Analysis

Distributors assess impact of COVID-19 as China bounces back

24th March 2020
Alex Lynn

Into the fourth quarter of last year and in the early going of 2020 the electronics industry was confident about a return to growth, and the sunny uplands of increased revenues.

The chickens are not lining up to be counted. Coronavirus has knocked plans sideways, as distributors impose travel bans, suppliers and distributors forbid visitors, and product shortages, notably passive components, bite.

“We are seeing an upsurge in orders for multilayer ceramic capacitors, tantalum capacitors and chip resistors,” says Steve Rawlins, CEO at Anglia. “This isn’t being driven by demand, it is customers ensuring they have enough stock to keep production lines running.”

“We are even receiving bids from electronic manufacturing services in China. We haven’t seen that for a while so there must be a big shortage there.”

“Prices have risen,” Rawlins continues. “It's supply and demand. Two suppliers have increased prices, whether that’s because of the market or because prices are so low they weren’t making money, well, you pay your money take your choice.”

Ismosys CEO Nigel Watts concurs, “We were seeing the market come back, now coronavirus will potentially knock things back. It’s like toilet rolls, customers are snapping up inventory while they can.”

In the US ECIA Chief Analyst Dale Ford summarised a survey amongst its members: “Semiconductors can act as a proxy for the wider components industry,” he explained. “Up until the end of January, forecasts were encouraging, and it looked like the industry would enter a growth phase in early 2020 and mark the start of a new cycle in the industry.

“Concerns over the virus have sucked all the life out of the room regarding those predictions. The high degree of uncertainty in markets from Wall Street to Main Street make it difficult to predict the future of the electronics component in the near-term.  At this point, possible outcomes range widely. 

“Optimistically, there is hope for a snapback in the second half of the year if the virus can be brought under control in the first half.  In a more painful scenario, a multi-year decline could result if the global economy is damaged severely by a long-lasting global pandemic that continues through 2020.”

Are there any bright spots. Well China is one.

Last week Qualcomm CEO Steve Mollenkopf told CNBC that “the sun has come up in China. Supply chains are back up to 70 to 80% capacity.”

“Demand is up in China,” concured Rob Rospedzihowski, President of EMEA Sales for Farnell who has seen signs the country is emerging from the Coronavirus crisis. “It’s not back to 100%, but we have seen strong demand in the past two to three weeks.”

“In the US business is sporadic. Automotive and heavy industry are down. As you might expect the medical sector has rebounded strongly.”

“In Europe we had seen limited impact until recent government measures. The downturn in Italy now looks set to impact other European countries,” he remarked.

He also reported no delivery problems – “everything is on schedule, apart from MLCC availability, that’s the biggest headache we have.”

In recent months Farnell has added new suppliers to its line card increasing the depth and breadth of the company’s inventory. “We are well positioned,” added Rospedzihowski.

Rawlins also imparted more optimistic news.

And as of last week Rawlins reported that he had not seen any of the company’s UK customers closing manufacturing; “in fact we are seeing massive jumps in production, UPS power supplies/generators, also some customers pulling inventory in early, a bit of stock piling I suspect.”  

“We are seeing lots of design activity, mostly based around semiconductor products, it’s as good as we have seen since early last year. Obviously it takes time for orders to come, but it is encouraging.”

“Our design activity started to surge in the second half of 2019, and we anticipated a steep climb in 2020,” says Nigel Watts. Coronavirus has made him less certain whether this will be sustained in the short term.

Rawlins had also detected a growth of confidence in the UK now that there is a clearer road, trade negotiations notwithstanding, on Brexit.

“The general election result sparked activity.”

He continued: “We had our bank in last week, and they have seen lots of activity. Capital expenditure has picked up, and they reported more mergers and acquisition activity tooLike the ECIA’s Ford he is hopeful of a comeback in the second half of the year.

“Our view of 2020 is flat for six months,” says Rawlins and then a pick up in Q3. He warned that forward orders have to start coming through to make that happen.

Mouser Electronics is reporting global sales up 6% so far this year buoyed by strong performances in Europe and north America.

“Europe is up 8.5% and the US is up nine percent,” says Mark Burr-Lonnon, Senior Vice President, EMEA, Asia and Global Service. “Asia/Pacific is down 2%, driven by the impact of Coronavirus in China, all other countries in the region are reporting increases.”

Eyeing the probable impact of Coronavirus on supply chains, Mouser Senior Vice President Mark Burr-Lonnon explained: “In the short-term the good news is that we have lots of inventory so we can help customers with any supply chain worries over the next three to six months. We can spread the inventory, especially the new product introductions. We want to seed the market so it’s not in our interest to sell the lot in one go.”

He has two concerns. One is the availability of passive components made in China, most notably multi-layer ceramic capacitors (MLCC) and chip resistors. “There’s just not enough product coming out of China, I’ve heard of some companies at 30% of their usual production output, others at 70%.

“Most of these products come out of China, so there is no one who can step in and fill the gap.”

“We’ve not seen any price increases yet,” Burr-Lonnon continued, “certainly not at Mouser, we have inventory bought before the Coronavirus outbreak so we can hold prices.”

“It is possible that we will start to see prices on some passive components rise in the near future, some suppliers are looking at a 30% price increase, and it’s possible that MLCC prices will be rise by as much as 50% to 70%.”

Mouser says that all 27 of its locations around the world are in full operation, and all Customer Service and Technical Support teams are fully available by e-mail and chat.

Employees in some locations are working from home due to local conditions. In these locations, customer phone calls are being answered, but with some reduced voice-call capacity.

A company statement added that because it orders stock months in advance of expected demand for a product, we foresee limited impact on most products at this time. Any delivery changes on out-of-stock products will continue to be communicated to affected customers. Delivery dates and lead-times will also continue to be updated on any affected part number.

There are some disruptions of delivery to customers in quarantine areas, based on local route restrictions and government controls.

At this time, most of our suppliers have not reported any specific impact on their production or shipping schedules. However, a few suppliers are operating with a reduced staff, and some suppliers seeing short-term impact by local quarantines.

Digi-Key says its backlog with suppliers remains strong.

The company stated: “Because we fulfil all orders from our remote Thief River Falls, Minnesota location in close collaboration with our Fargo, North Dakota facility and team members, we are highly focused in responding to this crisis as it evolves. We have been able to rapidly adjust staffing to align with increased demand, while fully supporting the safety and health of those impacted. We remain committed to meeting our same-day shipping performance in the midst of this unprecedented situation.”

All of Digi-Key's locations globally are fully operational, while stringently adhering to safety and best-practices guidelines.

RS Components says it has tested its IT capability across all our markets and is confident that it has the appropriate measures in place should its teams need to work from home.

“Regarding our Distribution Centres, we have a global distribution network - with distribution centres in the UK, Ireland, France, Spain, Germany, Italy, South Africa, North America, Australia, Hong Kong, China and Japan – this means we are able to flex our supply chain. We are taking all practical steps to maintain normal operations,” the company stated.

Sales in the European Semiconductor Distribution Market fell by 16% to 1.95bn Euro. 2019 ended with a relatively moderate decline of 4.4% to 8.88bn Euro.

Georg Steinberger, chairman of DMASS commented: “The level of slowdown in Q4 is just a reaction to the low bookings in the previous quarters. And without DTAM to TAM conversion happening during 2019 (suppliers taking distribution business direct) the distribution market would have been flat, which is positive, considering that the overall components market (OEM and Contract Manufacturers) suffered more.

“With major macro-economic effects hopefully going away in Q1/2020, we could have expected a return to growth soon enough, a hope that the coronavirus outbreak in China now renders unachievable. The importance of China for the global electronics supply chain is critical and ramifications are nearly unavoidable.”

As for this year, Steinberger maintains his cautious optimism: “No one counted with the virus as a new disruption to the market, however we have to see what supply chain effect it has on this and the next quarter. The opportunities for innovation and therefore components business are still marvellous for years to come.”

That’s a view shared by others.

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