Front End I Electronic Components Supply Network


Heads down, keep moving forward - it’s just more of the same


The EU Referendum is a done deal and regardless of how you chose to cast your vote the aftermath is likely to take some time to work through the supply chain, presenting an additional challenge for managers in the UK electronic components industry. In this article Adam Fletcher, chairman, Electronic Components Supply Network, takes a look at some of the headline implications for our industry in the short to medium term


at the same time has consigned £sterling exchange rates to remain low, at least until the UK economy strengthens. Electronic components are generally traded internationally in a base currency, historically US$, which is then converted back into the appropriate local currency. In the short and probably medium term the UK electronic components supply network will have to embrace the likelihood that £sterling will remain weak against other major trading currencies and prices will adjust in-line with the prevailing exchange rate, both up or down.


Rising prices Adam Fletcher O


nce again the pundits, politicians and commentators got the voting intentions of the great


British public wrong! Their considered opinion was that the likely outcome of the EU Referendum was a marginal lead for the Remain campaign. When in the early hours of Friday June 24th this was proved to be incorrect, it wrong-footed equity and capital markets who had already effectively ‘priced in’ a Remain vote. Their efforts to speedily revise their position contributed much to the uncertainty over breakfast that morning as markets adjusted to find a new level. Equity markets fell sharply but recovered within a few days to something reassuringly close to their pre- referendum levels. Conversely, on the currency market £sterling fell sharply against most currencies, particularly the € and US$, and has not yet recovered.


Good for some


The intervention of central banks with their injection of public money played a critical role in stabilising the markets post-referendum. Don't expect them to admit it but it I suspect some financial organisations made significant profits during this period of turbulence. Signalling by central banks that already historically low UK interest rates could possibly be cut further probably helped boost equity markets as investors migrated to seek improved returns, but


12 July/August 2016


Rises in the prices they are asked to pay for the electronic components they need are never welcome so most customer organisations have agreed an ‘exchange rate window’ with their trading partners, primarily to protect both parties from the vagaries of the currency market and ease the transactional cost. These agreements allow some exchange rate flexibility to occur without demanding a corresponding pricing reaction, however when the rate passes the agreed threshold (as it almost certainly has recently) prices can be revised to a new agreed exchange rate level. The alternative is to purchase and pay for goods in the base currency.


Positive benefits Viewed from a wider economic perspective an effective currency devaluation should give UK based organisations a significant price advantage in export markets, resulting in a sales boost which will help drive recovery and growth. On the down side it also makes UK assets - whether property, goods or the organisations that produce them - great value for prospective overseas purchasers. On June 14th Swiss-based Datwyler Holdings AG announced that it had agreed terms to acquire UK-based Premier Farnell, a leading publically quoted manufacturer-authorised distributor, for an enterprise value of £792M in cash. The recent decline in the exchange rate against the Swiss Franc and the € of circa 10 per cent,


Components in Electronics


let’s call it £80m for this transaction, is likely to provide a welcome if unplanned bonus for the acquirer, although a deal of this scale and nature has to gain competition and markets regulatory approval before it can be completed, which is likely to take several weeks.


Economic uncertainty There was already a concerning uncertainty of direction in the UK economy before the EU referendum, which following the result has significantly increased. It is however very hard to determine what if any, impact this economic uncertainty is having on the UK electronic components market. The consolidated opinion of ecsn's manufacturer authorised distributor members announced in December last year was that 2016 would be essentially a ‘flat’ year (i.e. no sales revenue


in the UK, the EU and in the wider international economy following the EU referendum will prevail in the medium term but it’s impact on the electronic components supply network is, subject to some catastrophic event, likely to be muted. The UK's fundamental underlying economic position has not diminished and I'm confident that after a short period of adjustment it will return to more stable and normal conditions, but will be subject to prevailing macro-economic conditions just like all other economies. ecsn along with the other industry associations within the UK Electronic Systems Community (ESCO) will continue to actively engage with government departments on critical areas such as legislation and regulation to ensure the needs of our industry are in no way compromised.


growth) and although not yet fully compiled and released the outcome to May 2016 will I predict, turn out to be at the lower end of this forecast. That said, ecsn members are reporting very positive feedback from their customer organisations on the new design opportunities they are working on and their prospects for the full year outcome. I remain concerned however that this seemingly upbeat customer sentiment has yet to feed through to the hard statistical data the association collates and disseminates each month, although it's interesting to note that average payment terms in our market, which for the past five years were well beyond the industry norm of 55-60 days, have in the first six months of this year returned almost to this level, suggesting a welcome improvement in the financial health of our customers.


Reassurance


What is guaranteed (well almost) is that the higher level of economic uncertainty


Unfortunately the UK and


international electronic components supply network have almost no influence on what will happen to equity, capital or currency markets in the short or medium term but our members remain well positioned to manage the period of turbulence that will inevitably follow the UK's implementation of Article 50 of the Lisbon Treaty. Organisations in our market have long experience and good systems in place to manage large fluctuations in exchange rates and highly uncertain customer demand, and today have good inventory availability to support customer’s needs. I recommend that we keep our heads down, keep working smartly, focus on our organisations and customer support and react to opportunities or threats in our market appropriately. In other words, its just more of the same, so keep moving forward positively as per normal.


www.ecsn-uk.org www.cieonline.co.uk


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