While the overall electronics systems market is expected to grow more this year than last, there could be some supply headaches for buyers as semiconductor suppliers limit capacity additions in the wake of a less-than-robust 2007.

The dollar value of worldwide shipments of electronics systems will grow 6% to $1.29 trillion in 2008, according to a new report by researcher IC Insights. But capital expenditures by semiconductor companies are forecast to fall by about 10%. That's because growth in 2007, which was driven by healthy demand for mobile communications handsets, consumer products, notebook PCs, wireless networks, and automotive electronics, showed the smallest annual percentage increase since the 2001–2002 electronics industry downturn.

Worldwide shipments grew 5% in 2007 to $1.21 trillion. By comparison, the total value of electronics systems shipments grew by 6% in 2006, 8% in 2005, 13% in 2004, and 10% in 2003, after falling 4% and 14%, respectively, in 2002 and 2001. Among the fastest-growing electronics systems markets in 2007 were video game consoles, cell phone handsets, portable digital audio, radio frequency identification systems, smart cards wireless personal and local area networks and high-definition DVD players.

While electronic systems sales are expected to grow 6% in 2008, IC markets are forecast to increase 10% to $243.4 billion, driven by the same equipment segments that drove industry growth in 2007. PCs remain the largest end-use segment for ICs, accounting for about $73 billion, or 33%, of total integrated circuit sales in 2007. Cell-phone handset ICs were the second largest segment in 2007 at nearly $35 billion, or 16% of the total, but growing at a faster 13% compound annual growth rate.

Demand for electronics equipment will be robust through at least 2011 when the equipment market reaches $1.6 trillion.

For instance, memory IC suppliers could add flash capacity, but cut back on DRAM capacity. Kurt Doelling, vice president of supply management for Sun Microsystems, says he's already seen some reduction in DRAM capacity impacting buying plans.

Computer OEMs, which buy a lot of DRAM, could struggle with less supply and firming to higher prices. But consumer electronics manufacturers tend to use flash memory and should benefit from the capacity increase.

"Consumer electronics is the fastest growing segment and with some of the most profitable products," says Doelling. "Margins are higher for many consumer electronics products. We [in nonconsumer markets] may have to fight a little bit more for attention from key suppliers."

Overall, however, Doelling says that he is not as concerned about supply issues this year as he is about the health of the overall economy. He says if the economy weakens it will mean less demand for end equipment and more supply availability.

"The whole picture is mixed right now," Doelling says.

Looking longer-term, IC Insights believes electronics systems growth will strengthen through 2011, and the annual cumulative average growth rate (CAGR) will be 7%, matching the 25 year average CAGR for the electronic systems market.