Front End I Electronic Components Supply Network
Electronic component market growth continues
The UK electronic components markets are continuing to grow, and grow at a faster rate than those in other key European and global economies. Whilst the impact of the devaluation of £Sterling following Brexit had on component prices and revenue growth must be acknowledged, our sector has experienced 'real' growth thus far in 2017 and has exceeded that forecasted by members of the Electronic Components Supply Network (ecsn). The association's chairman Adam Fletcher believes that the currency effect is almost exhausted and he expects to see ‘real’ rather than ‘inflated’ market growth in the second half of the year
Adam Fletcher E
stablishing an industry consensus amongst ecsn members for the year in prospect is always challenging, but
forecasting performance for the current year was made more complex because Brexit introduced many ‘known unknowns’ into their deliberations. In the event ecsn members forecast that the UK / Ireland electronic components market would see an improvement in Billings (sales revenues) in 2017 in the range one per cent-to-four per cent, with a mid-point of 2.5 per cent. Our forecast was too conservative: consolidated returns from ecsn members showed actual growth in the UK electronic components markets of 16 per cent in 1H '17 when compared to the same period the previous year (see graphic: IDEA Quarterly Trend Statistics Q2 ’17). However, the impact of the currency decline following Brexit and the consequential component price increases must be
10 October 2017
subtracted from the calculation in order to arrive at the real 1H '17 Billings growth. That said, Brexit did drive a surge in export sales from domestic manufacturing industries, while at the same time the ‘input price’ of many products imported into the UK increased. Almost all electronic components are base priced in US$ converted to € and then to the local currency. As existing inventory is sold the replacement inventory must be imported at a higher price with the new pricing being passed on within the supply network. ecsn members believe that the exchange rate variation contributed to approximately 10 per cent of the 17 per cent growth we experienced in 2H ‘16 and into 1H ‘17, but the underlying seven per cent growth is still twice the rate of ecsn members' original forecast. To be fair the impact of exchange rate fluctuations on markets is notoriously difficult to predict but statistical calculations strongly indicate that the exchange rate effect on growth had already started to decline as we entered 2H ‘17. Unaudited data for the first two months of this quarter suggests that growth in the UK and Ireland electronic components markets is continuing at a similar run-rate to the first half of the year, which is unusual.
Global markets
In contrast to the UK, Asia-Pac, the world's largest electronic components market, saw disappointing growth in Q1 ’17 reflecting the continued slow-down in demand for the consumer goods they produce for global markets, particularly mobile phones and all variants of PCs. An improving trend in Q2 ‘17 has resulted in estimated first half growth for Asia-Pac in the range four per cent-to-six per cent. The Japanese electronic components market also experienced growth in 1H '17, albeit at the slightly more modest three per cent-to-four per cent range, thanks to increasing activity and orders in their manufacturing sector. The US electronic
Components in Electronics
components market also improved significantly in the first half with growth of 5.5 per cent driven by an upswing in overall US manufacturing led by the automotive sector, a situation very similar to here in the UK. These figures suggest that the global electronic
components market (not including commodity flash memory) will potentially grow in the range six per cent-to- eight per cent in 2017.
Forecasting Uncertain customer demand coupled with poor customer forecasting over the last decade has led to many manufacturers of electronic components quite correctly reining back their capital investment, reducing manufacturing capacity and thereby removing of a lot of the supply network resilience. Throughout the world Manufacturer Authorised Distributors support >98 per cent of all customers and as a result are often amongst the largest customers the components manufacturers serve. They strive to provide the manufacturers represented with reliable demand forecasts, which are based on regression analysis of actual monthly product sales over the previous 12 months, which with some human intelligence applied are surprisingly accurate. Bearing in mind that one of the primary roles of authorised distributors is to buffer inventory both for the manufacturer and their customers, accuracy cannot be measured in ‘lean manufacturing’ terms but in weeks or months of inventory. Fortunately, aggregated demand patterns arrived at from many customers along with the authorised distributors' inventory stocking policy (typically three months average demand) means that shortages and stock- outs are rare.
Into the second half of 2017 Even the modest global growth our industry is currently experiencing has had a negative impact on the general availability of all electronic components. Quoted manufacturer lead-times have migrated well beyond recent industry norms with availability of most components on eight- to-10 weeks lead times. Some components however are on 12-to-16 week lead times and manufacturers of a very small number of components are already quoting lead- times beyond 20 weeks. Fortunately demand in the global electronic components market remains
geographically cyclically. Western economies typically experience growth in the first half or the year and slow in the second half while the Eastern economies slow in the first half but experience strong growth in the second half of the year, which has something of a balancing effect on global supply and demand... In my opinion much now really depends on the level of demand in the Asia-Pac electronic components market for the remainder of this year. A slowdown will reduce lead times a little but if it remains at the current forecasted level, lead-times will inevitably firm up further. If growth exceeds forecast I expect component manufacturers to struggle meeting market demand. It's time that manufacturers of semiconductors and passive components brought mothballed capacity back into service, contract out some manufacturing services or in some circumstances added new capacity in order to meet demand challenges head-on. The global electronic components markets are highly competitive and as a result I suspect that a reasonable level of equilibrium between supply and demand will be achieved in 2018 but there may well be the odd hiccup along the way. To avoid exacerbating this supply problem further and speed the return to market stability I encourage all organisations to communicate effectively with their partners both up and down their supply networks.
www.ecsn-uk.org
www.cieonline.co.uk
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