5. INDUSTRY OVERVIEW AND Oun.OOK
During the second quarter of 2005, the Malaysian economy expanded at a slower rate of
4.1% (10 2005: 5.6%). The private sector continued to be the main growth driver. The
services sector provided the main impetus to growth, underpinned by strong consumer
spending, travel and business activity. Meanwhile, the manufacturing sector expanded at a
more moderate pace of 3.2% (102005: 5.7%). Output of export-oriented industries grew by
4.1 % (102005: 5.4%) supported by selected resource-based industries such as chemical products and off-estate processing industries, and the electrical and electronics products industry. The domestic-oriented industries recorded a decline in production mainly due to contraction in the output of fabricated metal and construction-related industries. The construction sector declined by 2.0% during the quarter. The mining sector also recorded a decline following a contraction in crude oil production.
Going forward, while high oil prices and rising inflationary pressures are a concern, the
momentum of global demand is expected to be sustained in the second half of the year
following favourable indicators from the US and more recently from the Euro area and Japan.
Prospects are also reinforced by an expected improvement in the global electronic sector in
the lalter part of the year.
The favourable external environment is expected to support the expansion of domestic demand. The six-month smoothed growth of Leading Index also suggests continued economic expansion. This is further supported by the MIER’s Business Conditions and Consumer Sentiment Indices. which point to expansion in private sector activities in the nearterm. The Malaysian economy is expected to grow by between 5-6% in 2005. On the supply side, growth would be supported by expansion in all sectors, except construction. The manufacturing sector is expected to grow at a moderate pace of 4.5% in 2005 (2004:9.6%), in tandem with the developments in the global semiconductor industry. The services sector would remain firm supported by consumption and tourism activities as well as strong expansion in the telecommunication, finance and business services activities. The primary commodity sector would continue to benefit from higher production of crude palm oil, rubber, natural gas and crude oil, as well as increasing contribution from other miscellaneous agriculture, mainly food-related activities.
In an environment where inflation has increased, the level of monetary accommodation will be
balanced to ensure that the maximum sustainable growth is achieved in an environment of
price stability. Given the uncertainties associated with both the inflation and economic
outlook, particularly in relation to the impact of high oil prices. the balance of these risks will
be closely monitored in setting the future course of monetary policy.
(Source: Press Release by Bank Negara Malaysia 24′” August200S “Economic and Financial
Developments in the Malaysian Economy in the Second Quarter of 2ooS” and Bank Negara Malaysia
Annual Report 2(04)
5. INDUSTRY OVERVIEW AND OUTLOOK
5.2 Manufacturing Industry
The manufacturing sector in Malaysia is the second largest sector in the country after the services sector, contributing about 31_6% to the country’s GOP in 2004_ The overall growth of the manufacturing sector during the review period (Mid-Term Review of the Eighth Malaysian Plan from 2001-2003) averaged 1.5% p.a. compared with the Plan target of 8.9%. The slower growth was due to the 5.8% contraction in 2001, which brought down the average growth rate despite the growth of 4.0% and 6_5% recorded in 2002 and 2003, respectively_ Since the performance of the export-oriented industries was adversely affected by the economic slowdown in the major industrial countries, the domestic-oriented industries, which grew at 5.4% p.a., were the main contributor to growth for the sector. The manufacturing sector is expected to grow at an average rate of 7.8% p.a. during the remaining Eighth Malaysian Plan period. The export-oriented industries are projected to rebound to 9_6% p.a. while domestic-oriented industries are expected to sustain growth at 8.3% p.a.
(Sources: Mid-Term review of the Eighth Malaysian Plan 2001-2005)
The electronics sector (semiconductor and electronic equipment & parts) account for about
48.3% of the total manufactured exported goods in 2004. Exports of semiconductor and
electronic equipment & parts amounted to RM188.6 billion in 2004. Semiconductor exports
are significant, amounting to RM89.3 billion or 34.5% of the total electronics, electrical machinery and appliances exports in 2004. Growth emanated mainly from the expansion in
the wireless and PC markets as well as consumer electronics products_
Unlike the previous semiconductor cycle (1999-2000), which was mainly driven by Y2Krelated corporate spending, the latest cycle is differentiated by no significant over-investments in the technology sector. Secondly, the current downturn is caused by both supply and demand factors. Thirdly, inventory accumulation has not been excessive_ The inventory-toshipment ratio of electronic products in the US has remained low at 1.22 at end-December 2004. Lastly, the adjustment to inventories have been relatively quick, as large multinational companies begun to cut back on production and reduced their inventories since the fourth quarter of 2004. Given these factors, the view is that the current downcycle can be expected to be modest compared with the sharp downturn in 2001.
Since many multinational companies are located in Malaysia, domestic manufacturers are also undertaking the inventory adjustment as reflected in the slowdown in manufacturing production index in the closing months of 2004. During the year, semiconductor manufacturers in Malaysia have also continued to move up the value chain to produce higher valued added products and ventured into manufacturing-related activities, including locating their regional hubs.
(Source: 8ank Negara Malaysia Annual Report 2004)
5.2.1 HDD Industry
Worldwide HDD Shipments by Drive Class, 2002·2005 (million)
2002 2003 2004f 2005′
Mobile Class 1.x-in. 1.40 3.38 15.12 23.81
Mobile Class 2.5in_ 34.6 47.3 56.3 66.7
Desktop Class 164.1 189.0 208.9 228.0
Enterprise Class 19.3 21,2 23.5 24.3
Total 219.4 261.0 303.7 342.8
Growth (%) 12.0 19.0 16.4 12_9
5. INDUSTRY OVERVIEW AND OUTLOOK
The HOD industry shipments, which increased by 16% unit growth to 342.8 million in 2004, were above IDC’s expectations. Worldwide HOD revenue was around USD22.8 billion in 2004, representing just shy of 3% growth over the previous year. In terms of revenue, the largest contributor is the desktop class drives segment which makes up about 55% of the total HOD shipment in the past 3 years. Of late, the industry is seeing tast growing revenue potential tor mobile class drives.
2004 started and ended strong with respect to enterprise-class shipments, with a 23.5 million
drives shipped worldwide, surpassing the 22.1 million shipped during Ihe Y2K time period.
Server demand surpassed IDC’s expectations in 2004 and this momentum is expected to
carry into 2005 with a 3.4% increase to 24.3 million drives. However, the overall revenue
contribution of this segment declined to 18% of all worldwide HOD revenues in 2004 (2003:
21%). IDC expects its share at contribution to decline further to near 15% in 2005.
Demand for desktop-class HODs also remained strong during the year under review. Even
after accounting for the strong consumer electronics demand, the tie ratio to PC shipments remained high, indicating that the white-box segment continues to grow. Based on the
current PC torecast, IDC expects 2005 shipments ot about 228 million desktop-class 3.5in.
drives, representing 9% growth over 2004.
Mobile-class drives shipments continued to grow, reaching more than 56 million units in 2004. The continued growth of laptop sales is generating the high demand and is expected to continue as corporations transition to increased utilization of mobile PCs. Current year forecast is expected to be just as robust, with mobility and wireless technology surpassing any cost advantage the desktop PC may offer. However, with Seagate and Western Digital entering the segment in 2003 and 2004, respectively, IDC expects that supply may outpace demand, Revenue grew by more than 8% (over USD6 billion) in 2004, with similar growth expected in 2005, driven by double-digit unit growth in the midst of eroding average selling price (ASP).
IDC expects aggressive ASP erosion, especially in the 2.5in. segment as new vendors
increase manufacturing capacity and compete tor market share by lowering prices. However,
demand for small form factor (1.8in., 1.0in. and 0.85in.) HODs in 2005 will be very strong,
indicating the potential for exponential growth. Demand will return to a more realistic linear
trend in 2006 due to strong competition from flash-based storage. “is aiso expected that
consumers will increasingly look for storage solutions within the home that will enable the
sharing of data between multiple PCs and various other devices leveraging digital storage.
(Source: IDC -‘Worldwide Hard Disk drive 2004 Vendor Analysis: Market Growth Continues Against a Backdrop of Shifting Dynamics”, dated January 2005)
5.2.2 Semi-conductor and Electronics Industry
The Eighth Malaysian Plan expects growth prospects for the electrical and electronic products
industry during the period to be favourable. The industry is targeted to grow at an average
annual rate of 8.8%. The electrical and electronic products sub-sector in the country is
shifting into higher value-added activities through skills upgrading, product design and R&D.
In the semiconductor product group, several companies wili be upgrading and producing
integrated circuits that require high technology. Similarly, in the consumer electronics group,
more advanced products will be manufactured such as thin film transistor-liquid crystal display
for television, personal computer monitors and mobile phones.
(Source: Eighth Malaysian Plan 2001-2005)
5. INDUSTRY OVERVIEW AND OUTLOOK
The semiconductor industry has been cyclical. Cycles typically included two years of 20% growth, one year of slow growth, and one year of flat or declining growth. The growth rate of global semiconductor sales has slowed gradually starting in the mid-1980s, from a 16.1 % compounded annual growth rate (CAGA) from 1975-2000, to about 15% in 1998. The longterm growth rate is now expected to be in the 8·10% range. The SIA has forecast a CAGA of 9.8% through 2008 (released on 8 June 2005). The robust long-term outiook for chip sales reflects the growing pervasiveness of semiconduclors in a very broad range of products.
Forecasts of Global Semiconductor sales
Year Sales (USD billion) % YOY Change
2005 226 6.1
2006 246 8.8
2007 273 11.0
2008 309 13.2
(Source: Semiconductor Industry Association)
The SIA has revised upwards its worldwide sales for 2005 from flat growth to 6.1 % recently. The revision is due to a stronger than expected worldwide sales during the first quarter of 2005, driven by better demand on a number of important end markets, including personal computers (PCs) and wireless handsets. Concerns of high energy prices and lingering excess inventories that may dampen sales in 2005 did not materialise and economic growth, especially in the USA, has remained strong. Key drivers of semiconductor growth in 2005 are forecasted to be the cellular phones (+13% yoy), PCs (+10% yoy), digital televisions (+65% yoy) and digital cameras (+15% yoy).
In the 1990s, consumers emerged as the primary force driving semiconductor sales. If consumer products are defined as products purchased by individual consumers with their own money, consumers now drive roughly half of all semiconductor sales. With the internet boom and declining PC prices, individuals now consume more than 30% of units sold in the PC marketplace. Consumers dominate the cell phone market, more than 10% of end semiconductor demand, by commanding more than 90% of sales. The automotive segment is similar. Just as the corporate IT sector once largely determined spending, the global consumer now dominates the technology spending of the early 21 st century.
The Asia Pacific Aegion, which includes China and Taiwan, will continue to be the fastestgrowing market and is projected to reach 46% of the worldwide market in 2008. Today, the region not only leads in electronic equipment production-from low-end to advanced products-but rt is also a significant consumer of sophisticated electronics. China is now the largest market for cellular handsets, representing 20% of demand, and the second largest market for personal computers. South Korea has the most advanced nationwide cellular network in the world. The electronic equipment and semiconductor industries have evolved into a truly global market.
(Source: Semiconductor Industry Association 2005 Annual Report; Press Release by the Semiconductor Industry Association “SIA Projects 6% Growth for Global Semiconductor sales. 6 June 2005; and Press Release by the Semiconductor Industry Association “Global Semiconductor Sales Hit Record USD213 Billion in 2oo4”)
5. INDUSTRY OVERVIEW AND OUTLOOK
In the electronics industry, the latest assessment is that the global semiconductor down-cycle would be modest, with impact mainly felt in the first half of 2005. Forward looking indicators in the US including new orders, unfilled orders and the inventory-to-shipment ratio lor electronics support the view of a modest downturn. Meanwhile, global demand for electronics is expected to remain favourable in 2005 supported by the relatively the relatively strong global growth. The PC segment would also continue to benefit from the strong demand in the Asia-Pacific region. The growth in the electronics sector would be further reinforced by the continued trend towards increased application of chips in consumer appliances due to the increasing convergence in computing, digital media and wireless technology_
Malaysia is therefore expected to benefit from these positive factors, given the diversity in the electronics and electrical products manufactured in the country. More importantly, major multinational companies have been migrating production lines for some high value-added products to Malaysia to leverage on the cost-efficiencies in production.
(Source: Bank Negara Malaysia Annual Report 2004)
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