No Nightmare Scenario for Distributors Despite Downturn in Global Economy

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Business confidence in the electronics supply chain seems to be recovering. Yet there are still major concerns about the threat of a downturn in the global economy. The result is the first six months of the year are proving to be a period of uncertainty for suppliers and distributors.

“The global economic uncertainty more so than the euro-crisis on its own is having the biggest impact on business confidence,” the head of one component distributor told Electronics Weekly last week.

Whilst another distribution managing director was more upbeat about business prospects for the first half of the year. “Our order book has recovered 25% nearly now at last year’s levels,” he said.

At the start of April, Electronics Weekly asked a group of executives in the component distribution what level of business confidence they were seeing in the market.Almost 70% of those surveyed said they were more confident about business prospects than they were three months ago.As many as 40% of those questioned said that new order levels were higher than they were at the start of the year.Whilst the evidence seems to be that the first three months of the year have not been as slow as some observers were predicting at the end of last year. Any confidence that there will be some growth in the market seems to be extremely fragile.

One semiconductor distributor had this warning: “Whilst there is a lot of design activity, orders are slow to start on new product build and existing build volumes are down.”

Typically, in Europe more than 50% of the distribution business comes from design-in activities for products which will eventually manufactured offshore, according Georg Steinberger, chairman of pan-European semiconductor market analyst DMASS (Distributors’ and Manufacturers’ Association of Semiconductor Specialists).

The big fear at the end of last year was the level of excess inventory in the supply chain which is hitting bookings. This was more relevant in the supply semiconductors than in other product groups such as passive components were much of the excessive inventory had been removed before the start of the year. In December, the industry representative body the ECSN expected it to take until mid-Q2 next year before the inventory situation for chips has normalized.

According to market analyst Gartner, globally semiconductor lead times have been lengthening in the first months of the year from a low point in December. “We believe the market is slowly recovering, despite the fact that lead times continue to fluctuate, as the market continues to recover from an inventory excess,” said Gartner.

It seems that that by the end of Q1 inventory levels in general were no longer the major concern for supplier. The big worry is still the state of the global economy.

“We are not seeing decisions on supply chain being made purely on the state of the euro-crisis,” said one executive.

“So much comes from Asia and the US, even as fabs for “European” manufacturers that the global situation is more relevant than the euro-crisis,” he added.

There is some evidence that manufacturers are controlling production capacity more efficiently than they did 12 months ago. This avoids the risk of over oversupply in stuttering end-markets.

“Capacity is being tightly controlled, but we are seeing lead times slightly shorter on some products as demand picks up,” said another component distributor.

All concerns for the start of 2012 were fuelled by a weak last three months at the end of last year.Sales of semiconductors through distribution shrank in the UK and across Europe as a whole by 9.1% in Q4, according to DMASS.Despite this the market grew by 7.6% over the year as a whole.<strong>According to DMASS</strong>, the UK semiconductor distribution market shrank by 7.5% in the last quarter of 2011 to €117m.

The fear was that the fall in confidence would continue into the first quarter of 2012.

“The last quarter displayed the current market trends of cautious ordering behaviour in some and inventory corrections in some other industry segments,” said Steinberger, “the two halves of 2011 couldn’t have been more different, from 23% plus to 7% minus. I would not be surprised to see the opposite in 2012 – weak first half and stronger second half.”

ECSN suggested at the start of 2012 that the component distribution market in the UK and Ireland could potentially shrink by 5% this year to total £1.12bn.

"The outcome of Q1’12 in the UK / Eire is not yet known but anecdotal evidence suggests that it was better than the forecast (9.5%) decline and suggests that Q4’11 may have been the low point in the cycle," said Adam Fletcher, chairman of supply chain representative body ECSN/Afdec.

"The UK / Eire and European electronic component markets have historically always shown stronger growth in the first half of the year but we are operating in uncertain times and historical trends may not be a reliable guide," said Fletcher.

However, the UK market is more resilient to the storms of the global economy than it was even five years ago.The manufacturing sector is smaller, but leaner and far more competitive.There are even growth markets in aerospace and defense, but also security systems, M2M wireless and renewable energy.And the automotive activity amongst tier 2 suppliers has not declined in this country as much as might have been expected.There are now tentative signs that business confidence in the UK supply chain is turning the corner and may even be starting to improve.

The one note of caution is that the effects of the global economic uncertainty may not have yet fully played out.As one distributor cautioned: “There continues to be mergers, acquisitions and consolidations in the industry due to the global uncertainty for sure. This could have an impact on the supply chain later in 2012.”

(Courtesy: Electronics Weekly)