Soaring Electronic Sales to Developing Countries Come With Pressure to Cut Prices

IC prices have averaged 10% lower since last summer than in the previous twelve months, partly because of a tilt in the mix of parts shipments to the lower cost parts used in the assembly of entry-level consumer and PC products designed for sale in developing countries. Semiconductor manufacturers

End-market demand for semiconductors has spread from North America, Europe and Japan to the new industrial countries in Asia and the developing world much faster than semiconductor production facilities. While production facilities will follow eventually, large developing countries with rapid economic growth have already become significant markets for products with semiconductors. Developing countries are still a small share of total end-market consumption of products with semiconductors, but they are a large and increasing share of the market growth.

Electronics products are penetrating developing countries more rapidly now than they did in developed countries over the last three decades. This is partly because electronics products are now relatively cheaper than when they first became available in developed countries. The more rapid penetration is also partly because there is often no mechanical/electrical produce to displace — cellular handsets are the best example. Market penetration in developing countries has also been spurred by the rollback of import tariffs and quotas. And in 2005-06, market penetration in developing countries has been boosted by the strong income gains from soaring commodity export sales to the industrial countries, especially for oil, metals, lumber and farm products.

The accelerating growth of electronics products sales will continue in the developing world at least well into 2007, but will then slow markedly for several years after the peak of the current economic cycle. The developing world is far more cyclical than the industrial world. These economies are dominated by supplying industrial materials or assembly services to industrial countries. Close to home, Mexico is an example of an economy whipsawed about by small changes in U.S. industrial export orders. Nonetheless, electronics product sales will grow faster in the developing than in the industrial world for several decades.

For short-term sales planning, it is still more important to understand economic trends in Japan and Europe rather than China or India. But the reverse is already true for long-term capacity planning. Together, China and India will account for more than 30% of world economic growth in 2006. Expected economic growth is even higher this year in many small countries dominated by oil and metal exports.