New Markets Emerge as Electronics Converge
In the Olympics, the motto for athletes is "swifter, higher, stronger." But, in the electronics industry, the motto for manufacturing engineers is "faster, smaller, lighter."
New applications, such as smart phones, implantable medical devices and automotive telematic systems, continue to spur demand for cutting-edge electronics. Those products require smaller, lighter, faster, more powerful advanced packaging technologies with increased functionality, memory capacity and reliability.
While traditional products, such as computers and televisions, will continue to demand large amounts of connectors, semiconductors, sensors and other components, the electronics industry has been shifting its focus to growth opportunities in auto parts, portable consumer electronics and medical devices.
Over the last 20 years, the electronics industry has been anchored by a steady demand for personal computers. However, that lucrative market is expected to cool off over the next decade. In fact, Gartner Inc. (Stamford, CT) predicts that three of the top 10 PC manufacturers will exit the market by 2007, due to slower growth rates and reduced profit margins.
"While the market has registered double-digit shipment growth the past few years, tougher times lie ahead," warns Leslie Fiering, research vice president for Gartner's client platforms group. According to Fiering, PC unit growth will average 5.7 percent annually from 2006 through 2008-half the 11.3 percent average of 2003 through 2005. Emerging markets will account for more than 60 percent of growth from 2006 through 2008.
"With PC replacements still in full swing, 2005 should be a reasonably strong year for PC vendors," says Fiering. "However, the end of the replacement cycle is likely to strain viability for even the largest PC vendors in 2006 and beyond." She predicts that many PC manufacturers and their suppliers will attempt to diversify into related markets, such as consumer electronics, to bolster margins.
Semi Soft Year Ahead
In many industries, machine tool consumption is a leading economic indicator. However, electronic manufacturers keep a close eye on semiconductor capital equipment spending. Gartner reports that worldwide spending grew 66 percent in 2004. But, despite that exceptionally strong growth, the industry will begin to experience a slight drop in demand this year. Capital equipment spending in 2005 is projected to decline 0.6 percent.
"We expect a downward cycle driven by supply and demand issues," explains Klaus Rinnen, vice president for Gartner's semiconductor manufacturing and design research group. "We do not expect a semiconductor device unit contraction, but rather a slowing in the pace of expansion, which, combined with new capacity additions, would lead to a supply-demand imbalance."
According to Rinnen, 2004 was one of the best years ever for the semiconductor capital equipment market. Wafer fabrication equipment revenue rose 72 percent, while packaging and assembly equipment revenue grew 49 percent. In addition, automated test equipment revenue increased 52 percent in 2004.
"Worldwide semiconductor wafer fab utilization reached 94.8 percent at the end of the second quarter of 2004, up from 93.2 percent at the end of the first quarter," says Rinnen. "As manufacturers trim production levels to reduce further excess inventories and as added capacity comes online, these high rates will not continue."
Rinnen warns that utilization rates could drop below the 90 percent level in the first quarter of 2005. "While seasonal demand growth in the second and third quarters will buffer the impact of capacity in motion, rates will decline in late 2005 and bottom out in the first quarter of 2006 in the low 80 percent range for all production, before beginning to climb again," predicts Rinnen.
According to Semiconductor Equipment and Materials International (SEMI, San Jose, CA), $35.3 billion of new chip manufacturing, testing and assembly equipment was purchased in 2004. This year, the industry is expected to contract 5.1 percent. Industry revenues are expected to increase slightly in 2006 before rising nearly 15 percent to $39.6 billion in 2007.
"Following a robust growth year in 2004, [there will be] a pause in 2005 as semiconductor manufacturers digest the new manufacturing capacity," says Stanley Myers, SEMI president. According to Myers, demand for wafer process equipment, which is the largest segment by dollar value, will decline 3 percent in 2005. Test equipment, which experienced growth in excess of 50 percent in 2003 and 2004, will see sales decrease about 9 percent in 2005. Assembly and packaging equipment is forecast to decline faster and recover more quickly with a decline of 14 percent in 2005 and gains of 11 percent and 25 percent, respectively, in 2006 and 2007.
At the North American International Auto Show in Detroit this month, Ford Motor Co. (Dearborn, MI) unveiled a concept car called the Mercury Meta One. The vehicle is loaded with advanced electronics and active safety systems. For instance, the car is equipped with a lane departure warning system to alert drivers who might be wandering out of their lane. It also features a collision mitigation system, which can detect an impending collision and trigger the brakes to slow the vehicle and reduce the impact of the crash.
Today's vehicles already contain hundreds of sensors and actuators. Electronics are used in a growing number of control systems that monitor engines, brakes and suspension. In fact, some luxury vehicles contain nearly 100 control systems.
Increased safety and fuel efficiency demands have led to features such as electronic stability systems and tire-pressure monitoring systems. By the end of this decade, vehicles will be equipped with active safety systems, such as infrared electronic stability control, heat detection devices, and miniature digital cameras that continuously monitor and adjust speed and direction. Adaptive headlights, external air bags, night-vision systems and self-parking lasers are also expected to be widely available in the near future, in addition to other devices that can be used in blind-spot, lane-departure, collision-avoidance and obstacle-avoidance systems.
According to Databeans Inc. (Reno, NV), semiconductor sales for automotive applications are expected to reach $15 billion this year vs. $13 billion in 2004. At the same time, even though the U.S. market for cars and trucks is growing at 3 percent annually, the market research firm says demand for "car chips" will grow 9 percent annually between now and the end of the decade.
"Automotive electronics have finally caught up with the rest of the automotive industry by providing components with life cycles of over 10 years, and partnerships aimed at better integration of the new systems," notes Robert LaGuerra, an analyst at ABI Research Inc. (Oyster Bay, NY). By 2010, he says approximately 40 percent of a vehicle's value will be derived from electronic content. Thirty years ago, less than 9 percent of a vehicle's value resulted from electronics.
However, there is a direct correlation between the number of electronic functions and the number of defects per vehicle. In fact, automakers recalled more vehicles in the United States last year than ever. Many experts point a finger at the increasing complexity of cars and trucks, such as vehicles that rely more heavily on computers and electronics.
In an effort to improve quality and reduce complexity, a group of manufacturers recently formed AUTOSAR. Focused on the Automotive Open System Architecture, the goal of the AUTOSAR initiative is to define a worldwide industry standard for basic functions and interfaces in every automotive electronic control unit. The initiative is working toward networking systems and subsystems, and is creating a common technology interface within and to the vehicle. The first vehicles designed according to the AUTOSAR rules are expected to be on the market in 2008.
At work and at play, people are becoming increasingly mobile, and the electronics industry is driving that trend with a plethora of portable products. As transistors shrink in accordance with Moore's law, the power and space required to perform most electronic functions decrease, enabling portable versions of many, once stationary, products.
According to In-Stat/MDR (Scottsdale, AZ), unit shipments for portable products are expected to grow from 500 million in 2002 to nearly 1.5 billion in 2007. By 2013, 50 percent of semiconductors will be used for consumer products.
"Many electronic products that will emerge over the next few years are likely to be targeted at consumers," claims Jim Tully, vice president and chief of research at Gartner Inc. "Music systems and cell phones are the most popular types of personal electronic products today. But, this will change dramatically over the next 10 years.
"For example, smart clothes made from new fabrics will support changing patterns and colors," adds Tully. "Teenagers could be walking around with moving images on their T-shirts or fashion logos that change to suit the occasion. These products will require flexible interconnect technologies that are likely to be manufactured using low-cost polymer-based reel-to-reel production technologies."
The same approach will be used for many emerging electronic products, including organic light-emitting diode (OLED) and light-emitting polymer (LEP) displays, electronic paper, intelligent labeling and bank notes.
Camera technology is advancing rapidly through the development of electronically enhanced lenses. "This will allow ultra-thin cameras to be made," predicts Tully. "Coupled with a small display, this technology is also likely to find use in smart glasses. In addition to vision correction, these systems would support zooming, night vision and distance measurement. Given the right fashion conditions, this market could be worth over $1 billion per year."
Portable diagnostic imaging systems and home monitoring equipment, such as cholesterol monitors and blood glucose meters, are driving demand for electronic medical devices. Other fast-growing medical device applications that rely heavily on semiconductors include telemetry and diagnostic imaging equipment.
Market researcher Databeans claims that semiconductors are now included in 34 percent of all medical devices. The total market is predicted to grow from $174 billion in 2004 to $179 billion by 2009.
"Electronic assembly in the medical device industry is characterized by frequent changeovers and there is a strong necessity of strict process discipline to ensure high quality in the end product," says Bhargava Attada, a research analyst at Frost & Sullivan Inc. (San Antonio). "Growth in the medical electronic marketplace is fueled by continuous innovation and replacement technologies. New products are introduced into the market every year."
Attada expects the market to experience strong growth over the next six years as the aging baby boomer population increases the demand for healthcare products. For instance, he predicts that the medical printed circuit board market will grow 6.1 percent annually between 2003 and 2010.
"Printed wired boards are expected to increase in density as products become smaller," says Attada. "The average number of layers is estimated to be eight to 10 layers in high-end applications, such as medical imaging devices."
High growth is also expected in the flexible circuits market, due to implantable applications. Board manufacturers are working closely with medical device manufacturers to build new substrates and new layouts to suit medical applications.
"Higher component density is one of the major factors that is likely to drive the medical electronic component market," notes Attada. "Component traceability assumed importance after the global economic slowdown. The medical industry is likely to be one of the first few industries that are likely to adopt the lead-free manufacturing process. This requires re-engineering the components from the design stage for operating parameters and temperature profiles in the reflow process on the surface mount technology line. Such components are likely to be priced higher and boost revenue growth in the future."
Getting the Lead Out
Many electronic manufacturers are scrambling to adopt lead-free solder. The effort to go lead-free is driven by a combination of environmental considerations, government legislation, and the marketing advantages of lead-free electronic packages. Some leading manufacturers have already voluntarily eliminated lead from their products, while other are trying to catch up to impending legislation in Europe that takes effect next year.
"Lead-free solder paste is not only technologically feasible, but, in most cases, it is as reliable as traditional eutectic lead-based solder paste," says Raman Monga, a research analyst at Frost & Sullivan Inc. (San Antonio).
"While the industry has identified possible alternatives to traditional tin-lead solder alloy, much work needs to be done, especially in the area of component and board reliability and assembly process development," he points out.
According to Monga, efficient temperature control is extremely important. "Unless the thermal efficiency and profiles of the products being processed are improved, the problems posed by high temperature are likely to continue to restrain market growth," he points out.
In addition, high processing temperature requires 15 to 25 percent more energy, and this makes some electronic assemblies increasingly prone to warping and other issues. Solder alloys comprising tin, silver and copper are workable, but Monga says manufacturers "are uncertain if these are capable of offering long-term reliability. To solve some of the problems associated with lead-free solder paste, surface mount technology equipment manufacturers are [investing heavily] in product development."