IP&E War Heats Up Electronics Supply Chain, Part 1

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Large, billion dollar transactions are unusual in the interconnects, passives and electromechanical (IP&E) components market but recent developments point to a stirring in the sector that will have major impacts on OEMs, suppliers and parts distributors serving the sector. True, IP&E components are anything but glamorous and the main vendors — Amphenol, AVX, Kemet, Molex, TE Connectivity and Vishay, amongst others — aren’t as popular as the big semiconductor suppliers like Broadcom, Intel, TI and Qualcomm. Also, aside from educated investors who understand their roles in the electronics supply chain, IP&E vendors typically aren’t even on the radar of the general public. Until recently, that is.

The planned $7.2 billion acquisition of Molex Inc. by Koch Industries announced recently was not only unexpected but, in many ways, it also highlights the significance of the connector market to the entire electronics industry. Connectors, passives and electromechanical components gained elevated status following the transaction and the industry may witness a wave of consolidation and other M&A deals in coming months and years. (See: Koch Veers into Electronics with $7.2B Molex Acquisition.)

What’s bubbling up to the surface today is the silent war that has been brewing for the last several years in the IP&E segment as investors like Berkshire Hathaway (owner of TTI Inc.), Koch Industries, vendors and top distributors pour more resources into the sector and jostle for the title of market leader. With Arrow Electronics and Avnet, the two top distributors in North America and the industry’s leading global players, challenging specialized IP&E rivals, suppliers in this segment are being wooed and coddled by companies seeking to increase revenue and improve margins.

“There’s opportunity for consolidation in the IP&E space,” said Chuck Delph, senior vice president of sales, Avnet Electronics Marketing, Americas, in an interview. “The market share that small specialty regional distributors have is still significant. So there’s some opportunities for consolidation but Avnet’s focus is organic growth and delivering technology solution through our designchain capability.”

The war over the IP&E procurement budget is taking place on several fronts. In one corner of the battlefield distributors are taking on each other and fighting to be named Lord of the IP&E kingdom. At the other end of this turf war, though, are suppliers – especially in the Western hemisphere – who want to make it clear that IP&E products aren’t just commodity items to be abandoned to low-cost Chinese manufacturers.

Today, companies like Amphenol, AVX, Kemet, Molex, TE Connectivity and Vishay market themselves as technology leaders in the IP&E segment. Each one of these companies regularly trot out press releases announcing proprietary parts aimed at OEMs seeking an edge in the competitive market.

“Electronics continues to proliferate, and this requires more connectivity and at TE, we’re really proud to be the world leader enabling this connectivity,” said Thomas Lynch, chairman and CEO of TE Connectivity during a presentation to analysts July 24. “Our team around the world is doing a very good job of navigating through the economic uncertainty, focusing on our customers’ short-term and long-term needs and delivering strong earnings and cash performance. And I emphasize the long-term needs because we continue to invest alongside of our customers.”

Consumer electronics OEMs like Apple Inc. and arch-rival Samsung have been quick to use simple connectors to distinguish their products. Apple, for example, has used its FireWire connectors to demonstrate to the industry that connectors can incorporate leading technology to help manufacturers solve problems related to data transfer. The company hasn’t stopped here, though. With understated fanfare it is pushing the technology frontier in the connector area and has filed patents with the US Patent and Trademark Office for innovations such as “flexible headphone connectors.”

On August, 26, for example, AVX Inc., rolled out its latest connector for the industrial market and noted that the “single-piece, low pin count, top-entry, vertical card edge” part offers engineers and OEMs the opportunity to improve performance of their designs and products in the most demanding environments. “This unique configuration, combined with high-reliability, gold-plated beryllium copper spring contacts, provides engineers with a versatile, robust, and cost-effective single-piece solution for low pin count perpendicular PCB mating in harsh industrial applications,” AVX said in a press release.

Expect more of such innovations in future from connector suppliers and OEMs as companies push the limits of miniaturization and mobility across multiple industries, including consumer, medical and industrial. IP&E components will need to keep up with the technological advancements to help companies achieve the goals of giving buyers smaller devices, flexibility and portability, according to industry observers.

This may be one reason why companies like Avnet have turned their biggest guns fully on the IP&E market with the belief that technology innovations can help reduce the impact of commoditization. Margins in the IP&E sector don’t have to be wafer thin; technological advancements can be used to differentiate top-level suppliers from commodity parts vendors.

“Our customers are looking for solutions to time to market issues, complex technical issues around interconnects, passives and electromechanical components that come from OEM products becoming smaller, faster and that need to get to customers in a more cost effective manner,” said Avnet EM’s Delph. “IP&E components will be a part of that and Avnet has committed resources, tools and solutions that we’ve learned through our evolution in semiconductor all of which will enable us create value that we do not believe anyone else has.”

Billions at Stake

Billions of dollars in procurement expenses at OEMs and contract manufacturers are at stake. The IP&E market runs into the tens of billions of dollars annually, which explains the quiet war raging for market share in the sector as component distributors expand services to OEMs and EMS providers and as suppliers widen their offerings to include proprietary parts in a bid to lock in design wins. The entry and growing presence of foreign, low-cost Chinese manufacturers into the IP&E market has also turned the normally staid industry segment into a hotbed of activities.

BCC Research in a report published in early 2012 estimated the global market for passive and other interconnecting electronic components at $118.6 billion for 2011 and forecasts the sector would rise at a compound annual growth rate of 9.4 percent between 2012 and 2017 to reach $213.5 billion. The IP&E market is indeed huge but it’s also a massively splintered sector with most of the top players accounting only for fractional sales. As a result, opportunities for massive share gain exist and the race is on now to determine which distributors and suppliers can dominate the sector.

The $7.2 billion Koch-Molex transaction made headlines globally but other smaller and still strategically important acquisitions are being quietly executed in the IP&E market, all of them pointing to how vendors are positioning themselves for future growth. In June, Amphenol, one of the market’s top performers in the cable and wireless connector market, bought DC Electronics, a supplier of harsh-environment interconnect assemblies for the industrial market.

“This excellent acquisition builds upon our leading offering of high-technology interconnect products to the many diverse segments of the industrial market, including, in particular, the heavy equipment, medical and semiconductor test areas,” said Richard Norwitt, president and CEO of Amphenol while presenting the company’s June quarter results. “Very importantly, this acquisition is also consistent with our long-standing strategy to find and acquire complementary companies with strong management, leading technology and excellent market presence.”

Amphenol has been quite aggressive on the acquisition front with small transactions that added complementary technology to its product offerings. The company is aiming to further diversify its offerings to what Norwitt described as “unique markets,” including automotive, broadband, mobile, military and aerospace. The acquisitions in 2012 included the purchase of Deutgen Group, a supplier of high-technology, precision injection molded components for the automotive industry with about $25 million in annual sales. Amphenol may not limit itself to small acquisitions, though, and the purchase of Molex by Koch may spur it to push for a large transaction, a move that the management seem to think is quite possible.

“We will be very aggressive in the hunt for acquisitions. We will also be very prudent in prices that we pay,” Norwitt said. “The criteria that we have for acquisitions has not changed. We look for companies with excellent technology, with excellent people, in whom we can really put confidence and which are complementary to the company. And that really has nothing to do with size. We will acquire small companies and we will acquire big companies.”

In the second part of this report EPS will examine how component distributors are pouring resources into the IP&E market, expanding value-added services and jostling for greater market share. We will also publish excerpts from the interview with Avnet EM’s Chuck Delph.