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This week, both {complink 453|Arrow Electronics Inc.} and {complink 577|Avnet Inc.} reported their quarterly earnings and discussed a number of supply chain trends on their earnings conference calls. For buyers, two of the most important trends are leadtimes and pricing. Here's what the industry's two largest global distributors are saying.
Leadtimes are coming back in
From Arrow's standpoint, semiconductor leadtimes have moved back further than interconnect, passive, and electromechanical (IP&E) product leadtimes. “Right now, we are seeing leadtimes on the semiconductor side retuning to more normal levels,” said Mike Long, CEO of Arrow. “There are still products with extended leadtimes, and for those, customers are also giving us a longer-range of visibility into their needs.”
Avnet commented on the aggregate of product areas and described leadtimes as coming closer to normal. “If normal is eight weeks,” said Roy Vallee, CEO of Avnet, “and we got to 16 weeks, I'd say we are in the 12-week range right now.” Vallee said by the end of this calendar year, Avnet expects leadtimes will have worked their way all the way back to normal rates.
In Arrow's PEMCO business — passives, electromechanical, and connectors — leadtimes are still above normal levels, said Long. “They aren't coming in or are extended because of the [PEMCO] manufacturing processes,” he said. In general, the IP&E business isn't as volatile as the semiconductor business, so passive, electromechanical, and connector suppliers ramp their capacity upward or downward at slightly slower levels than chipmakers.
Prices have stabilized
As leadtimes began to stretch during the June quarter, average selling prices (ASPs), particularly in semiconductors, began to increase. They apparently have plateaued in the September quarter. Avnet Electronics Marketing global president Harley Feldberg said, “We are not seeing or feeling any degree of pricing pressure.” Feldberg added Avnet expects this trend will continue throughout the end of the year.
Vallee points out that prices tend to vary more widely during periods of excess capacity and excess inventory, which was the case earlier in the year. “When there's normal expansion — which is what we see happening now — we don't see as much ASP erosion,” he said.
The distributors' forecasts differ somewhat from their suppliers', who see business slowing down a bit more in the next quarter. Broadline distributors such as Arrow and Avnet carry a wide range of products — hundreds of thousands of stock-keeping units (SKUs) — and serve tens of thousands of customers. Since the distribution business is not concentrated in any single product base or in any single end market, their view tends to reflect the electronics industry as a whole. Arrow and Avnet both expect normal or better-than-normal cyclicality through the end of the year.
Arrow based this on interviews with 300 of its customers. “Their purchasing requirements are remaining positive, and if you look at 15- to 20-week leadtimes — and we are coming in closer to 15 — we still have some ways to go before we see the industry pulling back,” said Long.
What is your company's view on the market through the fourth quarter?
Barbara, Only a few months ago many companies were screaming about extended delivery times for components. Now, the storm is dying and a different problem is brewing. We've gone from strong demand to normal demand and we are heading for . . . (nobody can really say.) Are lead times moving to normal range because companies added production facilities or is this because double-ordering has ended or more likely, in my opinion, because inventory replenishment pushed up demand after initial drastic cutback by OEMs and distributors and now we are seeing normal demand patterns?
Boom, burst, boom, burst, boom, burst and boom, burst. Here we go again. If companies added manufacturing capacity to meet what they thought were strong demand and if this has now died down will see overage again only months after industry-wide shortages?
Hi Bolaji, This is a tough call. I think the industry is actually going to have supply/demand balance going forward. Here's why: suppliers were extremely cautious about adding capacity this past year and that's why we saw leadtimes stretch out. Rather than this being a boom, it's a return to “normalcy”. And the reason I think it happened so quickly is, for all its faults, the supply chain has improved its ability to respond to changing demand. So instead of seeing trends changing within a 6 month period, we are seeing change more on a 3 to 4 month period.
The other thing–and I should have mentioned this in the blog–is distributors are not seeing any increase in order cancellations. If there was a sudden spate of order cancallations that could indicate there was double ordering going on earlier in the year and that would be a problem. I don't think this happened because buyers are also being more cautious. Everybody wants to believe the signals are real, but no one is willing to actually put money down on that bet.
That's why, as commendable as it might be for government to want to stretch out its supportive hand to businesses, the best way for officials to help, at times, is to step out of the way.
I agree. Like you say, at some point officials need to know when to take the training wheels off.
There are also political issues at play here. I believe there is much less support for economic stimulus programs these days. In addition, if you're trying to increase confidence regarding the economy in general — especially in regards to consumer spending — I don't see how enacting new stimulus programs will help.
I think the “our view is just kind of get out our way and let us do what we do” quote is an opinion shared by many business leaders, and I agree with that philosophy as well.
Let's just deal with the current economic reality and move forward. Taking those training wheels off may be scary for some, but in time we'll wonder why we even needed them in the first place.
Dennis, So how do we explain the 50% plus of people who still want some form of stimulus? I know 37% say “we've had enough” and another 12% are saying “don't know” but a majority still wants some form of government assistance for the economy. I am trying to understand the thinking of the group that is still supporting a form of bail out. At this moment, most business executives don't seem interested in government bailout-fueled recovery because of the issues I discussed in the blog. It would be interesting, on the other hand, to identify the demography of those who still want further stimulus.
Dennis, So how do we explain the 50% plus of people who still want some form of stimulus?
I'm not sure! Perhaps it would be helpful to hear from some people who voted “yes,” to the poll?
I was curious too and after doing a bit of googling I found some recent opinions from people who think there should be a second stimulus plan.
One article said that the reason we need another stimulus to force banks to be more liberal about loaning money out, I suppose in order to fund growth for small business.
Another said that economists think there should be another stimulus focusing on infrastructure upgrades, because there are “two trillion or so dollars of unaddressed infrastructure needs.”
While I agree that there are many worthwhile infrastructure projects out there, I'm not sure exactly how throwing tons of money at that now is a fix-all, exactly. One example, while it'd be great to have high-speed rail… it's really questionable how the execution of that would work out in reality: how long would it take to complete? How much would it cost? Would it ever be profitable?
And perhaps my opinion of infrastructure projects is a bit skewed because I live in NYC, and the major subway expansion project here is still years away from completion and vastly over budget. And it will almost certainly never be completed as originally planned; they'll be lucky to have half of it up and running ten years from now. So even if some of these infrastructure projects did get funding, it's not as if that's a guarantee they will actually be completed.
Again, I'm a little mystified as well. Hope to hear from some people with different opinions on this!
I think the reason why some people believe that another stimulus or continuation of govt. intervention in business would be a good idea, is because of what happened over the last one and a half years. The American Recovery and Reinvestment Act with about $800 B seemed to act only marginally and the unemployment in the US rised above 10%. In came demands for other stimuli, tax breaks for companies hiring and the Jobs Bill etc. and more dollars were spent by the govt. This gives an impression that things can be sorted out with stimulus every time, which appeals to people who know little about the economy and debt as a whole. I think, if the economic and fiscal and monetary policies are solid, no stimulus or little of it was required to lift out of the recession. Some of the developing countries, like India, are perfect examples.
Bolaji,
I agree entirely with what you are saying here in this post.
“Sure, it can be argued that the assistance the US, EU, China, and Japan poured into the global economy following the financial and real estate market declines of the last years helped forestall a deeper and more distressing downturn, but officials also have to know when to let regular business activities resume and take away the training wheels. In the case of the high-tech sector, no amount of economic stimulus will help if buyers, whether corporate or consumers, have doubts about the future. The house-cleaning that has started at the personal and corporate levels must go on unimpeded and only then will real growth resume.
At the moment, what we have is a so-called helping hand that might be drowning us all in assistance. We can't know exactly what to plan for or how, as long as Big Brother keeps masking the big view of actual, fundamental demand. “
My question is do you have a direct line to the White House who seem to be influenced almost exclusively by Mr Paul Krugman(and is begging and screaming for more and more and more stimulus)??
Keep stimulating the economy until the US Dollar dies.That seems to be their theme,regardless of how badly Middle-Class Americans are really doing today,where Real world Inflation(stuff they eat everyday as well as Gasoline) are showing Double Digit price rises over the last one year alone.
http://www.caseyresearch.com/editorial/3791?ppref=CRX175ED1010A
This is very much against the fantasy world which the Federal Reserve economists and Paul Krugman are living in.Is it any wonder middle-class Americans are so angry and the anti-incumbency vote in tommorow's mid-terms is going to be so strong???
Regards
Ashish.
Hello, Ashish, nice to see you on this board. If you are not the Ashish from IE, then you sound just like him. I wonder to what extend people are influenced by party politics when selecting their answer to the poll. Generally, Democrats are more in favor of government spending and involvement, while Republicans take the opposing point of view. That is something to bear in mind with Election Day tomorrow.
Bolaji, I found your post very clear and convincing.
Hi Ariella,
It is the same me…
I hate putting myself in the bracket of either Republican or Democrat given that they are both EQUALLY responsible for the mess that we are in today in America.
I kind of look at myself as a fan of Small Government and I am a big fan of Ron Paul and his thoughts.It hardly matters that he belongs to the Republican Party. I am also a big fan of Chris Christie.
But I also know there are enough clowns (who want more and more stimulus) in both parties…
Hopefully the anti-incumbency vote in the mid-terms tommorow will be so strong so as to make the politicians in DC sit up and LISTEN to voters and their real world concerns rather than pander to clowns like Paul Krugman and Larry Summers.
Regards
Ashish.
Ashish, Even Paul Krugman complains the Obama administration does not heed him. Krugman wants a larger intervention because he believes this is what the economy requires while it appears the government is just happy it got something through the U.S. Congress. I think business executives do not necessarily see this as a political issue, though. If I know someone is going to bail me out no matter what stupid stuff I get into, I am likely to be even more daring than I would be if I knew I was on my own. That's a fact of life. Businesses know, however, that real growth comes from the innovation they can come up with in products and business processes. The government is hardly the place to look for this. I am not against injecting some form of stimulus into the economy. I am just at this point beginning to wonder if it is the best way to energize companies.