The global economic collapse has taken many victims and has exposed one of the component industry’s greatest strengths to also be among its biggest weaknesses. That strength is, in a word, diversity.
Today, electronics are not only found in, but are core components of, everything from cellular telephones to aircraft, and are pervasive across cultures and all levels of society. This makes virtually every man, woman and child, every conglomerate, organisation and government on the planet a potential end-customer of the electronic component manufacturers. What other industry can boast this level of market penetration? But therein lies a problem. When markets go into recession, virtually every one of those potential customers cuts down on spending, and the component industry bears the majority of the brunt.
Although the entire electronics supply chain has suffered from the economic meltdown, component distributors are in an unenviable position, often being the first to experience the effects of a slowdown in demand. Once demand starts returning to normal, it takes some time for component manufacturers to ramp up production and now the distributors’ problem is reversed: they cannot get stock of components to restore their inventory levels or meet immediate demand.
Although it would be naïve to think that the electronics industry’s problems are over, there is growing cause for component distributors to be optimistic, and areas where they can look for future growth.
Renewed demand
The effects felt by the component distribution industry at large can possibly best be estimated by using the biggest multinational players’ financial results as a barometer. Although a multitude of small distributors have gone out of business globally, the South African market has been protected from the worst effects to some extent.
One reason for this is the consolidation of the local distributors during the 1990s in particular and continuing somewhat into the 2000s. Another factor is the fact that relatively little manufacturing of mass-produced consumer electronics is done in South Africa and, as these have been the product types hardest hit, we could not lose what we did not have in the first place. The same cannot be said for the multinational distributors though. Here are some of the headlines:
In 2008, Avnet reported record annual revenues of $17,95 billion, up 14,5% on the previous year. Net income was also a record, at $499,1 million. Revenue for 2009, however, was down 9,6% on this figure, resulting in a net loss of $1,12 billion.
Arrow’s net income for 2008 was $301,4 million on sales of $16,76 billion, compared with net income of $407,8 million on sales of $15,98 billion in 2007. The company did well to stay in the black for 2009, posting net income of $123,5 million, but sales were significantly down at $14,68 billion.
Notwithstanding that these results are skewed somewhat due to misaligned financial year-ends and the fact that other major distributors do not release financial information, the general trend is clear to see: component distributors did not have a good 2009. But it is not all doom and gloom. For one thing, the local picture was not as bleak, for the reasons outlined above, and SA distributors, for the most part, managed to avoid panic in the form of mass redundancies and other kneejerk measures. And now the multinationals are seeing the beginning of an upturn.
Avnet has enjoyed two consecutive quarters of strong revenue growth, the bottom line being that in its most recent quarter (ending 2 January 2010) the company reported revenue of $4,83 billion, representing an increase of 13,2% over the same period in 2009. Net income for the most recent quarter was $103,9 million, as compared with a net loss of $1,205 billion for the same quarter last year.
The story is similar for Arrow, having achieved net income of $63,1 million on sales of $4,20 billion for the fourth quarter of 2009, compared with a net loss of $871,9 million on sales of $4,09 billion in the fourth quarter of 2008.
Ramping up production
Improved end-user demand is one thing, but distribution still comes to a standstill without a steady supply of sellable products. In response to growing demand, several wafer and chip manufacturers have announced expansions to their fabrication capacities. Market researcher Gartner has projected worldwide semiconductor capital equipment spending to surpass $29,4 billion in 2010, a 76,1% increase from 2009 spending of $16,7 billion.
“The dramatic semiconductor industry recovery rate over the last three quarters has necessitated a renewed growth for equipment spending,” said Jim Walker, research vice president at Gartner. “Spending by the memory and foundry markets, along with the advancement to new technology nodes, will drive the semiconductor equipment segment in the first half of 2010. Quarterly growth will see a slight slowdown in the second half before capacity additions start ramping up the equipment industry again going into 2011.”
Overall worldwide wafer fab equipment (WFE) spending declined 46,4% in 2009, but will grow 76,6% in 2010. WFE spending will be driven by aggressive technology upgrades, especially for the leading memory companies. Utilisation rates continue to run in the mid-80s to high 80s for total utilisation and in the low 90s for leading edge. Leading-edge utilisation will hit the mid-90-percent range by the end of 2010, which will start to drive stronger capacity additions in 2011.
After declining 40% in 2009, the worldwide packaging and assembly equipment (PAE) market is expected to increase by more than 75% in 2010. Decent PAE market growth is expected through 2012. The modest decline expected for 2013 is based on a more traditional inventory-based market contraction. On a regional basis, Asia/Pacific will improve its share of PAE consumption throughout the forecast period. From about 77% of PAE shipments in 2010, Asia/Pacific will account for nearly 85% of all PAE sales by 2014. China will be the largest individual consumer of PAE in 2012, accounting for nearly 27% of the total market that year.
In summary
Having experienced a couple of difficult years, all signs are that electronic component distributors’ headaches are set to ease during 2010 and beyond. With promising moves being made by companies throughout the supply chain, distributors will be hoping to return to business as usual, and as soon as possible. This can only be good news for buyers too, as component sourcing should become easier, albeit that it may take some time yet for prices to stabilise once again.
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