What’s happening in electronic components markets?...
07 June 2018
Each year, members of the professional community, the Electronic Components Supply Network (ecsn), collaborate to produce an annual forecast for the UK electronic components market. They predicted that 2018 was likely to be another 'interesting' year, and with extended manufacturer lead-times, strong growth of new applications, more mergers and acquisitions, a potential trade war and the dreaded ‘B’ word – it seems they weren’t wrong...
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This piece reviews events in the electronic components markets so far this year and offers thoughts on the likely outcomes.
The UK electronic components market is currently experiencing sustained year-over-year quarterly growth. In fact, the last eight quarters have seen the longest period of sustained growth since 2000 (see the graphic [links to digital issue]: 'ecsn/afdec – UK DTAM growth 2013 to 2018').
ecsn members forecast that the UK & Ireland market for electronic components would grow in the range of 10% to 12% in Q1 this year, compared to the same period in the previous year (the green and orange bars in the chart below indicate the forecast range).
In fact, although the market did make a strong start to the year, 10% growth was at the lower end of ecsn’s guidance, highlighting slowing growth in the UK manufacturing sector, and reflecting the latest data from the Office for National Statistics and the IHS Markit/CIPS (Chartered Institute of Procurement & Supply) UK Manufacturing PMI (purchasing managers’ index).
It’s too early in the cycle to have the definitive data, but anecdotal evidence suggests that the wider global components markets are continuing to grow strongly. Combined with limited production capacity, this global growth is extending availability of most electronic components out to new-normal lead-times of 8 to 10 weeks.
The electronic components market today handles over 1,000,000 SKUs (stock keeping units), of which there are approximately 100 ‘A’ class inventory items (‘high runners’), in terms of value multiplied by volume shipped, as well as 500 ‘B’ and ‘C’ class commodity inventory items, where manufacturers of these parts are today quoting greatly extended lead-times of 26+ weeks.
Industry buyers sometimes perceive any electronic component with a quoted manufacturer lead-time of 26+ weeks as effectively being on ‘allocation’, which can prompt double ordering (placing orders on more than one supplier and subsequently cancelling the orders on other suppliers once a delivery has been made). However, this practice has been proven to exacerbate the supply and demand problem, and is therefore best avoided.
Ongoing acquisition activity…
The flurry of consolidation activity in the electronic component industry shows no sign of ending any time soon. On 1st March this year, Microchip Technology Inc agreed to acquire Microsemi Inc for $8.5 billion, the latest move in its declared strategy of growth by acquisition. Wolfspeed, a division of Cree Inc, has extended its leadership in GaN-on-SiC technologies used primarily in power amplifiers for mobile communications by spending €345M to acquire the RF Power business of Infineon Technologies.
In the passives market, AVX moved into the antenna systems market with the acquisition of Ethertronics for $142M; and TDK followed its $1.3B acquisition of InvenSense in 2017 by spending an undisclosed sum to purchase MEMS ultrasonic sensor start–up, Chirp Microsystems. And in the EMS market, TT Electronics plc has agreed to acquire Stadium plc for £45.8M.
The ongoing Qualcomm/NXP merger proposal is currently held up by the Chinese regulator, but it does appear to offer sensible synergies for both organisations. The deal is seemingly still progressing, as Qualcomm is reported to have increased its offer price to $44B. The same cannot be said of Broadcom’s proposed $117B mega-acquisition of the newly combined organisation: President Trump has blocked the deal, citing concerns over national security. Although the President’s decision sent shockwaves through financial markets, it will probably prove to be a sensible course of action for all parties.
5G networks build-out and mobile super cycle
A major driver of electronic components industry growth in 2019 and beyond will undoubtedly be related to the deployment and availability of 5G networks. The global electronic components industry will benefit from huge opportunities in the design, manufacture and deployment of the base stations and infrastructure needed for global 5G operation, and a plethora of next-generation applications are already being spawned – including autonomous vehicles, smart factories, sensors in smart cities, and systems for the backhauling of aggregated data.
Access to the promised “significantly improved performance” is expected to drive strong consumer demand for 5G-compliant mobile phones. Research by market intelligence firm, Netscribes forecasts that there will be 24 million 5G SIM phone connections in the UK by 2022, as well as another two million 5G SIM machine connections, together generating a revenue of £2.8bn. That said, well-informed sources also predict that limited battery capacity will compel early generations of 5G phones to spend much of their time operating on 4G networks, only moving to 5G for short bursts of activity.
US/China – escalating trade dispute…
The US Trade Representative has determined that the acts, policies and practices of the Government of China related to the transfer of intellectual property and innovation are unreasonable or discriminatory and burden or restrict US commerce. The US proposes to redress this imbalance by imposing tariffs (import duty) of 25% on a wide range of items imported into the country from China. Chinese exports of steel and aluminium into the US have recently grabbed the headlines, but the order also encompasses many Chinese-manufactured electronic components including lithium batteries, relays, capacitors, resistors, connectors, LEDs, and so on.
If that wasn’t enough, the US imposed a 7-year ban on the sale of US technology to ZTE (China’s second largest telecom equipment maker) on April 16th for infringing an embargo of technology sales to Iran and North Korea. This action will probably mark the end of ZTE, but will also have a major impact on the sales revenues of many leading US technology companies. Hopefully, a negotiated settlement will soon be agreed, because the fallout of a trade war will threaten many organisations in the global electronic components supply network.
My best analysis of the current international electronic components markets is that an extended period of modest growth has been firmly established. It is, however, unlikely that this growth will be linear, and we must expect the odd bump along the way.
In the short-term, price rises in the passive components markets seem inevitable – while limited manufacturing capacity and the impact of M&A activities in the market will probably keep availability of most electronic components around 8 to 10 weeks for the foreseeable future (although the availability of a very small number of components could go out to 26+ weeks).
On the plus side, the price of commodity memory looks set to decline as additional manufacturing capacity comes online. The proposed imposition of tariffs on US imports and uncertainties over Brexit here in the UK are adding further levels of uncertainty into the market – but I remain confident that our industry will quickly adapt to whatever outcomes are eventually agreed.
In the meantime, I encourage all organisations to actively engage with their partners throughout the electronic components supply network. Only by ensuring good communication – both up and down the network – and by reacting diligently to the signals sent and received, will ‘supply equilibrium’ be maintained across our industry.
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