AVX Corp. CEO John Gilbertson has been in the electronics components business long enough to know growth signs when they start cropping up in key industry segments like automotive, cloud storage, defense and telecom. Anecdotal reports, though, aren’t quite as reliable as definite component orders and as a company that sells 44 percent of its products through distribution, Gilbertson wants channel partners’ confirmation before pushing the button to jack up production and supply.
He’s going to have to wait a bit longer. Distributors, too, believe the economic environment is improving and yet they aren’t beefing up inventories and won’t until they see irrefutable evidence of a stronger uptick in demand from OEMs and the end-market buyers.
The “wait-and-see” environment is a conundrum for many companies and executives across the electronics industry; Component suppliers think a resurgence in demand is imminent but won’t increase manufacturing capacity utilization until they’ve seen firmer signs of the economic improvement, heralded by rising inventory at distribution. Meanwhile, distributors too – now more determined to assure investors their capital investments are justifiable – are hesitant to spend money on stocks.
Who will blink first? Neither, in my opinion, because there’s a third-party that’s benefitting currently from the current stalemate: OEMs. Purchasers and parts suppliers are no longer working against each other’s interests but instead move in tandem to ensure neither party gets burned by OEM demand overestimation that have in the past resulted in nasty down cycles.
Everyone involved in the supply chain will pay a price for this situation although the impact on the players will not be equally distributed. Failure to anticipate an increase in demand could result in lost sales for some components suppliers and distributors – this is where brokers or gray market suppliers make their money – but OEMs, too, may find themselves losing sales as a result of inability to keep factories humming when component orders get filled late due to shortages.
They may also end up paying a hefty premium for components, either to suppliers jacking up prices as demand exceed supply, or to brokers that have desired parts. It’s a long-term problem many assume the industry had finally solved but recent developments indicate that’s not the case. Prices are still under pressure at suppliers and margins too won’t recover at distributors until pricing leverage shifts back to suppliers. It may happen this year, according to industry executives, but even those who hold this view – like Gilbertson at AVX – are holding their final verdict until they get more evidence.
“I mentioned it last quarter but it still holds true. We are hearing a lot of common themes across all markets calling for more improvements this year than last,” Gilbertson said during a presentation to analysts. “We’ll just have to wait and see the results as the year progresses.”
Industry lead-times will have to expand beyond where it is today for pricing to change and for distributors to see the margin improvements they sorely desire.
DISCLAIMER: Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.