The switching power supply industry, like many high-tech sectors, has experienced the equivalent of the perfect storm: a combination of simultaneous forces so rare that it defies imagination. These forces consist of the dot-com bust, terrorism, war, accounting scandals and severe acute respiratory syndrome (SARS).
The industry has reacted to the combined impact of these forces by refocusing the business model used during former boom times. To fully understand the market as it will emerge today, the inflated growth cycle of the past must be examined separately from the geopolitical and global uncertainties of today. That unsustainable growth cycle has also led to false expectations about where the recovery is heading today, while global uncertainties have just extended the time that recovery will take.
In the past, the power supply industry experienced a period of double-digit growth, only to see it shattered by the economic downturn. While all vertical markets except those in the military/aerospace sector will continue to experience declines in 2003, slow but steady longer-term growth will prevail over the 2004-2007 period.
Telecom/datacom is expected to continue in decline through 2004. Growth in military/aerospace and industrial/instrumentation applications will exceed the overall growth of the North American merchant switching power supply market. Neither the industry as a whole nor telecommunications alone will return to 2000 levels over the next five years. This is due to the unnaturally high growth they experienced during the dot-com boom.
The sooner vendors realize that economic recovery will not signify a return to the times of irrational exuberance, the better equipped they will be to embrace slow economic growth scenarios. The worldwide ac/dc switching power supply industry is expected to increase at a modest growth rate of 3 percent through 2007. This growth will emerge as we put behind us present-day uncertainties such as war, paving the way for increased demand.
Although it is obvious, it is still worth pointing out that the world is in a heightened state of uncertainty. The resulting risk aversion stemming from terrorism, war, accounting scandals and SARS has affected everyone. For example, worldwide shipments from ac/dc switching power supplies have declined dramatically in the past few years. The industry declined by several billion dollars to level off at just over $4.2 billion in 2002.
Global and geopolitical uncertainties have been used as the sole excuse for poor corporate earnings:
Terrorism and war have put the economic recovery on hold by contributing to slow capital spending.
Corporate and accounting scandals have shaken the financial markets.
The economic consequences of SARS will be felt for months because of the goods unsold and the new consumer products that were delayed during the height of the epidemic.
To some extent, each of these exogenous effects has contributed to declining revenue streams in the power supply industry. Many CEOs will hold up any or all of these reasons as an excuse for poor earnings, when in reality much of the problem has been a business plan based on overzealous forecasts and recoveries resembling the past bubble.
One should not ask, "Why is there a big decline after the dot-com bust," but rather, "Why is there such fast revenue growth during times of irrational exuberance?"
Long-term outlook
Several forces occurring simultaneously have influenced the decline in the switching power supply industry. The greatest influence has been an artificial expectation of revenue growth based on an earlier boom-bust period.
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North American merchant shipments of internal ac/dc switching power supplies segmented by major industry (percentage of dollars).
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At the peak of the bust, uncertainties such as terrorism, war, accounting scandals and SARS added the necessary ingredients for the perfect storm. Natural business cycles and fluctuations combined with some level of external forces should be factored in to create more accurate forecasts. Lessons from the past bubble, however, must be learned if we are to weather the storm.
Vendors of merchant switching power supplies can mitigate risk by developing business models that are based on the moderate growth of vertical markets, applications and trends. For example, regardless of computer hardware demand, the storage of increasing amounts of digital data will continue to rise. The result is a 2.4 percent annual growth forecast in power supply revenue for the memory storage applications. Other strategies include product innovations in the areas of packaging, digital signal processing and adjustable output voltages. Product innovations are being used to capture market share in this very stormy climate.
Marianne D'Aquila is an analyst in the power group at market research firm Venture Development Corp. (Framingham, Mass.).
