Korea's March industrial production sets stage for electronics-led resurgence

Korea's industrial production was only 0.1% y/y lower in March, despite the high base last year and much stronger than expected (consensus: -1.6%). On a seasonally adjusted m/m basis, IP fell by 0.4%, after rising 2.3% in February. Auto producers were affected by a slump in demand in Eastern Europe, notably in Russia. 

Indeed, a leading Korean car maker reported that its sales in Russia had fallen by more than 40% y/y in Q1. It was, however, planning to launch more SUV models this year - from May in the US and July in Europe, which signals higher production ahead. 

This came at a time when car production was held back for most of Q1 when port strikes at Long Beach and Los Angeles caused severe unloading delays for US-bound cargo (this was cleared only in early March). As a result, the inventory/shipment ratio jumped further to 1.24x in March (February: 1.23x; December low: 1.16x; 5-year average: 1.04x) - led by electronics and automotives. Indeed, auto output fell another 2.3% y/y in March, extending the 12% y/y drop in February. Electronics production also fell 4.9% y/y, as lower handset (-31.9%) and PC (-10.9%) output offset an increase in semiconductor output (+16.6%).

"We remain sanguine on electronics in the coming months", says Barclays. The global semiconductor equipment book-to-bill ratio was in expansionary territory for the third straight month (March: 1.10x; February: 1.02; January: 1.04 and Q4: 0.98), indicating that Asia's electronics manufacturers are investing in plant and machinery again, an indicator of increased production in the months ahead. 

Korean consumer electronics makers are lining up more products for launch this year, than in previous years. A second bright spot is services output, which again offset the weakness in industrial activity more strongly in March. Services output growth accelerated to 3.1% y/y (Feb: 2.8%; Jan: 2.3%), largely helped by a stronger performance in real estate, business and financial services - and the residential property cycle turned up. This helped to offset a bout of weakness in tourist related industries - namely, in commerce and lodging.

"We continue to look for a meaningful pick up in Q2 once the inventory overhang in electronics and automobiles clear and maintain our forecast for 2015 full-year GDP growth of 3.5% (BoK: 3.1%) on the back of a brisk summer launch season for consumer electronics and an improved external outlook", added Barcalys in a report on Thursday.