RTC Group, Inc.

Embedded Market Bucks the Trend, or Just Dodges a Bullet?

By: Warren Andrews, Associate Publisher

The last few weeks I’ve taken some time out to talk to some companies in the business as well as some of their customers. Overall, while cautious, there was a general tone of optimism, and almost all reported that business was doing well. Comments ranged from business being flat to one company that enjoyed a record quarter. However, outside of the rarefied atmosphere of the embedded computer business, things in the electronics and computer market look bleak.

The news over the past month has been abysmal. It seems layoffs are rampant throughout the electronics and computer industries. Even Microsoft, which eschewed layoffs during the burst of the dot-com bubble, announced it is shedding 5000 employees. And it’s not alone. Here are examples of just a few layoff announcements in January:

• Sprint dropping 8,000

• IBM another 2,800

• Philips Electronics 6,000

• Texas Instruments 3,500

• Intel 5,000

• AMD 1,100

• Motorola 7,000

• Ericsson 5,000

• Microsoft 5,000

• NEC 20,000

Add this to the 140,000 we reported in these pages last month from Silicon Valley alone, and the numbers mount up. And there’s other bad news too (below). However, one has to ask if the massive layoffs are simply an artifact of the bad economy, or perhaps as much a ritual purging of the workforce to let companies run leaner and be more aggressive with increased productivity. I’m sure a little of each is true. We’ve seen this ritual cleanup of the employment ranks in virtually every economic cycle over the years, and the result has been that companies have been more responsive and efficient after the cleanup and that they tend to see greater growth spurts after hitting the trough of a major downturn.

The bad news of the layoffs reported doesn’t stand alone. Missed earning calls, lowered revenue and profit expectations, and lowered end-user demand continue to plague the electronics/computer industry. Intel alone announced a drop in net profit of 90%. Nortel, once a darling of the communications industry, declared bankruptcy; Nvidia slashed revenue outlook 50%; Motorola sales dropped by the same 50%; and high-tech venture funding has dropped 30%, to mention a few of the disasters.

The Good News…

The good news is that the economic malaise that’s affected the general computer/electronic market, the financial markets and the economy in general still has not yet infected the embedded computer industry. Several market areas continue to be strong including the military, medical instrumentation/therapy and environmental management. And even in the area of industrial control/automation, where one would think it’s the darkest, there are signs of buoyancy. The area that’s particularly upbeat is that taking advantage of the latest generation of low-cost, low-power processors such as Intel’s Atom family and Via’s Nano.

But why has this small subset of the computer/electronics market continued to flourish? I’m not sure there’s an easy answer to that one–or more correctly, a single answer. There are many factors at work that may go some way to explain the phenomenon. First off, there is the law of small numbers at work. The overall dimension of the embedded computer market measures only about $3 to $5 billion–such a small fraction of the overall electronic/computer market as to render it statistically insignificant.

Second, as we’ve reported in these pages before, the embedded computer industry tends to be a lagging indicator, which means that as the economy in general–and the computer/electronic market specifically–moves, the embedded computer market follows in the same direction and the same magnitude only some 12 to 18 months later. While this may be the case, we won’t find out until later in the year.

However, I don’t believe we’re in for a fall later this year. Instead, I think the buoyancy of the subset of the electronic and computer market is the result of yet other factors at work. There is little question but that advances in technology have moved computers and electronics into an ever-increasing sphere of application areas. Further, the growth of wireless technology has enabled thousands of new applications in the embedded space. In addition, other technologies such as GPS, newly developed sensors and advanced lasers further expand the number of possibilities out there.

In essence, we have a mini revolution made possible by the convergence of a number of different technologies. Last issue (RTC, January, NVC ) we focused on some of the technologies that will make a difference in the coming year. Though most of those are based on semiconductor developments, they are nonetheless enablers of embedded technologies.

Applications Make a Difference

Earlier, I mentioned that certain application areas have remained resilient to the country’s economic woes. One of those was, of course, the military. As the new administration starts to get its feet on the ground, there are strong indications that military programs will proceed largely unabated despite the economic climate.

In the market wrap up and update in our sister publication, COTS Journal, I looked at the growth of embedded computers in military and aerospace applications. This past year saw the merchant market for computers and electronics in the military grow some 7% to 8% to approximately $1.4 billion. Some companies topped that and boasted growth in the double-digit range, while others staggered along with only about 5% growth. Granted that’s a small portion of the more than $80 billion in computers and electronics in the military, but significant to the players. According to most sources, that growth rate will continue through 2009, increasing to more than $1.5 billion.

Key growth areas for this market are program upgrades and technology insertion. As new programs are delayed, suspended and in many cases cancelled, it’s imperative to update older equipment and keep it going. This is one of the key areas of growth across all branches of the military. Much of this takes advantage of legacy electronics such as VME and some of its more recent derivatives such as VPX.

However, there are other areas that have supported the embedded computer industry in both the military and commercial sectors. As mentioned previously, the development of the new generation processors such as the Intel Atom family have enabled a totally new generation of embedded computer. Wearable computers, for example, have seen dramatic growth in military establishments around the globe

Add to these developments the tremendous advances in wireless technology along with GPS, and thousands of new applications have been enabled. These applications run the gamut across many market areas covering medical monitoring systems, wireless robotic control, transportation, construction, security, property maintenance, POS, education, environmental control, research, scientific exploration and manufacturing. In almost all cases these systems are developed to increase productivity and reduce expense.

Then, there’s a major trend on the way that was discussed by RTC Editor-in-Chief, Tom Williams, dealing with the “greening” of our environment. Despite the fact that the cost of petroleum dropped from a high of close to $150/bbl to under $40/bbl in the past six months, my own power bills have seen a net increase over the past year. Further, there is a growing attitude in this country and around the world toward energy conservation.

The combination of the new, low-power processor technology and the growing sentiment toward energy conservation and reducing carbon emissions is leading to the development of new embedded computer subsystems designed to reduce power dissipation in everything from lighting to motor control and from environmental control to intelligent power grid management. All of these areas are dependent on embedded computer technology.

And finally, the embedded computer community continues to borrow from the world of commerce and consumer goods. That means we can look for new applications taking from the world of netbooks, wireless capability including audio and video, and control all from handheld equivalents of smart phones.

Even in the down times, corporations such as Cisco and Juniper Networks–and even AT&T–are starting to see the evolution of this technology and it is expected to be pervasive throughout the next decade. Certainly the expansion of wireless capability including 3G and upcoming 4G speeds are fertile territory not only for the bourgeoning market for smart phones with complete video capability, but they will form the backbone of any number of commercial/industrial/military/security applications.

The bottom line is that there are many areas in the embedded computer arena with a tremendous upside potential. Currently estimates for growth for 2009 are running in the 5% to 6% range. Actually, we believe growth is far higher in units sold, however average selling prices will continue to decline–not necessarily a bad thing. The ability to sell lower priced units expands the potential universe of users while lowering revenue. And, perhaps this is a double-edged sword; I believe the increases in volume will far outstrip the erosion in price resulting in a very positive bottom line.

© 2009 RTC Group, Inc., 905 Calle Amanecer, Suite 250, San Clemente, CA 92673