Consumer Electronics Industry Outlook

The manufacturing build up in China for the consumer electronics (CE) 2009 Xmas season has started. Inventory drawdown from last year had an impact in the fourth quarter 2009 and the first quarter of this year so product volume in the major areas was down year to year.

However, it appears that the worst is over as demand for computers and Flat Panel Display TVs is showing more strength than would be expected on a seasonal basis. But the problems of the worldwide recession had caused some companies to reduce production and some shortages will occur over the next few months. These include DVD and CD drives (since optical pick-up heads are in short supply); HDD drives for notebooks and LCD glass panels.

PC demand is picking up in the consumer notebook area, which includes the new netbook category. The Macbook is particularly strong. Business demand for PC remains weak as business customer are waiting for the release of OS7 from microsoft.FPD for notebook PCs was up 35% Q/Q and netbook displays increased 85%. We expect PC sales to show positive Y/Y gains in the second half of 2009. Even the DRAM market is picking up, probably as a result of improving notebook sales.

The cell phone market is still in a state of technology transfer from traditional to smart phones. Apple (AAPL) sold a million new iPhones in the first weekend, dwarfing Palm’s (PALM) Pre sales. For the first three months the estimates of Pre sales vary over a wide range, from 150,000 to 300,000, with most recent reports estimating a balance between supply and demand for the Pre of about 40,000 a week.

Supply has been constrained due to supplier problems and Palm may introduce an updated Pre handset before year end. More phone manufacturers are announcing new smart phones, such as Nokia (NOK) for Sprint (S), and it is possible that the netbooks that the phone companies will be selling may take some market share from smartphones.

Prepaid phone rates are dropping as secondary cellular providers offer deals on networks rented from the major providers. Prepaid is one of the faster growing sectors in the cellular business.

The TV market is picking up. Volume has grown significantly and unit sales at retail look good. However, much of the retail demand is driven by deep discounted sales of smaller screen sizes, with 32″ being pushed. Best Buy (BBY) had good results in TV, notebook PCs and cell phones in the first quarter and we believe this has continued in the second quarter.

LG (LPL), the second largest FPD maker after Samsung, has announced a capacity increase of an 8G plant (the latest technology plant is 11Generation) that will supply the smaller size panels. Corning Glass (GLW) has restarted a FPD glass line and the company continues to announce better than expected demand and increased growth forecasts.

Digital camera demand remains stagnant as higher priced SLR camera demand, which had been growing, seems to have flattened out and there are some good sales for those looking for something better than a pocket camera.

Overall we expect a reasonable Xmas season. Inventories are at a low level and there may be a few shortages. The pessimism of the beginning of the year is not as prevalent and CE consumer confidence looks to be improving.

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