Valuation of the Electronics Manufacturing Industry

The electrical equipment manufacturing industry, covered by SIC Group 36, covers all companies engaged in manufacturing equipment, machinery, and supplies for generating, storing, transmitting, and utilizing electrical energy, with the exception of computer equipment. The industry includes power distribution

Industry Overview

The electronics industry supports a wide range of other industries. Electrical components play a critical role in the telecommunications, medical, automotive, and many other major industries. The rise and fall of these industries greatly impact the demand for electronics.

Currently, the overall demand for electronics products is increasing. Corporate inventories in many sectors have returned to nearly historically normal levels, after rising when sales fell during the recent economic downturn. The return to normal inventory levels means that companies are ordering supplies and equipment on a more consistent basis, thus generating demand for electronics and other components. According to research firm Value Line, the electronics industry's prospects over the next three to five years appear relatively strong.

The level of electronic content integrated into consumer and industrial goods is increasing, which also increases demand for the industry's products. Technological innovation also continues to deliver electrical components of increasing complexity and reduced size. As a result, new applications for electronic components are continually being developed, further increasing demand.

The automobile industry, for example, is incorporating more electronic features into vehicles. Electronic circuit boards are being added to vehicle components that previously were entirely mechanical. New features, such as global positioning systems and built-in television displays, are becoming popular.

Emerging markets are likely to grow faster than the established markets in North America and Europe. While these foreign markets are more volatile, electronic firms are still entering them in hopes to achieve higher long-term growth rates. Declines in local currency versus the dollar can decrease foreign production costs as well.

Semiconductors: Digital and Analog

Advances in the semiconductors arena also generate demand from the other sectors of the electronics industry. As the performance level of integrated circuits grows, so does the number of electronic components needed to support each chip. The effect is that electronic component businesses usually grow along with the semiconductor markets they serve. A good example is how the digital revolution is driving strong demand for advances in analog electronics.

Digital technology, as the name implies, works with numbers. Data is stored as ones and zeros. But humans cannot readily read data in that format. Digital operations need to be able to translate in readily understood analog formatting. A digital camera, for example, uses analog chips to translate visual data - wavelengths and intensities of light - into digital code. In order to view the picture, the code must be translated back as a visual display. Other device functions, such as timing features and battery performance, are also commonly handled with analog systems.

According to Gregg A. Lowe, senior vice president at Texas Instruments, "On average, there's probably 15 analog chips for every digital processor you use." Analog semiconductors generated about 40 percent of Texas Instruments' semiconductor revenue in 2003. Texas Instruments isn't the only company supporting the demand for digital products by making analog devices. National Semiconductor has announced a new dual high-performance analog-to-digital converter. The company said the converter could be used for applications such as digital oscilloscopes, automated test equipment, and satellites and communications systems.

Consumer Electronics: The New DVD

The electronics industry supports the production of a wide range of consumer products including cars, kitchen appliances such as toasters and ovens, cell phones, televisions, and more. The development of new consumer products can drive sales, but carries the risk that consumers may not want the new product, or may prefer a competing technology, as occurred when sales of VHS products rendered Betamax recording systems obsolete.

In a battle reminiscent of the conflict between the Betamax and VHS, the challenge of designing the next generation of DVDs has begun. The next generation of digital videodiscs is expected to be able to store six times more data than current DVDs and carry high-definition images. The major contending technologies are Blu-ray and HD-DVD. Which standard consumers ultimately adopt will determine which electronics industry manufacturers benefit from the new DVD products.

Blu-Ray is backed by Sony and supported by consumer electronic companies with an interest in keeping the television set as the primary device for watching movies and playing video games. Blu-Ray also has supporters in the computer industry, including Dell and Hewlett-Packard. The production of Blu-Ray products is supported by Philips, Samsung, Sony, Matsushita, and Sanyo.

The HD-DVD technology is more computer-based. Its main proponents, Toshiba and NEC, envision a future television as a display monitor that will have a hard drive run by software and connected to the Internet. The HD-DVD standard won a strong endorsement last July, when Microsoft stated that its next operating system would be HD-DVD compatible. Production of HD-DVD products is supported primarily by Toshiba and Sanyo, which is also supporting the development of Blu-Ray products.

Outlook

The electronics industry is currently enjoying an increased demand for electronic components and products. Decreasing inventories among corporate consumers as a result of overall economic growth has helped create and sustain this demand. The industry also benefits from the continued creation of new markets as more electronic components are integrated into both corporate and consumer technologies. Investing in new technologies carries a risk however, especially when competing technologies are being simultaneously developed, a scenario that has occurred more than once in the consumer electronics sector. Overall, the electronics industry should continue to see sales growth and new product development unless the current economy takes an unforeseen turn.

Sources: Electronic Engineering Times, New York Times, Value Line, Wireless News