ADVANCED CERAMICS MARKET OVERVIEW: Advanced Ceramics Markets Begin Recovery
The advanced ceramic markets appear to be recovering from the slump that affected so many jobs and corporate bottom lines from 2001 to 2003. Sales have increased significantly for many sectors, global demand is on an upswing, operating margins are healthy, and product innovations are creating a wealth of new opportunities.
There is a dark side to this recovery, evidenced by the lack of jobs that are being created despite the positive economic signals. As with virtually all manufacturing sectors, customers continue to shift to low-manufacturing-cost regions, forcing ceramic component manufacturers to move as well. Companies that once had thousands of employees based in the U.S. and Europe now have several hundred in their headquarters and strategically placed R&D facilities. Rising product demand is increasingly being filled by manufacturing facilities in China, and the quest to find regions with ever-lower manufacturing costs has intensified. While shareholders certainly stand to benefit from this trend, it remains to be seen what impact the situation will have on the ceramic industry and the overall U.S. economy.
However, not all companies are falling victim to this trend. In some cases, such as ceramic armor, increasing orders from the U.S. government have boosted U.S. production. In others, continued innovation has allowed companies to increase market share while resisting pricing pressures. Following is an overview of some of the key sectors in the advanced ceramics industry.
ElectronicsAfter seeing record growth from 1999 to early 2001, the electronics sector began to slide. During what some companies have labeled an "unprecedented correction phase" from 2001 to 2003, demand fell significantly, forcing sales, prices and profits sharply downward. However, many companies in this sector agree that 2003 saw the bottom of this downturn. By the third quarter of the year, orders were beginning to pick up, and the first half of 2004 saw double-digit sales increases in virtually every electronics market.
As a result, the mood in this sector has changed substantially. Caution and uncertainty have largely been replaced with optimism, as many companies have begun to see significant growth potential going forward. For example, American Technical Ceramics Corp., a manufacturer of high-performance electronic components, including capacitors and thin film circuits, said that it is seeing higher sales volumes in all of its major product lines, primarily due to strong demand in the wireless infrastructure, semiconductor equipment and military markets. KEMET Corp., one of the world's largest manufacturers of tantalum and multi-layer ceramic capacitors and solid aluminum capacitors, reported that it believes electronic products are in a long-term growth phase, based on the proliferation of cellular phones, personal computers and consumer electronics.
According to AVX Corp., a manufacturer and supplier of passive electronic components and related products, electronic content is now more than a third of the total cost of a car, and this market continues to grow at a rate of 16% a year. Additionally, the analog-to-digital shift in consumer products is increasing electronic device content. Liquid crystal displays (LCDs) are replacing television "tubes," and DVDs are replacing VHS tapes and players at a rapid pace. Shipments of consumer digital cameras increased dramatically in 2003, and a compound annual growth rate of 15% is predicted through 2008. All of these factors point to a significant growth potential for ceramic capacitors and other electronic ceramic components. Indeed, according to Business Communications Co., a firm that provides industry research and technical market analyses, the U.S. electronic ceramics market is forecast to grow at an average annual growth rate (AAGR) of 8.3% over the next several years to reach $8.5 billion in 2008 (see Table 1).1
However, a significant amount of growth is also occurring outside of the U.S. AVX reported that Asia represented 40% of its total sales in fiscal 2004 (ending March 31, 2004), and that it expects sales to that region to continue to increase. The company's sales as a percentage of total fiscal 2004 sales declined 4.7% in the Americas, offset by increases of 3.1% in Asia and 1.5% in Europe. As a result of this continued shift of production capabilities by customers to the Asian region, AVX is also shifting its manufacturing capabilities. By the end of the company's fiscal year, approximately 63% of its employees were in lower-cost regions. In addition to China, AVX is also eying the Czech Republic and El Salvador as cost-effective manufacturing locations.
KEMET has also reported increasing sales in Asia as the reason for its manufacturing shift. By early 2004, 90% of the company's production workforce was in low-cost locations (primarily China and Mexico), and it anticipated that virtually all of its commodity production would be in low-cost regions by mid-2005. The company said that production that remains in the U.S. will focus primarily on early-stage manufacturing of new products and other specialty products for which its customers are predominantly located in North America.
For companies that keep a U.S. manufacturing base, innovation and customization will clearly be key to retaining market share.
AutomotiveThe automotive sector had a difficult year in 2003. According to automotive information provider R.L. Polk & Co., total U.S. new vehicle registrations were down by 6.5% to 16.4 million at the end of the 2003 model year (in September). Automotive sales in Europe didn't fare much better. Compagnie de Saint-Gobain reported that only Spain and the UK saw an upturn, rising 3.8% and 0.6%, respectively. Sales of new vehicles fell by 6.3% in France and 1.2% in Italy, and also dropped for the fourth straight year in Germany. Overall, sales of new cars across Europe were down 1.3% to 14.2 million. However, in Latin America, Brazil's auto manufacturing output rose 2% to 1.83 million, and Argentina saw an 87% jump to 148,600. In Japan, new vehicle registrations climbed by 1.5% to 4.03 million.
As the global economy continues to improve, sales in the automotive industry are expected to climb. Ford, General Motors and DaimlerChrysler all reported flat to slightly lower U.S. sales in the first two quarters of 2004, but all three companies said they expected the situation to improve in the second half of the year. GM said it expects total U.S. industry sales of approximately 17.2 million vehicles in calendar year 2004 due to strengthening labor markets and increases in household income, and all three companies are expecting higher worldwide sales compared to 2003.
While a boost in automotive sales will certainly help ceramic manufacturers that are serving this market, new technologies have already begun to pay off. According to Thomas R. Hinman, vice president and general manager of Corning Diesel Technologies, new U.S. and international emissions control regulations are creating significant opportunities for diesel emissions control products. By 2008, most on-road diesel engines in the U.S., Japan and Europe will require advanced emission control technologies-many of which will incorporate ceramic substrates and ceramic particulate filter products. Corning believes the worldwide diesel market opportunity for these products could reach $1 billion by 2008 as global emission regulations are phased in. Additionally, proposed U.S. off-road diesel emission standards will begin taking effect around 2011, which will open up a second phase of opportunity for diesel technology products.
Ceradyne is also seeing increasing demand for its sintered reaction bonded silicon nitride (SRBSN) diesel engine components in high-performance, environmentally friendly Class 8 (large truck) engines. A new automotive trend could soon expand this market even further. Earlier this year, Mercedes-Benz (owned by DaimlerChrysler) introduced its E320 CDI-a sedan with a diesel engine. Within five months of the launch, the company had already met its 2004 sales target for the vehicle. New Environmental Protection Agency regulations requiring further reductions in the sulfur content of diesel fuel and possible tax advantages (modern diesel engines are considered an environmentally friendly technology) are expected to give diesel sales in the U.S. an additional boost.
AerospaceCompanies serving the aerospace industry also have some good news-according to Labor Department data compiled by the Aerospace Industries Association's (AIA) Aerospace Research Center, the U.S. aerospace industry is hiring once again. Industry employment reached 579,800 in June 2004 after falling to a 50-year low of 568,700 in February. AIA said this marks a reversal of a downward trend that began 14 years ago at the end of the Cold War, then followed by declining defense budgets, industry consolidation, and two commercial market downturns.
The increase in employment coincides with recent increases in shipments by U.S. companies in the commercial aviation, general aviation, helicopter and defense sectors. Boeing announced that it expects to ship approximately 284 aircraft in 2004 compared to 281 a year ago. General aviation billings have increased 17% the first half of 2004 over the same period last year, according to the General Aviation Manufacturers Association. The industry shipped 395 U.S.-manufactured civil helicopters worth $214 million through June-setting a pace not seen in over 19 years. Additionally, defense aerospace shipments increased to an annual rate of $76 billion in the first six months of 2004-a 9% increase over all of 2003. Based on the recent hiring increases, companies expect this upward trend to continue at least into 2005.
BiomedicalSince the U.S. Food and Drug Administration approved the first ceramic-on-ceramic hip joint replacements in February 2003, biomedical ceramics have become a big business in the U.S. Wright Medical Group, Inc., headquartered in Arlington, Tenn., said that its LINEAGE® ceramic-on-ceramic acetabular system helped the company achieve a 37% growth in its hip business in 2003 to a reported $78.1 million. The company saw another 52% increase in its hip business in the first quarter of 2004 compared to the same period in 2003, and a 30% increase in the second quarter.
Stryker Corp., based in Kalamazoo, Mich., had already seen its Trident® ceramic acetabular system become well received in Europe, Australia and Canada. Now the product is also rapidly gaining popularity in the U.S. The product helped boost 2003 sales in the company's Orthopaedic Implants division by 18.6% to $2.1 billion, and contributed to another 19% surge in sales in the first half of 2004. Earlier this year, Stryker launched a national television advertising campaign featuring legendary golfer Jack Nicklaus, who received a successful Trident hip implant in January 1999. The increased awareness of the capabilities of ceramic-on-ceramic hip joints is likely to drive demand even higher in the future.
Emerging technologies in other medical areas also have the potential to create significant new markets for ceramic components. According to AVX Corp., implantable devices to regulate hearts and improve hearing are becoming more commonly used. Using wireless technology, doctors can now monitor an implantable heart device over the Internet. Additionally, shirts wired with technology can monitor stroke victims, football helmets can warn if an impact was strong enough to cause a concussion, and devices to improve sight are also under development.
ArmorOf all the advanced ceramic applications, armor has unquestionably seen the biggest increases over the past several years. Ceradyne, Inc., headquartered in Costa Mesa, Calif., saw its 2003 sales increase 67.5% to $101.5 million in 2003, primarily due to an enormous demand for its ceramic body armor, and its sales in the first half of 2004 were up 83.8% compared to the same period in 2003. The company has also begun receiving large orders for military vehicle armor. In August 2004, Ceradyne completed its acquisition of ESK Ceramics (ESK) based in Kempten, Germany, which will considerably diversify its product lines and markets. (See the article on pp. 17-19 in this issue for more information about this acquisition.) But while armor will now hold a smaller percentage of the company's overall sales (40% vs. 65% prior to the acquisition), it will likely continued to be a significant component of the company's growth for the foreseeable future as demand for ceramic armor continues to rise.
Other companies are also benefiting from the boom in ceramic armor. Ceramic Protection Corp. based in Calgary, Alberta, Canada, posted a 256% increase in sales to $17 million for its fiscal year ending October 31, 2003, with a 376% increase in the sales of its armor products alone. The company has continued to see its sales of armor increase rapidly in 2004. And after seeing its 2003 sales rise 19% to $365 million, Jacksonville, Fla.-based Armor Holdings Inc. received a five-year, indefinite delivery, indefinite quantity contract in August 2004 worth up to $52 million to provide ceramic body armor to the Marine Corps Systems Command.
According to Investor's Business Daily, armor has outranked 96% of public firms in earnings per share growth and stability the last five years. Over the next year, it is anticipated that the U.S. armed forces will spend more than $1 billion on armor protection.2
EnergyU.S. government funding for research and development of advanced energy technologies is at historically high levels-according to the U.S. Department of Energy, more than $700 million is being spent annually to advance energy efficiency technologies, and more than $200 million is being spent to support renewable energy.
For example, more than $4 billion in tax credits have been proposed over the next five years for solar, wind, geothermal, bioenergy, combined heat and power and other energy supply technologies with low or zero carbon dioxide emissions. Additionally, the Hydrogen Fuel Initiative and FreedomCAR Partnership is providing $1.7 billion through 2008 to develop hydrogen-powered fuel cells, a hydrogen infrastructure, and advanced automobile technologies.
Next-generation nuclear energy is also being pursued as a zero-emissions energy supply choice. The Generation IV International Forum, with the U.S. and nine other nations as partners, is working on reactor designs that are safe, economical, secure and able to produce new products, such as hydrogen. The U.S. is also participating in the largest and most technologically sophisticated research project in the world to harness the promise of fusion energy, the same form of energy that powers the sun.
Yet another promising technology draws on the world's enormous resources of coal. Along with international and private-sector partners, the U.S. is sponsoring a $1 billion, 10-year demonstration project called "FutureGen" to create the world's first coal-based, zero-emissions electricity and hydrogen power plant using carbon sequestration technologies.
Ceramics are an integral part of many of these developments. Ceramic materials are helping to harness the sun's energy in solar photovoltaic modules, ceramic bearings are increasing the performance of wind turbine generators, and carbon/glass hybrids are spawning a generation of newer lightweight wind turbines that can increase the turbines' energy production capabilities. Ceramic composite membranes are showing promise as a way to separate hydrogen from fossil fuel gas streams in carbon sequestration technologies, and ceramic insulators are key components of the fusion power plants envisioned in the future. Ceramics are also crucial components of nuclear energy-in fact, one industry executive predicted that nuclear applications could easily become as big as armor for the ceramic industry within the next five to 10 years. And in the fuel cell arena, solid oxide fuel cells (SOFCs), which are made from ceramic materials, are progressing rapidly. According to The Freedonia Group, SOFC demand in the U.S. will reach $115 million by 2008, and $490 million by 2013, holding approximately 20% of the total fuel cell market (see Table 2).3
Although many energy applications are still in a research-and-development phase, this will certainly be a sector to watch in the coming months and years.
Other ApplicationsCeramics for structural and industrial wear applications, thermal- and wear-protective coatings, and chemical processing and environmental-related products are also expected to be growth areas in the coming years. According to Business Communications Co., the AAGR for structural ceramics will be 11.8% through 2008 to $900 million. Over the same period, the AAGR for ceramic coatings is forecast at 8.4% to $1.3 billion, and the chemical processing and environmental-related sectors will likely see a 7.0% AAGR to $2.2 billion.1
After several years of sales decreases and spending cuts in virtually every advanced ceramics sector, this is welcome news.
Editor's note: The foregoing information (except where noted) was compiled from publicly available information in annual reports and news releases, as well as personal interviews.