UK electronic components market growth continues into Q4 2017…

Author : Adam Fletcher, Chairman of the Electronic Components Supply Network (ecsn)

07 December 2017

Despite Brexit uncertainties, the UK electronic components market performed much better in 2017 than was forecasted by manufacturer-authorised distributors, and has generally outperformed expectations. This trend is reflected throughout the global electronic components supply network, and as a result, manufacturers’ lead-times are extending.

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This piece considers how the end of the year might shake out, and provides an insight into the outlook for 2018…

Forecasting is always challenging, but 2017 was made more complex because Brexit introduced many ‘known unknowns’ into the deliberations. In the end, ecsn members’ consolidated forecast predicted that the UK & Ireland electronic components market would see growth in billings (sales revenues) in the range of 1% to 4% in 2017, with a mid-point of 2.5%.

However, domestic manufacturing industries experienced an unexpected surge in export sales in 2017, driven by the significant depreciation of pound sterling following the Brexit referendum, alongside increased demand for electronic components. At the same time, the fall in the value of GBP forced up the ‘input price’ of many products imported into the UK, because most electronic components are base-priced in either US dollars or euros.

As existing inventory is sold, replacement inventory must therefore be imported at higher prices – with the new pricing inevitably being passed on within the supply network. These factors contributed to headline growth for the UK electronic components market of 17% in the first three quarters of this year (see chart). The pink line shows the actual sales revenue by quarter, which is well above the forecast boundaries. It’s likely that growth in the fourth quarter will slow, but is still likely to be well above original forecast levels.

Underlying growth

ecsn members believe that the price increases in GBP, caused by the exchange rate decline, contributed to approximately 10% of the 17% headline growth in the first half of the year – but had a declining impact in Q3 of probably less than 5%. To determine the organic growth in 2017, it’s necessary to subtract the impact of the currency changes from the data.

When this is done, the underlying growth rate for the year-to-date is 9%, which is still three times the rate of ecsn members’ original forecast. It’s apparent that we’re now seeing welcome, real growth in the UK (albeit at slightly slower rates than the European average).

The wider market

Q3 data for Europe was not available when EPDT went to press, but analysis of the 1H data reveals that the average growth trend across the entire European electronic components supply network was 9% when compared to the same period in 2016.

The US electronic components market also improved significantly in the first half of 2017. 5.5% growth in the US was driven by an improvement in the overall US manufacturing sector – a pattern very similar to what the UK has experienced.

Q1 was disappointing for Asia-Pacific, the world’s largest electronic components market, but picked up again in Q2 – resulting in estimated first-half growth figures in the range of 4% to 6%. Estimates for Q3 predict growth of approximately 6%, reflecting only modest demand for the consumer goods produced in Asia-Pac for global markets, and little government market stimulation.

The Japanese electronic components market also experienced growth, albeit in the slightly more modest 3% to 4% range, thanks to increasing activity and orders in the country’s manufacturing sector.

The global electronic components market remains geographically cyclical. Western economies typically experience growth in the first half of the year, while Eastern economies experience growth in the second half. This has a welcome balancing effect on global supply and demand.

As the global economy continues to recover, and global GDP returns nearer to historical growth rates, the electronic components industry has also returned to stronger and more consistent growth, driven by emerging market drivers and the ever-increasing ubiquity of electronic products in daily life. At the time of writing, no hard data for Q4 2017 is as yet available, but industry discussions indicate widespread anticipation that Western economies will have slowed a little during the fourth quarter, and Eastern markets will have grown (but at modest levels).

Anticipated results for the full year will probably show that the global electronics market will have grown in the range of 8% to 10% in 2017 (excluding commodity flash memory). As supply and demand begin to come back into balance, I predict a hockey-stick shaped growth trajectory for the global electronic components market over the next five years, and a welcome period of more consistent growth for European electronic components markets.

Constrained availability

The stronger global growth we’re currently experiencing has had a negative impact on the general availability of all electronic components, and has pushed manufacturer lead-times well beyond recent industry norms. This, alongside poor customer demand forecasting over the past decade, has prompted many manufacturers of electronic components to reduce capital investment, which has diminished resilience within the supply network.

Current availability of the majority of components has doubled, and today 8 to 10 weeks’ lead-time is commonly quoted. Some components, however, are on 12 to 16 weeks’ lead-time, and manufacturers of a very small number of components are already quoting lead-times in excess of 20 weeks.

New global market drivers

The global electronic components market is currently transitioning from consumer products primarily mobile phones, but also PCs and home entertainment systems) towards fully autonomous transport and smart cities. The vast infrastructure build-out (including the deployment of the 5G mobile networks that will be required to support autonomous vehicles, connected cities and their populations) is a huge opportunity for the global electronic components markets.

The move from internal combustion engines towards all-electric vehicles is another big shift that will significantly reshape the electronic components market. I do not, however, expect these developments to become pervasive as quickly as is currently being forecast – due to the complexity of the systems, the cultural animosity to such profound changes, and the inevitable delay while international regulatory and legislative frameworks play catch-up.

That said, the process is already well underway, and in revenue terms, I believe the IoT’s ‘things’ (in other words, hardware) will grow at a rate faster than the deployment of the ‘Internet’.

Prospects for the UK...

I expect that the UK electronic components markets will continue to grow over the next few years, but since the UK doesn’t directly manufacture the high-volume products that drive the market, it will be at a rate lower than the global average – rather than at the top of the growth curve. UK organisations may benefit from others’ deployment of their IP, but the real ‘added value’ lies in integrating components into systems that end-users buy and deploy – and in recognising and exploiting the new opportunities that inevitably emerge.

There’s no doubt that the wider UK economy and electronic components markets continue to be unsettled by the Brexit process. Going forward, I expect any Brexit-related problems that impact the electronic components supply network to be practical rather than financial, and will probably relate to the ‘frictionless movement of goods’ across the EU.

I’m confident that the highly competitive nature of the global and UK electronic components markets will ensure a reasonable level of equilibrium between supply and demand in 2018, but there may well be a few nasty bumps along the way. I encourage all organisations to communicate their needs to their component manufacturers and their authorised distributor partners honestly and effectively, and work with their supply network partners to help maintain market stability.

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