Front End I Electronic Components Supply Network
Electronic components markets update 1H 2019
increased their inventory of raw materials in Q4 ’18 in preparation for a March ’19 Brexit, which as we know, didn’t happen. At the same time as customers have been consuming this Brexit buffer inventory their forward order book has been weaker than anticipated, so there’s been no need for inventory replenishment. With the announcement of a Halloween Brexit it is likely that UK customers will have increased their in-house inventory once again during Q3’19 but they’re likely to have suppressed the level of the new buffer holding in-line with the continuing weakness in their forecast customer demand. ecsn members had looked
Adam Fletcher B
y any measure 2019 has been – and looks likely to continue to be - an ‘interesting’ year for the UK
economy. This uncertainty is manifested in the UK and Ireland electronic components markets where following an unprecedented eleven consecutive quarters of growth, members of the Electronic Components Supply Network (ecsn) failed to achieve their Q1 and Q2’19 sales revenue forecast. In this article, the association’s Chairman Adam Fletcher reviews what happened in the first half of this year and shares his thoughts on the likely outcome for the full year and beyond.
In December last year ecsn members
forecasted that the UK Distributor Total Available Market (DTAM) would continue to grow in 2019. They predicted a modest first half ending with growth of 6 per cent and were confident that an improving second half would conclude showing growth in the range 3.4 per cent to 8.5 per cent for the year. In the event Q’1 ended showing a (1.3 per cent) decline and Q’2 ended showing a (1.7 per cent) decline when compared to the same two quarters last year. The consolidated outcome for 1H ’19 revealed a decline of (1.5 per cent) compared to H1’18. This was really quite a small decline, but the result did fall well below ecsn members’ forecast of 6 per cent growth. See graphic DTAM Growth 2013 to 2019. The blue bars show actual performance, whilst the green and orange bars indicate ecsn’s forecast range.
A perfect storm?
A number of factors have contributed to the decline in the UK electronic components markets, the most significant of which is probably the uncertainty caused by Brexit. Many customers
10 October 2019
forward to seeing a return to stronger growth in the second half but their calculations have been significantly skewed by the destabilisation of the global economy caused by the escalating trade war between the US and China. Further, the problems associated with Brexit continue to weaken £Sterling exchange rates against the US $ and EU €, which is likely to result in increased input material pricing. As neither electronic components suppliers nor their customers are able to influence the variance both parties will have to share the pain.
More Trade Wars
Much has been written about the current trade war between the US and China but as I discussed in last month’s Components in Electronics, the trade dispute between Japan and South Korea is potentially more concerning for electronic components markets. Almost all products traded between the US and China are currently subject to swinging customs tariffs. In addition, an executive order handed down by President Trump has all but banned US organisations from selling products or services to, or using products or services from, organisations included on the lengthy ‘table of denials’ list. The result for US electronic components manufacturers is that they cannot sell their products into several large Chinese based customers and they now have to process and pay tariffs on goods they import from China. Further, certain overseas organisations have been banned from acquiring any US based organisation, technology or service. Implementation of this particular part of Trump’s executive order is currently ‘on- hold’ whist negotiations are ongoing but could be reinstated with very little notice. For many component manufacturers Authorised Distributors act as the ‘importer of record in the US and so must also comply with the new tariffs. These distributors are seeking to reduce their cost burden by establishing Foreign Trade Zones to handle goods destined for subsequent re-export. Responding (overreacting?) to events in
Components in Electronics
South Korea, the Japanese government chose the 4th July ‘19 to announce a tightening of the rules it applies to the export of three chemicals essential for the manufacture of semiconductors and display technologies - Fluorinated Polyimide, EUV Photoresists and Hydrogen Fluoride Gas - citing reasons of “national security. Without these specialty chemicals
convergence of a multitude of new applications for technology, particularly in 5G handsets and infrastructure build out, the transition towards electric and autonomous vehicles and the vast array of IOT deployments, but this could be dependent both on an improvement in global GDP growth and a speedy resolution of current trade wars. At home,
companies such as Samsung, SK Hynix, LG etc., will have to cease production in South Korea, causing huge economic damage to them and the local economy whilst threatening massive supply problems for the entire electronic components supply network and electronic systems industry.
Looking forward The global electronic components industry is currently slowing as customers for mobile phones, the primary market driver, hold off purchasing new models until faster 5G products and services become available. The ongoing trade wars and geopolitical tensions may delay the planned global roll out of 5G products and services and further reduce global GDP growth, although the recent offer by Huawei to licence its 5G technology in order to placate US security concerns could be a game changer. At home, continuing delays and uncertainty about Brexit is likely to slow growth in the UK electronic components market in the 2H’19 and the 6 per cent growth predicted by ecsn members at the end of last year looks very unlikely to be achieved. In my opinion the outcome for the full-year 2019 is now likely to be in the range (1 per cent)-to-1 per cent, which in the prevailing economic environment should be viewed as an acceptable result. The longer-term forecast for the UK,
European and Global electronic components markets remains “up and to the right”. Industry sentiment is that there will be a return to stronger growth into 2020 and beyond, driven by the
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the outlook for the UK economy and all those operating within it must be viewed as dependent on a successful conclusion of the Brexit palaver.
I encourage all organisations to communicate effectively both up and down their electronic components supply network. Reacting diligently and efficiently to signals sent and received will help all achieve their goals, particularly in the period of uncertainty that all individuals and organisations currently face. 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 chair of the International Distribution of Electronics Association (IDEA), an association of individual country electronic components associations whose objective is to share best industry practice. Further information about The Electronic Components Supply Network and afdec may be found at the following website:
www.ecsn-uk.org with regular industry updates available to all on the Breaking News pages.
ecsn-uk.org
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