ISS: Recession possible, but consumer electronics will be a bright spot

by Bob Haavind, Editorial Director, Solid State Technology

End markets determine the ultimate demand for semiconductors, and even if there is a recession, the consumer electronics market, which now absorbs over 50% of semiconductor output, should continue to grow, predicted Shawn DuBravac, chief economist for the Consumer Electronics Association (CEA) at the recent Industry Strategy Symposium (ISS) in Half Moon Bay, CA. Moreover, his model indicates that the probability of a recession has been trending downward since it peaked in mid-2007, and now it is well below 50%.

DuBravac cited four factors increasing the risk of a recession: the credit market turmoil, housing market collapse, high energy prices, and slumping employment. But even if there is a mild recession, he went on to explain why he believes that consumer electronics (CE) will hold up well in spite of a slowdown.

Recently risk has come back into vogue, with banks less willing to loan to each other while corporate borrowing has been repriced higher. This higher price for credit is global, but it is not as bad as 4-5 years ago, DuBravac said. He believes the housing slump should continue for a couple of years — well into 2009 — and there will be steep price declines in some hard-hit areas such as Phoenix, Miami, and Ohio. He added, however, that housing is less of a contributor to GDP than it was back in 2005.

Oil leads a spike in commodity prices, but DuBravac said oil prices should drift back down to $80/barrel. US demand is finally settling down, he explained, although it was still rising until very recently. In the late 1970s, oil/gasoline was 6% of total consumer spending, but it is a much lower percentage now, he noted.

Employment is the biggest factor to consider, with 3 million jobs created in 2006, far fewer in 2007, and a big question mark for 2008, he believes. Still, he predicts consumer spending will continue to increase slightly this year, with a 1% increase in 1Q rising to 3% in 4Q.

While retail sales have remained fairly even, spending on consumer electronics has stayed healthy, according to DuBravac. He illustrated the rising market by showing that in 1990-91, the average number of CE products per household in the US was 9.7, but by 2006-07 this had climbed to 25 CE products/household. One reason for the increase, he explained, is that new technological products used to take 20 years to get out into the commercial market, but now commercialization goes much faster than that. Broadband, for example, is now in about 51% of US households, but 50% of broadband users have had it less than three years. While time to market has shrunk, consumers are struggling, he admitted, to figure out how to interconnect the proliferation of new devices and services that have emerged recently.

Still, DuBravac said that consumers are so enamored of new technologies that they are reallocating more of their income to CE, and less to other areas such as automobiles. He showed a chart indicating that CE rose to 14% of consumer spending on durables in 2007, and this is expected to continue rising to 14.8% in 2008 (see Fig. 1 below). Consumers don’t see as much need to upgrade other durables, such as automobiles, as they do for continuously upgraded CE products.

Another factor pushing CE into the marketplace is the growing trend toward embedding it into other products and services. DuBravac pointed to the automobile industry, which is already leveraging electronic technology to market its products. At the latest Consumer Electronics show, many executives from companies such as McDonalds were roaming the aisles looking for CE products that they might weave into their own services, he noted.

The upshot of all this analysis is this: following ~8.4% CE market growth in 2007, DuBravac sees it growing another 6.1% in 2008, even if there is a mild recession (see Fig. 2 below). Overall, he said, from 2003-2008, the CAGR for CE products was 9.7%, and he expects the trend to continue out into the future.

At least there was one bright spot in an otherwise sobering set of presentations at ISS2008. — B.H.


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