|June 27, 2002||atimes.com|
Asian tech industry headed for shaky recovery
HONG KONG - Asia's high-tech sector is now in the early stages of recovery, but all is not clear sailing ahead, Standard & Poor's has warned.
"After the protracted downward cycle of 2001, companies are [only] now crawling back up from the bottom," Standard & Poor's director Bruce Hyman said in a statement. The rating agency's views were carried in a new study titled "Asia High-Technology Industry Review".
Indications increasingly point to an improvement in sales and profits. Capacity utilization is on the increase and companies have enough confidence from improved demand to now start increasing their capital spending, the report said.
"One of the clearest signs of recovery has been in the semiconductor foundry sector, which is often one of the first in the industry to recover," said Tony Tsai, associate director of Taiwan Ratings, a Standard & Poor's Taiwan-based affiliate.
Taiwan-based Taiwan Semiconductor Manufacturing Co Ltd (TSMC), the world's largest foundry, saw revenue last month rise a sharp 77.8 percent year on year, with capacity utilization increasing to 80 percent from 67 percent in the first quarter of 2002. Even South Korea's debt-ridden Hynix Semiconductor Inc posted a profit in the first quarter. Hyman was quick to remain calm about this information.
"By historical measures, the recovery in 2002 will be modest, because general economic conditions remain relatively weak," he stated. Cell-phone sales are up only slightly, while data networking and computing stay a long way from robust expansion. Similarly, the chip industry continues to have ample inventory in some components, further hindering recovery.
"Asia is a high-growth market and is at the forefront of changes to the industry," Hyman said, addressing regional competitiveness. He outlined a number of key themes from the report that related to the operating environment in Asia.
The technology industry in Asia is migrating to mainland China to capitalize on lower cost structures and capture a large and fast-growing market for electronic products.
"Despite numerous political, legal, and regulatory concerns about investing in mainland China, the pull of this enormous developing market will drive the increasing trend toward locating there," Tsai said.
To mitigate the risks associated with investments in cyclical high-technology businesses, as well as to alleviate their substantial capital and research and development spending burdens, manufacturers are increasingly forming strategic alliances. Examples include NEC Corp and Hitachi Ltd's dynamic random access memory (DRAM) joint venture and the tie-up between Toshiba Corp and Matsushita Electric Industrial Co Ltd to develop and manufacture liquid crystal display products. Asian manufacturers have been favoring alliances, whereas in North America there have been a lot more acquisitions.
Amid a prolonged economic downturn and growing cost-based competition, the electronics industries in Japan and South Korea are undergoing radical changes. Korean companies such as Samsung Electronics Co Ltd have taken the lead in rationalizing their operations, while Japan's integrated electronics makers have found it difficult to maintain their competitiveness and are still faced with high cost structures.
"Legal and social constraints in Japan, mainly related to the nation's employment system, have hampered the ability of companies to respond to changes in the global operating conditions," said Fusako Nagao, associate director of Standard & Poor's.
Considerable pressure from customers to lower costs and speed up time to market is resulting in an acceleration of outsourcing. The major beneficiaries of this trend are low-cost component suppliers and original design manufacturers such as Hon Hai Precision Industry Co Ltd, Quanta Computer Inc, and Compal Electronics Inc. Also well positioned to benefit are companies in the semiconductor sector, including TSMC, United Microelectronics Corp and Chartered Semiconductor Manufacturing Ltd.
Overall, 2002 will be a year of slow recovery for the industry, with more sustainable growth probably occurring in 2003.
"Different segments will demonstrate relatively independent recovery paths and credit quality will no doubt diverge further in the face of additional changes in the structure of the global high-technology manufacturing industry," said John Bailey, another Standard & Poor's director.
Leading companies, boasting strong financial capacity, high operating efficiencies, and strong market positions will be able to grow and sustain their business positions. In contrast, smaller, more financially vulnerable companies will find it hard to survive in this extremely volatile industry.
"The market is littered with examples of high-technology companies that failed to keep up with industry trends and ran into financial difficulties," Bailey said, adding that the recent default of Hynix is a reminder of how dangerous a place the high-technology market can be.
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