Front End I Electronic Components Supply Network
European components markets enter a technical recession
always weak, primarily because organisations are minimising their in-house inventory as they approach the end of their financial year, and working days are reduced as a result of traditional Christmas manufacturing shutdowns in Europe, so a reversal of the current trend doesn’t look likely in the closing months of this year.
Slowing global electronic components market
Adam Fletcher T
he consolidated returns from European member companies in the International Distributor of Electronics Association (IDEA) reveal that that growth in European electronic component markets slowed to a small decline of just (0.9%) in the first three quarters of 2019 when compared to the same nine months last year. But it’s an escalating trend: Average ‘Billings’ (sales revenue invoiced, less credits) declined by (0.3%) in Q2’19 compared to the same period last year and by (7.5%) in Q3 - again compared to the same calendar period last year. Two consecutive quarters of decline is referred to by Economists a “technical recession”. In this article, Adam Fletcher, Chairman of IDEA and the Electronic Components Supply Network (ecsn) reviews the industry’s performance YTD and shares his view for the future.
Back in Q4’18 most analysts were predicting that European electronic components markets would grow in the range 4%-to-6% in 2019, a slightly more modest forecast than in previous years as it was already apparent that the German market (the largest in Europe) was beginning to slow. The current outcome for the first three quarters of 2019 was a decline of less than (1%) which is by any measure a small value, but it was not expected and is significantly below the IDEA members forecast. Historically the final quarter of the year is
10 December/January 2020
Customers for mobile phones – the primary electronic components market driver – are holding off purchasing new models until faster 5G products and services become available. The Automotive sector has also been slowing since mid ’18 and is not forecast to recover substantially until the second half of 2020, at which point it’s likely to start to overtake mobile telephony as the principle electronic components market driver due to the rapidly increasing electronics content of cars. Deployment has been slow in the IOT sector due to customer concerns about the lack of an international security standards, but these issues are now being resolved. The Aerospace, Computing, Industrial, Medical sectors are in good health but are “flatlining” in the current economy, however the Military and Server Computing sectors continue to show growth.
imposed on electronic components and advanced technology but quickly escalated to almost all goods traded between the two nations. The dispute has severely disrupted growth and caused a great deal of economic uncertainty, particularly in Asia. China still accounts for over 40% of global demand for electronic components but its market slowed over 2019, freeing up manufacturing capacity and easing global electronic components manufacturer lead-times. Although both the USA and China have made concessions, it looks unlikely that this dispute will be resolved anytime soon but when the two countries do eventually reach an agreement production will ramp up and a spike in demand for electronic components will probably be triggered. From mid-2017 the average manufacturer lead-time for electronic components increased from 2-to-4 weeks to a peak in mid-2018 of 16-to-18 weeks, with a very small number of critical components on 26+ weeks. The manufacturing lead-time is an important value in the ERP systems of all customers, which as it extends, automatically increases in-house inventory and order cover on suppliers to ensure continuity of supply. The average manufacturer lead- time for electronic components sharply
Bookings, billings and the book to bill ratio - IDEA Graphic T1 – Q3’19 A quick look at the IDEA Graphic T1 shows the Bookings, Billings and Book-to- Bill (B2B) ratio visually for the past three years. In a normal market it is generally accepted that a B2B ratio of 1.04 is the minimum required for slow stable growth. The B2B ratio fell to unity = 1.0 in Q4’18 and then declined to 0.93 in Q1’19, 0.86 in Q2’19 and 0.87 in Q3’19. Any B2B decline below unity is effectively a decline in customer order backlog, so over 2019 it has shrunk significantly.
IDEA forecast - 2020 and beyond IDEA members expected a correction in the electronic components market but lack of visibility in their customers’ markets is making them very reluctant to predict it’s timing, speed and scale That said they remain confident that the sheer weight of new high growth applications will continue to push the European and Global electronic components markets “up and to the right”. My personal view is that 2020 will be a relatively ‘flat’ year for electronic components markets but the second half will see a return to much stronger growth. In an industry where manufactring production capacity increases at a snail’s pace due to these fluctuations and uncertainty of financial returns, we must expect yet another period of rapidly extending manufacturer lead-time, which in turn will drive even stronger growth and product shortages…
In the meantime, please consider how your organisation can share its business intelligence effectively both up and down its supply network to help all organisations with their forecasting process and accuracy to try and minimise these swings which are not in the interests of any party in the electronic components supply network. Adam Fletcher is Chairman of the
Electronic Components Supply Network (ecsn), a business association established in 1970 that today offers support to all organisations with an interest in electronic components throughout their entire lifecycle. He is also Chairman of the International Distribution of Electronics Association (IDEA), an association of individual country electronic components associations whose objective is to share best industry practice.
ecsn-uk.org
Trade war slows growth The ongoing trade dispute between the US and China has had a negative impact on both global trade and GDP growth. The dispute centres around the abuse of US based organisations intellectual property rights by Chinese organisations (and thereby the state). Swinging import tariffs of between 15% and 25% were initially
Components in Electronics
declined in Q2’19 and by October ’19 had reduced close to 6-to-8 weeks. As a result, customers’ ERP systems continue to reduce their inventory and order cover in line with the revised lead-times and their projected demand. The impact of this lead-time reduction is to effectively remove 6-to-10 weeks Billings from electronic components markets, hence the current slowdown.
www.cieonline.co.uk
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