Front End I Electronic Components Supply Network


Forecasting in electronic components market


We're heading towards that time of year when many organisations start the annual analyses of the macro and micro economic factors that influence their future success. As part of the process management will review their supply network to ensure that resources are profitably allocated to maximise a successful outcome. Over much of the last decade many organisations' vision has been impaired, primarily because their customers have been unable to accurately forecast their demand due to an almost total lack of intelligence about what's likely to be happening in their customers' market. In a bid to provide a modicum of sight to the sightless, Adam Fletcher, chairman, ecsn, reviews some of the latest market 'intelligence' and how it might impact the electronic components market


T


he availability of electronic components internationally continues to remain excellent! Manufacturing lead-times for most products are at the lower end of industry norms and Manufacturer Authorised Distributors hold significant inventory, well profiled to meet the anticipated needs of their customers. That said, sales revenue growth in the global electronic components markets has stalled and final audited figures for the current year are unlikely to show an increase above very low single digit growth. The slight increase in the quantity of products shipped reflects the small decline in average selling prices (ASP).


Consolidation


Consolidation in the semiconductor market continues as manufacturers strive to increase returns for their shareholders. Alongside the smaller deals done to acquire particular technologies - Intel's acquisition of Movidus, for instance - there have been a number of much more ambitious purchases, such as Analog Devices' acquisition of Linear Technology and


Renesas acquiring Intersil. These may however be dwarfed if the current speculation that Qualcomm (who acquired CSR last year) is looking to acquire NXP (who only recently acquired Fairchild) proves factual. If this happens it would probably be the most expensive acquisition in our industry to date. There continues to be some consolidation in the Manufacturer Authorised Distributor channel particularly amongst smaller local distributors. Internationally Avnet Inc., acquired UK- based Premier Farnell, whilst selling its IT Solutions business to Tech Data Inc. Meanwhile, Arrow acquired the technical and electronics media portfolio of UBM, publishers of Electronic Times and other industry journals, which marked a surprise diversification into the world of international publishing. We must expect that these acquisitions and the likely product rationalisation they engender, together with subsequent disposal of non-core businesses, will inevitably cause some disruption in the electronic components supply network as


manufacturers re-align their sales channels, both direct and via their authorised distributors. But UK industry is used to working through ongoing challenges such as these and is well practiced in the steps necessary to minimise the potential disruption to their customers.


GDP and industry drivers Economists have suggested that growth in a more mature global electronic components market is now merely tracking global GDP growth. Although evidence is available that broadly supports this over the current three to five year period, this can be very dependent on key factors driving high growth, most notably the semiconductor developments critical to the very high growth products destined to become the new industry drivers. Initially it was mainframe computers, then PCs, then telecoms infrastructure and then over the last five years, highly integrated consumer products, principally smart mobile phones. But the demand for smart mobile phones has stalled. The replacement cycle continues to extend as customers see little point in upgrading to a device with few compelling new features. This marked slowdown in the demand for smart phones as well as other consumer products such as tablets and laptops all predominantly manufactured in Asia, is blamed for the slowdown in growth in the global electronic components market but is also having a significant negative impact on the GDP figures of these Asian economies, particularly China, which today is itself the largest market for electronic components. It’s important to note that these very


high growth rate industry drivers often mask a much more stable if slower- growing base of electronic components essential for military, avionics, automotive, industrial, medical and consumer products. These sectors, are much more closely linked to the manufacturing capacity of the local country and therefore to European, North American and Japanese GDP.


Many pundits have nailed their colours to the Internet of Things (IoT) to replace the smart phone as the key industry driver. But IoT is a generic term for a plethora of inter-related technologies, the growth of which can only increase rapidly once sensible, secure, global industry standards are established. This has yet to happen and looks unlikely to do so for a few years yet as individual organisations continue in their attempts establish a dominant technology around their favoured standard.


Micro-economic factors Manufacturing output in the electronics and optical products sectors of the UK has not yet returned to pre-2008 levels, mainly due to a lack of investment by industrial organisations and continued off-shore manufacturing. I suggest this is unlikely to increase significantly until 2018, representing a decade of lost growth for our industry and the UK economy.


12 October 2016 Components in Electronics


Adam Fletcher


The implications of a Brexit outcome have so far been generally positive for manufacturers in the UK, mainly as a result of the sharp decline in exchange rate between £sterling and the €euro and US$, which has made British exports very competitive. The increase in business sentiment as measured by the August 2016 Markit/CIPS UK Manufacturing PMI, which experienced a five-point gain in one month to 53.3, is one of the fastest improvements in 25 years of recording the metric. And whilst government spending has a limited impact on the electronic components supply network in the UK, the announcement of investment in nuclear power generation at Hinkley Point and the Successor Class Submarine (Trident replacement) does at least set the stage for increased opportunity. The forecast for UK GDP growth in the


current year is 1.5 per cent whilst ecsn members forecast 'flat' sales revenues for electronic components markets i.e. no growth or decline, in the same period, which also suggests that comparisons with domestic GDP may not an effective measure in the UK. I suspect the actual outcome will be within one per cent, which is probably as close as could reasonably be forecast bearing in mind that manufacturing in the UK accounts for only some 12 per cent of GDP. The latest consensus of leading forecasters suggests that UK GDP will grow by 0.75 per cent in 2017, which by definition suggests that the UK electronic components markets will likely to remain flat at best, unless new industry drivers emerge.


I believe that most opportunities for the UK and Ireland electronic components supply network lie in applications such as domestic and commercial building control systems and in the automotive sector, encompassing both the vehicles themselves and the infrastructure required to support increasingly complex automation. It is the design of, investment in and physical deployment of these systems that will be the electronic components industry drivers of the future. The UK already has a substantial lead over competitor economies in these technologies and is well placed for future success, but this is still several years away and will not help us in 2017. As ecsn members enter their 2017


forecasting mode about the only piece of good news I can offer them is that most other organisations in the UK electronic industry are facing exactly the same problems forecasting their business as their customers are. I look forward to sharing their consensus thoughts with CIE readers in early December with the aim of providing helpful guidance for the wider industry in the coming year. In the meantime, please consider how your organisation can share business intelligence effectively with its supply network.


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


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