ecsn Chairman’s viewpoint: Strong demand in 1H 2021…

Author : Adam Fletcher | Chairman | ecsn

01 July 2021

ecsn 2021 Forecast by Quarter
ecsn 2021 Forecast by Quarter

In my last report for EPDT’s Distribution supplement, back in January 2021, writes ecsn chairman, Adam Fletcher, I suggested that COVID-19 had put an end to ‘normality’ in the global electronic components supply network, and that ‘change’ had become the only constant.

This article was originally featured in EPDT's H2 2021 Electronics Distribution supplement, included the July 2021 issue of EPDT magazine [read the digital issue]. And sign up to receive your own copy each month.

Six months on, I’m able to review the annual forecast provided by members of the Electronic Components Supply Network (ecsn) in December 2020 in the light of what’s actually happened in the European electronic components markets in Q1 2021, and provide some analysis on the results, together with some commentary on our industry’s prospects for the second half of the year. One thing is absolutely certain: 2021 will prove to be an extremely challenging year for the global electronic components supply network, primarily a result of escalating manufacturer lead-times and fears about ongoing components shortages…

At ecsn’s regular Leadership Group meeting in July 2020, members highlighted that the forecast information they were receiving from customers could, at best, be described as “vague” – but in the middle of a pandemic, and with Brexit looming, that was probably not surprising. Perhaps more concerning, ecsn members also reported that manufacturer lead-times were starting to creep out, and by October 2020, there was strong evidence to suggest that this was seriously affecting both the semiconductor and passive components markets, while interconnect products seemed to be somewhat immune. In light of this, ecsn members tried to encourage their customers to increase their in-house inventory, and forward order cover, but there was little response; which is a great shame, as I’m certain that modest action at that point would have mitigated much of the current industry ‘pain’. However, at the very end of the year, we did see a flurry of customer activity, as components scheduled for delivery in January 2021 were pulled forward in an attempt to avoid possible Brexit supply issues.

ecsn/afdec UK electronic components forecast 2021

Based on the consolidated view of its manufacturer authorised distributor (afdec) members, in December each year, ecsn publishes its forecast for the year. Due to limited forecasting information received from customers, ecsn limited its forecast to the first half of 2021, and only provided ‘best guidance’ for the second half of the year. At time of writing, the association is preparing to elevate its second half ‘guidance’ to a firm forecast for the full year 2021.

The graph “DTAM By Quarter for 2015 – 2021” includes actual sales revenues achieved by ecsn’s manufacturer authorised distributor (afdec) members until Q3 2020 (blue bars), their forecast for the first half of 2021 (yellow & red bars) and their ‘guidance’ for the second half of the year (hatched yellow & red bars). In the absence of fully audited figures, we had to estimate the likely outcome of the final quarter 2020, but the consensus among our members was that figures for Q4 would settle in the range (6%)-to-0%, with a midpoint of (3%), suggesting that the UK electronic components market would experience a sales decline for full year 2020 in the range (10%)-to-(6%), with a midpoint of (8%). Our members’ forecast for 1H 2021 was for an outcome in the range (2%)-to-4%, with a midpoint of 0.5% growth, while their 2H 2021 ‘guidance’ suggested full year figures in the range 0%-to-6.5% growth, with a midpoint of 2.7%. If this turns out to have been achieved, this albeit low growth will be an improvement over the 2020 decline, but is further evidence that 2021 will be a year of slow recovery.

The graph “Forecast Billings – 2021” shows the ‘billings’ (actual sales invoiced) performance for the UK & Ireland electronic components market to the end of Q3 2020, while the green, purple and blue lines respectively show the upper, midpoint and lower ranges of our forecast for 2021. The shape of the pink line indicates how the UK historically performs more strongly in the first half of the year than in the second. Beware however… all three lines are currently running counter to the historic trend, possibly an early warning of supply problems in the second half of this year.

The outcome in Q1 2021 came as something of a shock: ‘billings’ showed 7.1% growth, which was higher than anticipated, but more worryingly, ‘bookings’ (new orders entered)took a huge 46% leap forward...! A very similar pattern is happening across all global electronic components markets, and so to help put this in a wider perspective, I’m sharing the pan-European data with EPDT readers...

Overall Q1 2021 bookings, billings & B2B trends: European “book-to-bill” increases exponentially in Q1 2021…

Graphic T1 is a visual representation of 12 quarters of consolidated European ‘bookings’ and ‘billings’, together with the corresponding ‘book-to-bill’ (B2B) ratios.

ecsn 2021 Forecast billings AND Graph T1
ecsn 2021 Forecast billings AND Graph T1

The chart reveals exponential growth in ‘bookings’ in the first quarter of 2021, compared to the previous quarter, and also shows a strong growth in ‘billings’ of 21% in the same period.

Q1 2021 ‘bookings’ increased by a whopping 52%, when compared to the same quarter the previous year, and the B2B ratio leapt from 1.22:1 to 1.61:1 – one of the highest levels ever recorded! It’s apparent that the market was seriously skewed in Q1 2021 by customers racing to increase their order cover on their suppliers in response to the rapidly extending manufacturer lead-times.

Q1 2021 bookings trend: European bookings increase exponentially in Q1 2021…

Graphic T2 compares the total electronic components ‘bookings’ result achieved in each European country in Q1 2021 and contrasts and compares these figures with the results achieved in the previous quarter and those achieved in the same period last year.

The blue bar reveals that, on average, European ‘bookings’ increased by 59.5% in Q1 2021 when compared to the previous quarter.

The light brown bar compares Q1 2021 ‘bookings’ figures achieved in each country with those achieved in the same quarter 2020, and indicates that on average ‘bookings’ grew by 52% in the period.

The dark brown bar compares average ‘bookings’ achieved in Europe year-to-date (YTD) with the same period in 2020, revealing that the average ‘bookings’ growth rate increased by 52% across Europe over the 12-month period, reflecting the rapid increase in customer demand across all European markets. I’m certain however that this is ‘phantom’ demand generated only by customers’ concerns about extending manufacturer lead-times, and we must expect a reversal when supply and demand return to balance.

Q1 2021 billings trend: European billings in Q1 2021 reflect a more accurate picture of activity levels in the electronic components supply network…

Graphic T3 illustrates total electronic components ‘billings’ achieved in European markets in Q1 2021 and contrasts and compares the figures with the previous quarter’s results and those achieved in the same period last year.

ecsn H2 2021 Graph T2 AND Graph T3
ecsn H2 2021 Graph T2 AND Graph T3

The blue bars reveal that European electronic components markets experienced an average growth of 21% in Q1 2021 when compared to the previous quarter.

The light brown bars compare Q1 2021 with the same quarter 2020, and shows that European electronic components supply network actually declined of (1%) in the quarter.

The dark brown bars compare current YTD ‘billings’ with the same period 2020, revealing an average decline of (1%) across the European electronic components supply network. Even given the return of positive sentiments, as economies emerge from the global pandemic, and despite the unprecedented increase in ‘billings’, this is a disappointing result, but I feel it does accurately reflect the resilience of European distributors, who have become adept at trading in adverse conditions. IDEA and ecsn members believe that the low point in the current economic cycle has now been passed, and they are optimistic that modest ‘real’ growth will return to the European electronic components supply network in the current year.

Supply & demand imbalance

Customer demand continues to outstrip supply throughout the global electronic components supply network, an imbalance that has been exacerbated by generally poor industry forecasting, a much stronger than anticipated economic recovery and year-on-year under-investment in components manufacturing capacity – which together with the recent rapid increase in demand has caused exponential growth in demand that is outstripping manufacturers’ capacity to supply. The extension of both semiconductor and passive components manufacturers’ lead-times is now also beginning to impact the lead-times for interconnect products. Customers have duly updated their ERP systems with this new manufacturer lead-time information for products they need to purchase, which has also triggered a step change in the required safety stock and order cover. No surprise then that lead-times are extending as customers try to load more orders – and so the cycle repeats! The placing of orders at over 50% of the likely electronics industry growth rate is just going to end in tears. No surprise then that that many components manufacturers (and thereby manufacturer authorised distributors) will now only accept new orders on NCNR (Non Cancellable, Non Returnable) terms.

Double ordering & the  grey market…

Customers are bound to be frustrated when they’re told that the components they require are unavailable on time, or without the imposition of swinging conditions. This situation is not being helped by the media’s reporting of electronic component shortages and line stops, nor for that matter by the exponential increase in customers ‘double ordering’ (the deliberate placing of duplicate orders on multiple suppliers), only to, as the required quantity of product begin to arrive, blithely cancel the outstanding orders. Sadly, customers seem all too willing to abuse their own ERP systems and their supply network partners in order to perform this trick, leading to internal confusion in the electronic component market, and opening a great opportunity for grey market dealers. Operations on the grey market ruthlessly exploit buyers under pressure to obtain the supplies they need to maintain production, and before resorting to this channel, procurement professionals need to ask themselves: “if my existing, trusted supplier cannot meet my requirements, is it likely that some internet-only, often remotely located organisation I’ve never heard of has just the components I’m looking for?” Existing suppliers are invariably best placed to understand and meet the needs of their customers, and buyers are well advised to break the relationship only after open, frank and cordial discussion. Mandy Rice-Davies famously once said, “well, he would say that, wouldn’t he?” and I recognise that the same may be said of me, but experience has taught me that ‘double ordering’ and ordering from grey market dealers are particularly daft and high-risk activities that should be avoided by procurement professionals and the organisations that employ them at all costs.

Longer term...

IDEA & ecsn members, together with many respected industry analysts, are forecasting that the current supply & demand imbalance is likely to continue into Q2 2022 at least, before equilibrium starts to return, and inevitably swings into overcapacity, when once again suppliers will be drowning in unwanted inventory. Forecasting what will happen in the intervening months is anyone’s guess. My personal advice is that organisations should plan for supply to remain tight throughout 2022, and keep everything crossed that something closer to demand & supply equilibrium will return to the electronic components supply network at some point in 2023 – but I recognise that 2023 is a long way off!...

The global electronic components supply network simply must improve its collaboration up and down the supply networks. Organisations must learn to effectively communicate their real demand with all their partners. Improving communication activity costs virtually nothing, and is much more affordable than the alternative – as I fear many organisations in the global electronic components supply network are about to find out. Please ensure your organisation is doing “its bit” honestly and effectively to boost collaboration and ensure all partners in the electronic components supply network win...

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