Front End I AFDEC
Whither the global electronic components markets…
All the signs are that the global electronics industry is recovering from the current economic crisis but many organisations are struggling to get to grips with its new shape and the role they’re going to play in it. Adam Fletcher considers some options for how
organisations in the UK electronic component supply network could position themselves to maximise their commercial advantage
F
orecasting electronic components markets is a huge challenge; there are so many variables influencing the outcome. You can be lucky and get close to the reality or be plain wrong and dismissed as a fool. Discussing the situation at the beginning of 2010 with market analysts and industry colleagues and friends I noted that the consensus was that in the absence of obvious ‘demand drivers’ the UK and European components markets would experience a modest start to the year with steadily improving growth thereafter. The Asian markets it seemed would have a better start to the year but slow in Q2, reducing demand and resulting in a lead-time decline before ramping up again in Q3 & 4.
The reality for the UK and European markets has proved to be very different. A dramatic +20% growth Q1/2 ’10 was led by the semiconductor and passive components sectors but with no obvious single market driver. Analysts are struggling to explain exactly what is driving the UK/EU market. Certainly the automotive sector has improved, whilst weakening exchange rates have given German and to a lesser extend UK industrial exporters a boost, but these factors can’t account for this level of growth.
I suspect many manufacturing organisations destocked to low in Q4 ’09 and when faced with lead-times increasing overnight to levels unprecedented in the last decade, may have overcorrected to meet perceived improvements in their customer demand.
8 July/August 2010
The Asian (primarily Chinese) electronic components markets have continued their unrelenting growth without the predicted slow down, driven by stronger than forecast demand for mobile phones, PCs (tablet, net-book and desktops thanks to Windows 7) and consumer products such as LCD TVs and DSC. These are markets sectors in which Western economies are involved in the design and specification but not the manufacture and procurement.
Component manufacturers The financial results for Q1/2’10, which for many electronic component manufacturers, were the best for a number of years, have been put down to cost and capacity slashing in 2009 and increased sales in the early part of the year, which had the effect of artificially boosting profitability in the short term. Electronic component manufacturers are struggling to keep up with the rapid increase in demand for their products and are re-commissioning capacity mothballed in 2009 whilst “sweating their existing assets” in as attempt to meet demand. They are increasing their investment but are being much more prudent, favouring increased use of sub-contractors over direct infrastructure investment. Their reluctance to invest in new production capacity can be attributed to a number of important factors: a. they don’t believe the demand is sustainable; b. the cost, availability and access to capital is currently prohibitive and c. global average selling prices are declining or at
Components in Electronics best, are remaining flat.
The range of electronic components sold into the Asian and Western markets is substantially different due to the end products manufactured. Asian OEM demand is for a much smaller range of products and very high availability of leading commodity products (memories, processors, analogue, capacitors etc), whereas in UK and Europe (and US) OEMs primarily engaged in industrial, avionics and automotive applications demand availability of a much wider variety of devices but the volumes needed are lower. It’s no surprise that many electronic component manufacturer choose to simply produce ‘n million’ commodity memory chips - easy to sell despite competitive pressure - than make a mix of several hundred products. For the others, the difficult task of getting the manufacturing product mix right and reducing product lead-times is exacerbated by Western customers who are notoriously poor at both forecasting and communicating their future demand. The situation is eased somewhat by manufacturer approved distributors who - in the UK at least - support the vast majority of customers and are therefore able to aggregate customers demand based on multi-level customer relationships and historical purchases patterns, enhanced by their ability to make speculative purchases of inventory to smooth demand.
Outlook
The consensus outlook for UK and European markets is that they are likely to slow significantly in Q3/4 ’10 pretty much in line with historical trends but it’s a tough call in the current market. We can however be almost certain that lead-times for many components are likely stop declining and will begin to extend as a result of increasing growth in Asia.
In Q3 the Asian markets will begin to ramp-up their consumer products
manufacturing ready for the Western Christmas and Asian New Year markets, which typically reflect the peak of consumer spending in the annual cycle. Sadly, UK and Europe electronic goods manufacturers no longer benefit from this upswing in the spending cycle and it is probable that large swathes of local systems integrators will be negatively impacted by it as component availability declines. In the short term these customers will need to carefully plan their material requirements by accurately gauging their own customers’ demands and communicating openly and effectively with their partners in the electronic components supply network. I’m often asked “so when will electronic components manufacturers start to significantly invest in new capacity?” The answer remains “not in the short term” because no organisation is going to make a large capital investment without at least one of the following key factors in place: long term supply contracts; significantly improved sustainable market pricing; availability of easily available, affordable capital; significant governmental incentives (tax breaks, subsidies etc) and/or a realistic chance of removing a competitor from the market.
That said, I remain sincerely hopeful that as an industry the entire electronics sector will achieve and sustain a small (
AFDEC |
www.afdec.org.uk
ECSN |
www.ecsn-uk.org Adam Fletcher is Chairman of AFDEC/ECSN
www.cieonline.co.uk
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