Recent electronics industry report suggests combination of a firming global IT demand, release of Windows 7, aging PC installed base, employment trends and emerging markets will drive a strong multi-year PC replacement cycle beginning in 2010 extending through 2012. (Note Figures 6 through 17, in particular, plus information on Hewlett-Packard, Apple Computer, Dell)
One industry research and investment banking firm states in a recent report it is raising its 2009 PC units from -8% year-on-year to -2% year-on-year and 2010 PC unit numbers from +0% year-on-year to +10% year-on-year. The report goes one step further initiating a 2011 PC unit estimate of +12% year-on-year and 2012 of +12% year-on-year.
PC cycle turning?
Deutsche Bank believes the PC market is set for a significant, multi-year recovery cycle driven by the combination of an improving global economy, new product upgrade cycles and further penetration growth in developing economies.
In the report, several key factors are cited as aligning which could drive significant improvement in PC unit growth over the next 12 to 24 months:
- Aging installed base
- Global economic recovery
- Continued penetration growth in emerging markets (EM)
- Operating system upgrade cycle
In looking at Figure 1, below, the bank believes there is potential for meaningful unit recovery through 2010 with acceleration into 2011 / 2012.
Figure 1: PC Unit demand / estimates in context of major OS releases
Aging install base
As highlighted further below, the combined installed base of Vista and XP PCs is approximately 1 billion units. Further, as of 2008, roughly 70% of the installed base was still running XP reflecting broad disappointment with Vista.
Corporations were slower adopters of Vista with over 73% of the installed base still on XP.
For instance, PC maker Dell estimates the average age of its install base has increased 9 to 12 months and ~75% still run XP.
The report states this also suggests the average age of the install base has elongated beyond the typical replacement cycle (2 to 2.5 years for notebooks; 3 to 3.5 years for desktops).
Previous Microsoft OS upgrades have marked the bottom in PC cycles, causing a demand pause ahead of the release, followed by a 5% to 10% year-on-year unit acceleration two quarters following the release and a 10% to 20% unit acceleration 12 months following its release (XP on the high end and Vista on the low end).
The report suggest Windows 7 to drive a healthy uptick in PC demand as an aging PC installed base and upgrade cycle (~70% of current installed base running XP or older) is supplemented by loosening IT budgets and an improving global economic outlook.
Deutsche Bank cites nearly universally positive reviews from users as the reason it expects Windows 7 to perform at the higher end of past. The report also makes the claim that as PCs age, the cost of maintenance and repair begins to greatly outpace the replacement cost, making upgrades an increasingly higher ROI proposition for corporate CFOs. As such, the bank expects an improving corporate spending environment to translate into improving upgrade activity.
Figure 2: PC install base by OS (units)
Figure 3: Install base split (percent)
Figure 4: PC installed base vs. PC shipments
The report expects the combination of the Windows 7 release, an aging installed base and improving global IT spending to result in significant upgrade activity over the next several years.
The report assumes that the average age of the PC install base peaks in 2009 at ~4.5 years and gradually trends to past levels.
Specifically, Deutsche Bank believes 10% PC unit growth in 2010 followed by 12% year-on-year in both 2011 and 2012 will lower the average age of the PC install base to 4.1 years or down ~2 months from 2009 levels over the next 3 years. In the context of an improving macro backdrop and the timing of Windows 7, the report believe these assumptions are realistic.
Global economic recovery: First U.S., then Europe
As highlighted below, Deutsche Bank’s economics team is forecasting US GDP to improve through the course of 2009 and return to positive growth in 3Q09 with +4% year-on-year and +2.5% in 4Q09.
Full year US GDP estimates are -2.5% in 2009 and +2.5% in 2010. Similarly, Europe will return to growth in the second half of 2009, albeit less vigorously, with full year GDP declining 3.9% year-on-year in 2009 and +1.3% in 2010 while the UK is expected to decline 3.9% year-on-year in 2009 and +1.2% year-on-year in 2010.
Due to the high correlation between PC unit shipments and GDP, Deutsch Bank expects the U.S. to recover first, followed by Europe. See Figure 5, below.
Figure 5: Deutsche Bank real GDP estimates (Y/Y)
As supported by Deutsche Bank’s analytics charts below,there is a very strong correlation between IT spending and the macro economy with coefficients of determination (R2) of 0.96 and employment and IT spending (R2 of 0.90).
For instance, PC unit growth is closely tied to GDP in both the United States and Europe. As highlighted below, the analysis indicates very strong correlation (R2 of 0.96) between PC unit growth and the macro economy in developed markets (US and EU).
Figure 6: IT spending and GDP growth trend
Figure 7: Correlation between IT spending and GDP
Figure 8: Employment and IT spending growth trend
Figure 9: Correlation between employment and IT spending
Figure 10: US GDP vs. PC units
Figure 11: Correlation between GDP and PC
Figure 12: US employment vs. commercial PC units
Figure 13: Correlation between employment and Commercial PC units
Figure 14: Europe GDP vs. PC units
Figure 15: Correlation between GDP and units
Figure 16: Europe employment vs. commercial PC units
Figure 17: Correlation between employment and commercial PC units PC units
The role of emerging markets
As highlighted below, the report states Deutsche Bank expects the resumption of global economic growth in 2010 of +3.2% year-on-year (vs. -1.2% year-on-year in 2009) to be led by emerging markets. More specifically, China and India are likely to lead the EM pack and developed markets with those geographies having 2010 growth rates that are 3x to 4x that of developed nations (+8% year-on-year for China vs. +2.5% for the US).
In addition, the report states the bank expects greater PC penetration to accompany the economic rebound as enterprises invest in PCs and IT hardware to support growth and declining PC prices and an expanding middle class to support consumer PC growth in emerging markets.
Figure 18: Global growth to be led by emerging markets
Data from research firm Gartner and IDC, included in the report, shows worldwide per capita PC penetration (PCs/1,000 population) is expected to grow from 168 in 2008 to 216 by 2012. Further, PC penetration is expected to grow in all geographic regions where the Asia Pacific region, Latin America and the Middle East and Africa will lead the trend as PC penetration in those geographies is expected to grow at a 10%+ year-on-year CAGR vs. +5% year-on-year in developed markets (U.S. 3% to 6%, Japan 2% to 4% and western Europe 6% to 9% year-on-year). A resumption of this penetration growth story is embedded in the bank’s new estimates.
Figure 19: Per capita PC penetration by region, 2008 and 2012E
Figure 20: Regional PC penetration forecast 2004 – 2012E
Figure 21: Regional PC penetration growth 2004 – 2012E
Figure 22: Emerging vs. developed market PC unit growth
Operating system cycle
Again, as highlighted in Figure 23 below (same as Figure 1), consumer demand (green line) significantly outperformed corporate demand (red line) following the release of Vista.
Deutsche Bank expects the magnitude of PC demand following the release of Windows 7 to be contingent on macro improvement, particularly among corporations who historically have been slower than consumers to adopt new technology due to extensive testing before rollout.
This said, the bank believes IT budgets are now beginning to loosen in conjunction with an improving global macroeconomic outlook.
In the past, operating systems releases have had a significant impact on the timing of PC purchases. For example, PC demand ahead of the Vista release fell from +20% year-on-year in the second half of 2005 to +10% year-on-year followed by a 5% acceleration 2 quarters thereafter, and ~10% acceleration year-on-year four quarters after the Vista release.
In the Windows XP release, demand fell from +18% year-on-year in the third quarter of 2000 to -10% year-on-year and then rebounded ~10% points two quarters thereafter and ~20% points four quarters after XP was released in the midst of the tech bubble bursting.
In both instances, the release of the new OS marked the bottom in PC unit shipments for the cycle.
The bank believes PC unit demand has bottomed for the cycle and will recover similar to past experiences. As a result, Deutsche Bank is forecasting PC unit growth to accelerate through 2010, with second half 2010 PC unit growth tracking into the double-digits.
Figure 23: Corporate vs. consumer growth trend with prior OS releases
Market share dynamics
To help put things into perspective, PC revenue, market share, geographic and regional split data is highlighted in the charts below for a few select, leading PC companies from the report. (Apple Computer, Dell, Hewlett-Packard)
Figure 29: Worldwide PC revenue market share
Figure 30: Developed market PC revenue share
Figure 31: Emerging market PC revenue share
Figure 32: Dell (DELL) regional exposure 2008
Figure 33: Dell (DELL) segment exposure 2008
Figure 34: Hewlett-Packard (HPQ) regional exposure 2008
Figure 35: Hewlett-Packard (HPQ) segment exposure 2008
Figure 36: Apple (AAPL) regional exposure 2008
Figure 37: Apple (AAPL) segment exposure 2008
Source: Deutsche Bank, VentureOutsource.com, September 2009