Taiwan's electronics sector at crossroads
Not surprisingly, the Taiwanese market is having trouble deciding which way its crucial electronics sector goes next. The signals are conflicting.
A usual indicator is the trend in United States computer-makers' new orders. The name on the outside of your PC may be American but look inside - it's Taiwanese.
Take the growth rate of US new orders, move it forward by 10 months and you would normally have a good match with the growth of Taiwan's electronics production . . . until the middle of last year.
At that time, US orders fell while Taiwan's electronics production continued to rise. The Taiwan market apparently read the US trend as the more important of the two and an electronics rally, which saw electronics shares outperform the rest of the market by more than 100 per cent since the beginning of last year, came to an abrupt halt.
If US orders are the critical indicator, a recovery is on its way. The orders are rising again. Although it might take a while to clear producers' inventories, this news has to be seen as good.
However, two other leading indicators say not all the news is good. The year-on-year growth rate of Taiwan's electronics orders on hand is slumping. On a six-month average basis, it was down to 11 per cent in March from 27 per cent last November.
This indicator again turns out to have a close correlation with the US Semiconductor Industry Association's tally of worldwide semiconductor sales.
The bad news is that the latest figures show the growth in semiconductor sales in an even worse position than Taiwan's orders in hand - and with a steepening downwards trend.
So which is it to be? Is a recovery in demand for computers truly in hand or is this just another blip in the figures, an historically reliable indicator but one which can no longer be relied on so closely when other indicators are pointing down? It's no wonder that Taiwanese investors are having some difficulty making up their minds and that they have generally been reluctant to fire up another electronics rally when share prices in the sector are already demanding.
It is of interest to more than Taiwan alone. Electronics is meant to be the one bright element of an otherwise glum export picture across the region.
Taiwan is the leader here because it is the big final-product producer. During the past few years, it has moved production of lower-tech components - such as computer mice, power supplies and modems - to offshore locations, mostly the mainland, while keeping manufacture of the final products - such as laptops - at home.
If demand for the final product now languishes, it will not be long before the component industries languish as well. This will mean problems for more countries than just the mainland.
The Philippines has kept its export growth rate above 20 per cent by investment in electronics processing zones.
Taiwan is the benchmark for Asia in electronics. It will be well worthwhile to keep an eye on what happens next.