ecsn/afdec forecast for UK & Ireland electronic components market points to low growth in 2020

05 December 2019

ecsn DTAM Growth by Quarter 2014-2020 with Forecast
ecsn DTAM Growth by Quarter 2014-2020 with Forecast

ecsn's forecast released today predicts that the UK & Ireland electronic components market will grow in the range -3% to +2% during the first half of 2020, with a mid-point of -1% decline year-over-year.

The association’s provisional guidance for the second half of the year suggests that the market will grow in the range +2% to +7% in H2, with a mid-point of +5%. If achieved, this will mean the full year 2020 will result in sales revenue growth in the range 0% to +4.5%, with a mid-point of +2%.

At this point in previous years, the Electronic Components Supply Network (ecsn) has provided a full 12-month Forecast for the year ahead, but with the current lack of visibility in the electronic components market, coupled with ongoing geo-political uncertainties, the association has chosen to limit it’s predictions for 2020 to the first six months of the year. However, the forecast is complemented by members’ best guidance for the second half of the year, which ecsn expects to firm up in Q2, in order to issue a complete forecast for 2020.

Compiled from individual returns from members of the association’s manufacturer authorised distributor (afdec) group, the figures released today further indicate that the UK & Ireland electronic components market is likely to finish 2019 showing a decline of -3.6% compared  to 2018, with UK distribution's share of the Total Available Market (TAM) having grown to about 43%.

According to ecsn Chairman, Adam Fletcher, the 2019 outcome is significantly below his members’ forecast of growth in the range +3.4% to +8.5%, with a mid-point of +5.9% growth: “The reasons for the decline in growth are discussed in more detail in the forecast released today, but are primarily the result of a global economic slowdown, precipitated by the trade war between China and the US, which has reduced demand and enabled customers to de-stock based on tumbling component lead-times increasing availability and their weakening order book,” Fletcher said.

Aubrey Dunford, ecsn Market Analyst commenced his presentation of the association's 2020 forecast by announcing that the UK & Ireland electronic components market results for the current year (2019) will conclude significantly below the guidance range provided by the association in December last year. According to Dunford, the market declined throughout 2019, with the outcome likely to be a decline of about -3.6% over 2018. ecsn’s forecast for the year predicted a growth range of +3.4% to +8.5%: "The first half of 2019 saw a small decline in growth of -1.5%, but the rate of decline increased in the second half of the year. Sales in Q3 declined by -5.5%, and Q4 is forecast to conclude with a -5% decline, compared to the same two periods in the previous year,” said Dunford. “The only slight consolation is that electronic components markets around the world generally underperformed industry expectations in 2019.”

The ‘Book to Bill’ ratio remained below unity throughout 2019 and has progressively declined throughout the year: “The negative book to bill ratio suggests that that the growth rate as we enter 2020 is likely to remain negative, but our members are forecasting a return to  stronger growth in the second half of the year.”

ecsn’s afdec members believe that 2020 is likely to be a year of consolidation, with only low growth in the first half of the year, but improving into the second half – but the range of member and industry analyst opinions about the rate of the growth remains wide, hence the association’s decision to provide only guidance, rather than a full year forecast: “The global electronics market is set on an expansion path, with new mobile standards such as 5G in the handset and infrastructure market and greater electronics content in automotive systems leading the way,” Dunford continued, “There is significant pent-up demand for new 5G handsets and infrastructure systems for smart vehicles, but these will all need a huge investment in local infrastructure, and it’s here where UK companies can really make a mark.”

ecsn/afdec members remain upbeat about opportunities for further growth in 2020, despite numerous factors that simply cannot be predicted with any certainly; however, the current trade wars are more likely to be settled during a US election year. Dunford concluded: “Whatever the outcome, we can be sure that UK companies will be preparing to participate fully in any growth – and that electronic components manufacturers and their authorised distributor partners will support them through any period of uncertainty.”

Consolidating growth...
At the end of 2018, ecsn’s afdec members reported eleven quarters of ‘quarter-on-same-quarter-the-previous-year’ growth, which is the longest period of sustained growth seen since 2000. “We were disappointed to see a reversal, but in reality, the declines were relatively modest,” Dunford said, “but the rapid decline in the book-to-bill ratio which started towards the end of the third quarter of 2018 was suggesting that the market had begun to turn.” Dunford sees a number of factors behind this downturn, among which the decline in the global economy predominated: “Sanctions imposed as a result of the trade war between China and the US, together with the need for a cooling of the Chinese economy, started to impact the largest Chinese datacom manufacturers, which had had a knock-on effect on the roll-out of 5G infrastructure and services at the same time as dramatic changes were taking place in the global automotive markets.

According to Dunford, UK companies are finding a reduction in forward orders as demand for their products in major export markets continue to slow at a time when uncertainty over Brexit is also restricting investment in capital projects. He acknowledges that the previous period of global growth which caused lead times for electronic components to extend on some product lines, especially in the more commodity product areas, has reduced substantially over 2019, but manufacturers have little incentive to make the necessary investment in order to expand their production capacity. In the current climate where customer visibility and order commitment is poor, expansion of manufacturing capacity has been modest at best, and this will inevitably lead to further supply problems. “Unfortunately, we could return to product shortages in some areas in late 2020 or 2021,” Dunford concluded.

Commenting on the 2019 outcome, ecsn/afdec Chairman, Adam Fletcher expressed his disappointment that his members' 2019 forecast was not achieved, and reiterated his opinion that the electronic components market is constrained by what happens to the global economy – but especially by changes in the Chinese, US and German economies. He believes that the ongoing trade war between China and the US has resulted in a significant economic slowdown, which has been amplified into the electronic components markets, as growth the largest electronic components market slows: “But the major impact on electronic components markets has been the dramatic reduction in the average manufacturing lead-time for electronic components from 18-to-20 weeks in mid-2018 to the current 4-to-6 weeks for most components (although there are still a few outliers). The impact of this is that customers have started, and continue to, reduce their in-house inventory and their order cover in-line with the new lead-times – which has had the effect or removing two months ‘Billings’ (sales revenue) from the market over the year,” he said.

Continuing limited visibility...
ecsn’s afdec members’ visibility in the electronic components market remains very limited because they are unable to obtain clear guidance from their customers, and there is a wide and diverse range of opinions on the likely outcome for 2020: “It’s always our aim to provide the electronic components markets, our customers and investors with a balanced and evidence-based forecast,” Fletcher said, “but after a long period of sustained growth in the UK & Ireland electronic components markets, punctuated by a year of decline, it looks likely that we’re in for a period of consolidation and low growth.”

That said, Fletcher remains confident that the trajectory for the electronic components markets in the mid-term is still up and to the right: “Stronger underlying growth will return, but will probably not be linear, and we must anticipate the odd bump along the way,” Fletcher said. The ‘bump’ the industry suffered in 2019 was harder than anyone anticipated: “I predicted that any growth would adopt a hockey-stick shaped curve towards the end of 2019, and into 2020, and in my opinion, the curve has simply shifted by 12 to 18 months, due primarily to the delay in the 5G roll-out, but also reflecting weakness in the automotive market – which is set to return to growth in 2020 – and slower than anticipated growth in IoT applications.

That said, in cloud computing, avionics and military, market growth remain strong, while PCs & laptops, medical and industrial markets are set to continue modest growth rates.” Despite the lacklustre results for 2019, Fletcher is confident that UK electronic components markets will continue to grow over the next few years – but at a rate lower than the global average, rather than at the top of the growth curve. He believes that stronger international economic growth will once again drive extended lead-times and lead to shortages of some electronic components: “The pendulum of supply and demand continues to swing, and in 2019 it swung far too far in the direction of supply,” Fletcher concluded.  “Until the electronics industry starts to collaborate more and share business intelligence throughout the network, we will all be at risk from extreme market oscillations. Hopefully 2020 will prove to be a more stable year, but I wouldn’t bet on it!...

Some individual ecsn members' comments on 2020...
Spectrum Electronics Group Managing Director, Nigel Watts
believes uncertainty continues to reign. “Local issues, such as the general election and the continuing debacle that is Brexit, are causing frustration and doubt in our industry and the public at large. The UK is losing the volume revenues to lower cost centres of manufacturing abroad. We fund it, we nurture it and then we lose it – a trend that must be reversed. I do however see definite reasons for cautious optimism: design starts are at an all-time high, as are the number of new emerging companies embracing the forthcoming 5G and IoT revolutions...

According to Peter Hannon, Managing Director of HARTING UK, 2019 proved to be the year of uncertainty, both economically and politically: “This definitely played a significant part in delaying investment decisions or pressing the go button. Coupled with this, we have had two Brexit deadlines where stocks were put in place, only to consumed again after the non-event. For 2020, we need certainty and clear leadership to refocus the economy whatever the decision. We await the outcome for our UK business, and remain cautious until there is clarity.”

Kevin Nicholls, Regional Sales Director at TTI felt 2019 was a good year for TTI, with a lot of positives to be taken from the last 12 months, despite a lot of uncertainty: “There is a light on the horizon, however – the upcoming election and Brexit-related uncertainty will ensure a challenging few months for the UK economy. My expectation is for the business confidence to return in the second half of the year, with growth across most market sectors.”

Solid State’s Managing Director, John MacMichael believes the recent acquisition of Pacer Components has largely buffered his company’s Value Added Distribution business from the more serious impacts of de-stocking and the general downturn: “The medical market has continued to grow, and our overseas business has remained stable, with some slight growth. However, 2020 looks like it will be a challenging year, with customers unable to provide even mid-term forecasts. Increased stock levels are proving key to taking business as it arises and meeting the needs of a customer base that is having to become ever more agile.

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