Martin Hingley's Blog

Q309 PC Forecast Highlights

• PC Brands accounted for $136b revenues worldwide in 2008 and set to fall 14% to $117b in 2009
• The extended PC ecosystem was worth $337b in 2008 and also set to fall 14% to $289b in 2009
• The downturn in the PC business will be V-Shaped with improving results each quarter from here on until break-even in Q2 2010 and growth in subsequent quarters
• Expect only modest quarterly growth for the PC market from 2011 onwards
• Component manufacturers are doing worst in the downturn in terms of profits, which are expected to remain negative for the foreseeable future
• Employment in the PC ecosystem is around 2.3 million and will remain around this level following a slight decline in 2009
• Contract Manufacturing will be the strongest of the sub-sectors of the PC ecosystem as long as the downturn doesn’t force a retraction of the supply chain
• HP (followed by Dell) is the strongest PC Brand worldwide with a 31% share of the leading worldwide players
• Acer is the only major PC Brand to have grown its revenues in the last year (ending in June 009)

As with other hardware areas PC revenues and spending have taken a battering in the current downturn. Looking at the whole market (including contract and component manufacturing, distribution, software and PC brands) the size of the entire market was worth $337 billion in 2008. PCs themselves (represented by the revenues of the PC Brands) were worth $136 billion, or 6% of the total ITC market – making it the biggest single component.

I expect revenues from the extended sector to fall by 14% in 2009 overall to reach $289 billion. As with my previous forecasts I have produced these statistics by building a market model from key vendor revenues.

The PC Market Will Experience A V-Shaped Downturn Followed By Three Years Of Modest Growth

As with the overall ITC forecast the evidence from the last three quarters is that this sector will suffer a V-Shaped downturn, returning to growth in the second half of 2010 (see Figure 1).
While the sides of the downturn will be steep, the period following the recovery is likely to show continuous (mid-single-digit) growth. I expect the recovery will largely be driven by a return to spending in Western country markets, with considerably less growth coming from emerging markets than was the plan at the beginning of 2008. We have noted before that the downturn is affecting emerging markets more severely than established ones, of which Japan, Germany and France reported to have come out of recession in the last week (however hesitantly).

PC Brands Dominate PC Supplier Types

Over the years the PC market has been increasingly disaggregated, with new types of supplier being created to match the ever-extending supply chain. There are now at least five types, as shown in Figure 2 and Table 1. Each of these has seen their revenues decline dramatically over the last three quarters. In particular:

• PC Brands – these lead the overall PC sector and consequentially suffered the biggest absolute decline in the last 3 quarters. We’ll talk more about these later on
• Component Manufacturers – Chip Suppliers (Intel and AMD) alongside hard disc manufacturers (Seagate, Toshiba, Western Digital, Hitachi and Fujitsu). These companies are perhaps most affected by any over-supply of PCs, as occurred at the beginning of 2009. Built on massive ‘economy of scale’ strategies it has been hard for component companies to adjust to the falling market. Fujitsu, for instance, has off-loaded its disk drive business to Toshiba and SDK. I expect revenues for component companies to grow by slow single-digit percentages after a fall of 16% in 2009.
• Distribution –including Computacenter, Tech Data, Ingram Micro, Northamber. Over the last few years PC Brands have encouraged the largest distributors to expand their international operations. At the same time the available market for such players has been diminishing, both by direct Internet selling and a move to retail.
• Contract Manufacturers – these include Compal, Quanta and Wistron (all based in Taiwan). The expansion of the supply chain over the last few years has included the outsourcing of manufacturing by almost all PC Brands to specialist companies (Dell remains one of the few still making some of its own machines). Quarterly manufacturing statistics published by these companies suggests that volumes continue to climb slightly and my forecast is that this sector will be least affected by the downturn and enjoy the highest growth in the up turn. However of the various type of PC supplier contract manufacturers are most vulnerable should the supply chain contract.
• Software Companies – Microsoft, Novell, Red Hat and Symantec. It is increasingly difficult to identify ‘PC only’ business from software companies, although the number clearly includes revenues from PC operating systems and anti-virus software. This is the smallest of the 4 categories. I believe it will also fare worst, as it is affected by the move towards ‘location-less’ styles of business. The introduction of Windows 7 by Microsoft in October will do little to improve the PC sector immediately, although it is well timed for the upturn in sales I expect.

Table 1 – World PC Market By Supplier Type – Revenues ($USb) – 2008-2013

Source: ITCandor, August 2009

HP Held A 25% Share Of PC Brands Worldwide In The Last year

The PC Brand market is dominated by a small number of suppliers (see Figure 3 for a market share of the leading suppliers for the year ending in June 2009). These have had varied success over the last year. In particular:

• Lenovo (-16%) and Dell (-15%) have done worst in terms of revenue growth.
• HP (-4%), Apple (-3%) and Toshiba (-35) were in the middle.
• Acer (+4%) was the only major brand to grow its revenues in the last year.

These annual results are most likely to get worse in the next few quarters as the falling quarters beginning in Q4 2008 become a larger part of the year. It will be interesting to see whether Acer, or any of the others manage to show growth for the period (including the 3^rd quarter) are taken into account.

All PC Suppliers Will Lose Substantial Profits – Component Manufacturers Will Be Hardest Hit

As always I’m tracking net profits (or equivalent) into account as I follow the market. In the case of the PC ecosystem it shows some interesting developments, which I expect to continue in the future. In particular:

• PC Brands – I expect this sector to experience a halving of its net profit in 2009 as a whole – the second steepest decline among the PC supplier types. I expect profit will steadily improve in preceding years, however I don’t expect it to return to the 2008 level – which will prove a record performance for the foreseeable future.
• Software – this sector is the second highest in terms of absolute profit, due to its relatively low production costs. Like the PC Brands I expect this sector to decline by 50% in 2009, followed by a period of modest growth in subsequent years.
• Contract Manufacturing – I expect revenues from this sector to decline by 10% in 2009, however all other years will show growth, not least because this is a new type of PC business. I am not predicting a failure of the PC supply chain.
• Distribution – This is typically a low-profit area. At the moment I am predicting that the sector will remain virtually profit-less throughout the forecast period.
• Component Manufacturing – this sector is suffering the most dramatic fall in profits resulting in negative results in 2009, which I expect to continue into the foreseeable future.

Table 2 – World PC Market By Supplier Type – Net Profit ($US b) – 2008-2013

Source: ITCandor, August 2009

World PC Supplier Employment Will Contract Slightly To 2010 And Then Increase Modestly

As regular readers of my articles will know I take a great interest in employment levels and the effect the current downturn is having on them. In total I the PC industry employs around 2.3 million in the companies I follow. Component Manufacturers and PC Brands are the 2 largest employers with around 800k each. Contract manufacturers employ around 420k, with software (18k) and Distribution (13k) smaller. Trends in employment by sector of the PC market are shown in Figure 5 and Table 3.

Table 3 – World PC Market By Supplier Type – Headcount (millions) – 2008-2013

Source: ITCandor, August 2009

Filed under: PC Tagged: | Acer, AMD, Apple, Compal, Computacenter, Dell, HP, Ingram Micro, Intel, Lenovo, Martin Hingley, Microsoft, Northamber, Novell, Quanta, Seagate, Symantec, Tech Data, Toshiba, Western Digital, Wistron