Components markets growing faster than forecast
According to Adam Fletcher, Chairman of professional community the Electronic Components Supply Network (ecsn), the faster than forecast growth experienced by the Electronic Components Markets in the UK and Ireland in the first half of the year is likely to extend into 2H '17. This trend is being reflected throughout the global electronic components supply network leading some commentators to forecast product shortages, but Fletcher said: "Currently only a very small number of electronic components, principally commodity semiconductors and passives are close to allocation."
At the end of each year members of The Electronic Components Supply Network (ecsn) collaborate to establish an industry consensus forecast for the year in prospect. The committee's forecast for 2017 was made more challenging as a result of the many ‘Known Unknowns' that BREXIT introduced into their deliberations but they eventually came up with a forecast that the UK / Ireland electronic components market would see an improvement in Billings (sales revenues) in the range one to four percent in 2017, with a mid-point of 2.5%.
In the event the forecast proved to be way too conservative: Even after the effects of currency decline had been factored out 1H '17 Billings growth in the UK electronic components markets. came out at seven percent compared to the same period last year, twice the rate of ecsn members' original forecast, primarily as the result of a surge in export sales from domestic manufacturing industries driven by the significant depreciation in £Sterling following BREXIT. At the same time the ‘input price’ of many products imported into the UK has increased. Almost all electronic components are base priced in US$ and as existing inventory is sold the replacement inventory has been imported at a higher price with the new pricing being passed on within the supply network.
Europe and beyond in 1H ’17
The graphic: ‘IDEA Total Components YTD Billings Trend Q1’17’ shows that the UK market is actually growing slightly slower than the average across the entire European electronic components supply network. In 1H ‘17 the underlying European growth was nine percent compared to the first half of 2016, confirming that the seven percent underlying growth rate determined by ecsn members for the UK electronic components market is realistic. Interestingly all the double digit growth occurred in countries where the Euro is not the base currency, further reflecting a likely exchange rate variance.
The US electronic components market also improved significantly in the first half of 2017. Growth of 5.5% was driven by an improvement in the overall US manufacturing sector. The Japanese electronic components market also experienced growth, albeit in the slightly more modest three to four percent range. Asia-Pac, the world’s largest electronic components market, saw disappointing growth Q1 ’17, reflecting the continued slow down in demand for the consumer goods it produces for global markets, particularly mobile phones and all variants of PCs. However, sales picked up in Q2 and an estimated first half growth in the range four to six percent is expected.
Accurate demand forecasting is a critical area where all organisations within the electronic components supply network need to improve. Manufacturer Authorised Distributors support the vast majority of global customers and are often amongst the largest customers of the manufacturers they represent. They strive to provide manufacturers with reliable demand forecasts for their products but many OEMs, ODMs and CEMs appear reluctant to actively engaged in the process with their supply network, leaving distributors to rely on regression analysis of product sales by month over the previous 12 months.
Manual intervention is needed to add or remove large known demand drivers and estimate likely growth trends. This process has been described as like driving a car forwards but only being able to see the road via the rear view mirror. Fortunately, known demand patterns for electronic components from many customers together with the inventory stocking policies of authorised distributors (typically three months average demand), means that shortages and stock-outs are rare.
Into the second half of 2017
Uncertain customer demand over the last decade has led to many manufacturers of electronic components quite correctly reining back their capital investment, but in the process much of resilience in the supply network has been deleted. Quoted manufacturer lead times are today migrating well beyond recent industry norms with availability of the majority of components on eight to ten weeks lead times. Some components however, are on 12 to 16 week lead times and manufacturers of a very small number of components are already quoting lead times beyond 20 weeks. Fortunately demand in the global electronic components market remains geographically cyclically. The growth that western economies typically experience in the first half or the year is balanced by the growth eastern economies typically experience in the second half of the year, somewhat smoothing out supply and demand.
“In my opinion much now depends on the level of demand in the Asia-Pac electronic components market in the second half of the year,” added Fletcher. “A slowdown will reduce lead times a little but if demand remains at forecasted levels lead times will inevitably firm up. If growth exceeds forecast then many component manufacturers may struggle to meet demand.” All-in-all it’s apparent that manufacturers of semiconductors and passive components in particular need to bring mothballed capacity back into service, contract out some manufacturing services or in some circumstances add new capacity in order to meet a growing demand.
“As we are only just entering the second half of the year there is no hard data yet but my discussions with industry leaders in other geographic markets indicates a widespread anticipation of ‘more of the same’, which suggests that the global electronic components market (not including commodity flash memory) will potentially grow in the range six to eight percent in 2017,” Fletcher added.
“I suspect that the highly competitive nature of the global electronic components market will ensure a reasonable level of equilibrium between supply and demand as we proceed towards 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 distributors honestly and effectively and work with their supply network partners to help maintain market stability.”