Union.
The expected weak performance of the global economy isn’t the only challenge facing electronics manufacturers, however. In fact, the industry has other fundamental issues that impacted it negatively last year and which will continue to be a drag on the entire sector throughout 2016 and beyond, according to industry executives and analysts.
"I think the industry will be flat to up 2 percent in 2016 although we expect to outperform the market," said Lindsley Ruth, group CEO at Electrocomponents PLC in an interview. "It's a tough industrial market but we are exploring areas of growth and making sure we operate more efficiently."
The low growth environment can be attributed to various factors. First, the electronic products – PCs, tablets, mobile phones and TVs – that have traditionally driven sales growth and volume shipment for electronics OEMs and the supply chain have largely reached saturation point in the consumer segment while enterprise purchasers remain wary, tamping down on IT equipment purchases until they have clearer evidence of a market upturn.
Shipments of wireless handsets and other computing devices in 2015, for example, were projected to decline from the prior year driven by slower growth in the mobile handset segment. Forecaster Gartner Inc. reversed a previous projection for a 1.5 percent expansion of the devices and instead predicted shipment would drop 1 percent to 2.4 billion units in 2015, down from 2.42 billion units in 2014. The company cited growing reluctance by consumers to replace existing devices.
"Replacement activity across all types of devices has decreased," said Ranjit Atwal, research director at Gartner. "Users are extending the lifetime of their devices, or deciding not to replace their devices at all."
The PC market was seen experiencing an even sharper decline compared with the other segments with shipment of desk-PCs, notebooks and ultramobile devices projected to decrease 9 percent in 2015, to 490 million units from 540 million in 2014. While mobile phone shipments are expected to continue a steady improvement in 2016, with shipments seen rising to 1.96 billion units, the market for PCs is forecast to remain stagnant this year before recovering in 2017.
Consumers need more compelling products to hit the retail stores and there aren’t many of such “must have” items on sale currently, according to Ford at IHS. The current crop of products has been in the market for quite a while and they’ve lost their novelty, he said. But the industry isn’t static and there are numerous technological innovations that have the potentials to replace the big volume drivers of today. However, these won’t mature for many more years, Ford said.
“What I see is a triumvirate of technologies that are developing and which will reach critical mass in that time frame of 2020 to 2022 to drive the next wave of growth,” Ford said. “The triumvirate, no surprises, is IoT, the Cloud and 5G. We all know about them and we are seeing shipments already but they haven’t yet reached real critical mass.”
Electronics manufacturers and other segments of the global economy that can leverage the technologies behind Internet of Things (IoT), the Cloud and 5G in the telecommunications world are working hard on developing a wave of new products based on these innovations. While the IoT and the Cloud are already being used in various ways, their full potentials won’t be realized for several more years, according to industry sources.
5G, the fifth generation wireless technology, falls in the same category. Many telecommunication services providers are still rolling out 4G and have not begun implementing the protocols necessary for 5G. However, 5G should become a reality in the telecommunication sector within the next 4 to 5 years, about the same time that analysts and technology enthusiasts expect IoT devices and the Cloud to become as ubiquitous as wireless handsets and PCs. These next-generation technologies will help reshape the electronics market and drive huge product sales, Ford said.
“The Cloud, IoT and 5G are so synergistic that all of our electronics are going to be reshaped and redesigned by those three technologies coming together in the 2020 to 2022 timeframe,” Ford said. “That is when we will have ‘need to have’ products. They are going to drive such strong benefits and value that we will see a strong re-engagement with electronics. We’ll see an entirely new world in the electronics market.”
If Ford’s projection is correct, the electronics industry will most likely experience low growth over the next several years followed by a huge spike in demand. Companies should prime their product lines and supply chain for the expected burst in demand while simultaneously forging the alliances they would need to navigate that world, he said.
“Manufacturers need to look at where they want to compete and where they will have strong products. That’s the first thing they have to do. The second is related to the technology triumvirate that I talked about,” Ford said. “They need to start preparing and engaging in technology and product development so that they are ready to ride that wave of growth that will come by about 2020. It’s not something that you can just jump in and say ‘Okay, now we are doing this.’ They have to anticipate what that future is going to look like and how they are going to be successful in it.”