Demand for electronic components is rising steadily and solidifying enough across all market segments that suppliers are beginning to hope they may soon be able to raise prices and improve their gross profit margins. Led by automotive, industrial and even segments of the consumer electronics market – smartphones and tablets – demand for components rose during the first quarter and while nobody is reporting a sharp increase in orders many suppliers believe they may have reached a turning point. Orders are expected to strengthen even more in the second half of the year, according to executives at component suppliers.
“In the first quarter, we saw continued economic improvement with fairly healthy business conditions in almost all market segments and a positive outlook across the board,” said Gerard Paul, president, and CEO of passives and active components vendor Vishay Intertechnology Inc. (NYSE:VSH) while presenting the company’s quarterly results to analysts at the beginning of this month. “Recovery is gaining momentum in Europe with strong orders, in particular, from industrial. Asia grew steadily, and in the Americas, the business is stable. Automotive continues to do well with growth driven by healthy vehicle sales in Asia and America. Consumer looks promising with continued success of gaming in high-resolution products. Smartphones are solid, and fixed telecom benefits from growth in 4G and broadband networks.”
While stronger demand is welcome news to the entire industry, what suppliers and distributors are actually waiting for is better component pricing leverage. So far, and for years now, component purchasers have had the advantage of calling the shots in pricing negotiations. That “buyer’s market” condition continues even now but not at the same level. Component prices continue to decline but the downward spiral has shifted from the mid-single digit to the low single-digit – in cases, as low as only one to two percent quarter-over-quarter.
Downward pricing pressure is normal within the electronics industry but a deceleration in that momentum is always the first clear sign that vendors are better managing supply. In other words, they are keeping demand and supply in better balance and tamping down on production to avoid flooding the market with components and driving pricing lower. Order cancellations have also fallen over the last two quarters in another signal that OEM demand and forecasts are supported by actual end-market consumption.
Once this trend shows up in the market for interconnects, passives and electromechanical (IP&E) components – it begins typically in the semiconductor end – pricing leverage and improved margins at suppliers and distributors should follow, according to observers.
“Order cancellations remain at a low level. The price pressure remains normal with minus 1 percent versus prior quarter and minus 2.8 percent versus prior year,” said Vishay’s Paul “We have seen a somewhat increased price decline in actives, minus 1.6 percent versus prior quarter and minus 4 percent versus prior year. The price decline in passives is moderate, minus 0.4 percent versus prior quarter and minus 1.4 percent versus prior year.”
Watch for inventory replenishment at distributors to further confirm the expected improvement in demand, which could drive up pricing and eliminate the weak hand suppliers have had in negotiations with buyers. As this shift accelerates, OEM purchasers that have not opened discussions about long-term purchase agreements may find themselves at a disadvantage. The time to lock in supply and favorable pricing terms for the fall back-to-school and end-of-year buying season is now.
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.