State of the nation for electronic components…

Author : Adam Fletcher | Chairman | ecsn

01 June 2019

Figure 1. ecsn/afdec quarterly UK DTAM growth 2013 to 2019

At the end of each year, members of the Electronic Components Supply Network (ecsn) collaborate to produce its annual forecast for the coming 12 months.

This viewpoint was originally featured as the intro to EPDT's 1H 2019 Electronics Distribution supplement, included in the June 2019 issue of EPDT magazine [read the digital issue]. Sign up to receive your own copy of EPDT each month.

The spectre of a trade war between the US and China, as well as Brexit machinations, complicated the process somewhat last year but, in the forecast delivered in December, ecsn members predicted that growth in the electronic components supply network would slow in the first half of 2019, before experiencing something of a resurgence in the second. They expected that components availability would improve in 1H 2019, before extended manufacturer lead-times return once more, driven by strong growth in the mobile phone handset, mobile phone infrastructure, computer and automotive sectors. Here, ecsn Chairman, Adam Fletcher reviews what’s happened in the first quarter of 2019 (in the light of 2018 audited results) and shares his thoughts on the likely outcome for 2019 and beyond…

The UK electronic components market is currently experiencing sustained quarterly year-over-year growth. In fact, the last 12 quarters have seen the longest period of sustained growth since 2000 (see Figure 1. ecsn/afdec quarterly UK DTAM growth 2013 to 2019). The blue bars in the graph represent actual performance, while the green and orange bars indicate the forecast range.

ecsn members forecast that in 2018, the UK & Ireland Distributor Total Available Market (DTAM) for electronic components would grow in the range 6.5% to 10% compared to the previous year, conforming with the normal historical pattern of strong growth in the first half, followed by lower growth in the second half of the year. In the event, the outcome for 2018 was growth of 9.7%, a strong performance that came very close to matching the upper end of the association’s prediction, but was driven by stronger than anticipated growth in the second half of the year.

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For 2019, ecsn members predicted that the UK DTAM would continue to grow, but at a slower rate, forecasting growth in the range of 3.4% to 8.5% for the year, reflecting uncertainty about wider economic conditions and its potential impact on the market. Growth has slowed, as was predicted, but recent returns from ecsn members indicate that 2019 should still see the UK electronic components market achieve an unprecedented 15 consecutive quarters of sustained growth.

UK & international economic variables…
Our members correctly forecast that in Q1 2019 their – and their customers’ – inventory levels in the UK would rise by approximately 4 to 6 weeks average demand, as a buffer against any delivery issues that may occur during the Brexit process that was scheduled to begin at the end of March. They expected that this buffer inventory would be consumed in Q2 2019, resulting in temporary slowing before the market stabilised and returned to a pattern of stronger growth in the second half of the year. Of course, recent ‘adjustments’ to the Brexit timetable now mean that this inventory buffer will have to remain in place for longer before it is eventually consumed, increasing costs for all parties.

The ongoing trade dispute between the US and China has had a negative impact on global growth. And because the dispute is centred around imports of electronic components, systems and related intellectual property, it has disrupted growth and is causing a great deal of economic uncertainty, particularly in Asia. The US has sought to extend its ban on the use of telecom and datacom infrastructure products manufactured by Huawei, which it believes may facilitate espionage by the Chinese government – but to date, it has had limited success in persuading other members of the Five Eyes intelligence community to follow suit. There are indications that the Chinese government is bringing forward legislation to enhance the legal protection of third- party IP rights, which once enacted should go some way to resolving this dispute.

What’s driving electronic components growth?
Global electronic components markets grew strongly in 2018, driven by a multitude of new applications for electronic technologies, particularly in automotive, computing, 5G infrastructure and factory automation (IIoT), compounded by several years of sequential improvements in global economic conditions and rising GDP. Sadly, increasing demand for electronic components has coincided with a lack of worldwide availability, primarily due to manufacturers’ reluctance to invest in new manufacturing capacity, because of continuing volatility in the global economic environment. Manufacturers of electronic components – particularly those producing commodity and merchant market products – viewed investment in new manufacturing capacity to be a riskier proposition than investing in alternative commercial strategies, such as mergers, acquisitions, stock buy-backs and the like. New manufacturing capacity is being added and this situation is easing, but as customers’ ERP systems acknowledge the change in lead-times, they will naturally begin to increase their order cover to reflect the new reality – which of course, will knock-on to skew the critical supply and demand balance.

Adam Fletcher, ecsn Chairman

Softer short-term demand and the outlook for the longer term
The global electronic components industry is slowing, as customers for mobile phones (the primary market driver) hold off purchasing new models, until faster 5G products and services become available. Automotive sales have been slowing since mid-2018, and in Europe, are not forecast to recover substantially until the second half of 2019. Consumers are concerned about the issues surrounding diesel engines, and more widely, are continuing to ponder on the economics of moving towards hybrid or electric-powered vehicles. In the IoT market, customer concerns about the lack of an international security standard are holding up mass deployment.

It’s something of a paradox that, despite all the uncertainty that it’s created, Brexit has probably been an important contributor to strong growth in the UK electronic components DTAM. The depreciation of pounds sterling (£) against US dollars ($) and the euro (€) has delivered a shot in the arm for UK manufacturers, by enabling them to offer more competitive export pricing. As most electronic components are priced primarily in US$ or €, our domestic manufacturers also saw a corresponding increase in their input costs, but their grumbles have been soothed somewhat by the boosted opportunity for export sales.

The wider forecast for the UK, European and global electronic components markets remains ‘up and to the right’. Industry sentiment is for a return to stronger growth in 2H 2019 – and for continued growth into 2020 and beyond. Customers can continue to have faith in the electronic components supply network, as manufacturer authorised distributors are experienced at successfully and professionally managing the sort of supply and demand changes we’re currently experiencing. I remain confident that our industry will quickly adapt to whatever Brexit or trade disputes throw in our direction. 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.

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. More info about ecsn at: www.ecsn-uk.org


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