ecsn electronic components 2019 market update...

Author : Adam Fletcher | Chairman | Electronic Components Supply Network (ecsn)

02 December 2019

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ecsn logo

After a 5-year period of sustained sales revenue growth, global electronic component markets unexpectedly stalled in 2019, and now look likely to end the year with single digit growth at best. Here, chairman of the Electronic Components Supply Network (ecsn), Adam Fletcher reviews industry performance in the first three quarters of 2019 – and shares his thoughts on the likely outcome for the full year & beyond...

This viewpoint was originally featured as the intro to EPDT's 2H 2019 Electronics Distribution supplement, included in the December 2019 issue of EPDT magazine [read the digital issue]. Sign up to receive your own copy of EPDT each month.

In a mature electronic component market, it would be no surprise for revenue growth to closely track global GDP, but in fact, over the past decade, our market has generally out-performed GDP in the range of 2-3%, primarily due to the increasing pervasiveness of electronic products in everyday life. When the demand for electronic components increases, the global electronics markets also grows, but in 2018, upper growth expectations were exceeded due to an increase in the selling price of commodity memory products.

In the UK...

Over the past 15 years, ecsn members’ forecasts have proved to be reasonably reliable, but forecast accuracy is always a challenge. Accuracy is particularly difficult to achieve in times of great fluctuation across macro and micro economic factors, especially when aligned to geopolitical tensions. The final quarter of each year in UK electronic components markets has historically been a low growth period, as many organisations approach the end of their financial year, and the ‘Santa effect’ takes hold. In Q4 2018, the market bucked this trend with increased growth, as organisations stockpiled buffer inventory ahead of an anticipated March 2019 Brexit.

The consensus of leading economic forecasters suggested that UK GDP would grow by 1.3% in 2019, which dovetailed nicely with ecsn members’ forecast that the UK Distributor Total Available Market (DTAM) would show growth in the range 3.4% to 8.5% for the year, with a mid-point of 5.5%. Following 12 consecutive quarters of sustained growth, this was considered to be a reasonable consensus view; but in the event, the outcome for the first three quarters of the year markedly confounded expectations, (see chart DTAM by quarter for 2013-2019). The blue bars in the graph shows actual performance, while the green and orange bars indicate the forecast range.

When compared to the same quarters in 2018, the actual outcome for Q1 2019 revealed a -1.3% decline, which increased to a further decline of -1.7% in Q2, before crashing to a decline of -5.5% in Q3. This equates to an overall decline of -2.8% compared to the same three quarters last year, which is a fairly unremarkable slippage, but sadly, does fall well below ecsn members’ forecast of 6% growth for the period. The ecsn forecast will therefore be missed by a long way, and it’s my personal prediction that the outcome for the full year 2019 is likely to be in the range -3% to 1% growth.

What’s happening in international electronic components markets...

Figure 1. ecsn UK DTAM 2013 to Q3 2019.jpg
Figure 1. ecsn UK DTAM 2013 to Q3 2019.jpg

It’s not much consolation for us in the UK to know that growth in international electronic components markets is also slowing. Anecdotal evidence suggests that the slowdown in the German economy is starting to impact the country’s electronic components sales, with pundits muttering that full year sales results are likely to be disappointing. That said, the German electronic components market, which remains Europe’s largest, performed significantly better than anticipated in the first half of 2019, growing by 5.4% compared to the same period last year. But despite this, the overall electronic components market in Europe only managed to grow by 2% in the first half of the year.

The US appears to be holding up, with electronic component markets reporting growth of close to 5% in the first half of the year. A turn down is beginning, but the rate of decline is significantly slower than in Europe, helped of course, by some electronics manufacturing having been ‘re-shored’ from China to Mexico, where components customers are often invoiced by US-based parent companies or distributors.

Data from the Chinese electronic components markets is hard to obtain and often unreliable, but the indications are that growth in China (probably in the range 6% to 8%) was much lower than is usual in the first half of the year, offset somewhat by significant stockpiling of US-manufactured semiconductor products by some of the largest Chinese organisations. However, Chinese electronic components markets historically grow faster in the second half of the year, although currently this trend is being hampered by restrictions on the supply of US hardware and software technology.

Why has revenue declined? Trade wars...

The ongoing trade dispute between the US and China has had a negative impact on global trade and GDP growth. Accusations concerning the abuse of US-owned intellectual property by Chinese organisations (and thereby, the state) initially impacted electronic components and advanced technology companies, but has quickly expanded to cover almost all goods traded between the two nations.

The result is that trade growth has been severely disrupted and a great deal of economic uncertainty has been caused, particularly in Asia. The US has banned the use of telecom and datacom infrastructure products manufactured by Huawei and other leading Chinese manufacturers in the US, and is putting pressure on other governments to do the same. There are indications that the Chinese government is bringing forward legislation to enhance the legal protection of third-party IP rights, which when enacted, should go some way to resolving this dispute. Despite protracted negotiations, no agreement or resolution of the dispute is in sight, although both parties have made small concessions.

The trade dispute between Japan and South Korea has also been disruptive in Asia, unsettling Asian financial markets, but has not yet had much impact in Europe. The Japanese government has applied export licences to three chemicals essential for the manufacture of semiconductors and display technologies, citing reasons of “national security”. Denying South Korean organisations, such as Samsung, SK Hynix, LG and so on, licences for fluorinated polyimide, EUV photoresists and hydrogen fluoride gas will disrupt production, potentially causing huge economic damage to the South Korean economy, and massive supply problems for the entire electronic components supply network and electronic systems industry.

ecsn market review & forecast Dec19-electronic components
ecsn market review & forecast Dec19-electronic components

Why has revenue declined? Brexit...

It’s something of a paradox that despite all the uncertainty that it’s created, Brexit has probably been an important contributor to the strong growth in the UK electronic components DTAM since 2016. The depreciation of £UK against US$ and €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$ and €, our domestic manufacturers also saw a corresponding increase in their input costs, but their grumbles have been soothed somewhat by the boosted opportunity in export sales.

It’s all too easy to put the 2019 sales revenue decline in UK electronic components markets down to Brexit uncertainty, but other factors are probably much more significant. There was an increase in buffer inventory of electronic components, as customers, components manufacturers and authorised distributors prepared for a March 2019 Brexit. It didn’t happen and customers consumed this additional inventory over the first half of the year. The “Halloween” Brexit deadline precipitated further inventory stockpiling, but at a lower level, and this is currently being maintained in advance of any Brexit settlement. Uncertainty continues...

Why has revenue declined? Market drivers...

The global electronic components market has been slowing as customers for mobile phones – still the primary electronic components market driver – hold off purchasing new models until faster 5G products and services become available. The automotive sector, which by 2023 is likely to become the predominant electronic components market driver, due to rapidly increasing electronics content within automotive platforms, has been slowing since mid-2018, and is not forecast to recover substantially until the second half of 2020. In the IoT sector, customer concerns about the lack of international security standards are now being addressed, but deployment has been slowed down while the issues are resolved. The aerospace, computing, industrial and medical sectors remain in good health, but they too are “flatlining” somewhat in the current economy. The military and server computing sectors are continuing to demonstrate stronger growth.

Why has revenue declined? Electronic components market correction...

Manufacturing lead-time is a critical value in the ERP systems of all electronic component customers, which as it extends, automatically increases in-house inventory and order cover on suppliers to ensure continuity of supply. In mid-2017, the average manufacturer lead-time for electronic components started to escalate, increasing from 2-4 weeks to a peak of 16-18 weeks by mid-2018. A very small number of critical components went up to 26+ weeks lead times – and remain there today.

Adam Fletcher, ecsn Chairman
Adam Fletcher, ecsn Chairman

Average manufacturer lead-time for electronic components sharply declined in Q2 2019, and by October 2019 had reduced close to 6-8 weeks. As a result, ERP systems continue to reduce customer inventory and order cover in line with the revised lead-times and projected demand. An electronic components market correction was considered inevitable, but predicting the timing, speed and scale of any correction is always difficult. UK manufacturers were generally confident about their prospects, but their order books have proved to be much weaker in 2019 than expected, and they see little prospect of improvement into the end of the year, due to the continuing weakness in their forecast customer demand resulting from the Brexit debacle and the general destabilisation of the global economy.

UK exchange rates continue declining...

The politics associated with Brexit continue to weaken £Sterling exchange rates against US$ and EU€, the two primary base currencies in which electronic components are globally traded. Prices will inevitably start to rise again in the UK, because manufacturers of electronic components have no influence over exchange rates, let alone their authorised distributors or their customers. The weaker exchange rate does however make UK-manufactured products more competitive in export markets, which should result in faster growth when the global economy starts to recover. The real problem will occur if and when £Sterling exchange rate starts to recover, because UK organisations will then find it difficult to maintain their margins in export markets, and a further squeeze on input costs is the likely outcome.

Into 2020 and beyond...

The wider forecast for the UK, European and global electronic components markets remains “up and to the right”: the sheer weight of new high-growth applications makes progress all but inevitable. That said, I suspect that as a whole, 2020 will be a relatively low growth year for electronic components markets, but the second half of the year should see a return to much stronger growth. But in an industry where manufacturers are reluctant to increase production capacity, this will inevitably lead to another period of manufacturer lead-time extensions. Customers however can continue to have faith in the electronic components supply network, as manufacturer authorised distributors are experienced at successfully and professionally managing these sorts of supply and demand fluctuations.

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.

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