Price erosion is one constant in the switch market, and 2015 is no exception. Prices for switches have dropped as much as five percent on average this year, according to manufacturers, which is good news for buyers but not suppliers. Also good news for buyers is stable lead times in the three- to four-week range for commodity devices, and eight to ten weeks for specialty components.
There is steady price erosion in commodity products, said Owen Camden, global director of product marketing, C&K Components. “Like many industries in electronics, there’s an overcapacity of supply, especially with all the Asian components coming online and new partnerships. There is increasing competition.”
Switch prices in North America in the second quarter of 2015 versus the first quarter were down four percent with all but two types of switches – pushbutton and snap-action – declining, according to market research firm Cumulus Inc. However, average selling prices (ASPs) for the first half of 2015 versus the same period in 2014 are up three percent.
Although pricing is up nearly three percent through the first two quarters, pricing has tailed off in the second half of the year, said Michael Schwert, founder, Cumulus. “As bookings have dropped considerably in the second half of the year, pricing goes right down with it.”
Units were up for most types but down in total by three percent year-to-date, said Schwert. Total sales growth for North America was less than one percent in the second quarter versus the first quarter, while unit growth climbed nearly five percent compared to the first quarter of 2015.
The Q2 Europe switch report finds that ASPs decreased in two of the eight categories of switches covered and were down almost three percent in total on a mix shift to lower priced switches, said Schwert. Total sales growth for Europe in Q2 was two percent above the previous quarter, and six percent better than the second quarter of 2014, while units grew five percent compared to Q1 and six percent higher than Q2 2014.
One way switch manufacturers try to combat steady price erosion is through value-added services and products such as product differentiation through customization and lead time reduction programs. C&K, for example, will adapt its standard products to fit a customer’s specifications that low-cost competitors can’t provide.
In many cases, custom products become standard parts in C&K’s portfolio. “We often realize that other customers may be interested in the modification as well. It allows us to offer more variations and a larger portfolio,” said Camden.
In addition, customization and a growing portfolio of standard products helps with pricing, he added. “As switches become more standardized and commoditized, there’s a slow, steady price erosion. So you build more value into a product to increase the value to the customer and to differentiate your product, which can help grow or maintain unit pricing,” said Camden.
Switch manufacturers, like all electronic components suppliers, also look for ways to reduce lead times to provide additional value to customers. Distributors often play a role in a vendor’s lead-time reduction strategy in terms of stocking inventory. C&K, for example, provides distributors with low minimum order quantities (MOQs), which also helps distributors increase their inventory turns.
In addition to price erosion, switch manufacturers face a relatively flat year in terms of sales growth, despite an uptick in unit growth of about five percent.
“The U.S. was the healthiest of the three main regional economies, but there was a lessening of the growth rate in Asia due to China, and EMEA was relatively flat,” said Camden. “The U.S. saw more growth than any of the other three regions, but it wasn’t by any means impressive growth. It was incremental growth.”
In 2014, switch market sales in North America were down one percent and units grew 20 percent compared to 2013, according to Cumulus. Sales revenues to date (Q1-Q3) indicate a slightly better year in 2015.
To remain flat, revenues in North America need to hit $59.5 million in Q4, said Schwert. He expects the market to be flat or grow one or two percent in 2015. In 2016, he projects a growth rate of minus two percent to two percent “barring a geopolitical eruption or extreme economic conditions outside of North America,” including tensions in China, the Middle East and the Ukraine.
The PMI tracks the overall switch market, which is tied to manufacturing, said Schwert. Manufacturing has been good for the past six or seven years until it just fell below 50, he said. [A number above 50 indicates the manufacturing economy is growing, and below 50 indicates a contraction.]
The Institute for Supply Management‘s PMI—an index of U.S. purchasing managers – fell to 48.6 percent in November, down 1.5 percentage points from October . This is the first time the U.S. manufacturing industry has contracted in 36 months as a result of declines in production, new orders, and raw materials inventory.
A couple of bright spots for potential growth are developments in the automotive and the Internet of Things sectors, all around connectivity. The latest numbers indicate that 6.4 billion “things” will be connected worldwide in 2016, up 30 percent from 2015, and reaching 20.8 billion by 2020, according to Gartner Inc. In 2016 alone, 5.5 million new things will be connected every day. Gartner also expects the IoT to support total services spending of $235 billion in 2016, up 22 percent from 2015.
Camden said the IoT is one C&K’s focus markets with growing applications around machine-to-machine communications in global security and safety, fire protection systems, perimeter security, control and factory automation, and home automation. Target products for these applications include tactile and DIP switches.
“We’ve seen about seven to 25 percent compound annual growth in the number of devices out there for these IoT needs,” said Camden. “The proliferation of these electronics results in the proliferation of components for them.”
Two growing requirements for IoT applications are smaller and sealed switches. “Many IoT and wearable electronics such as Fitbit and wearable headsets are getting smaller, which requires the switches to get smaller and offer higher performance to resist chemical and humidity intrusion,” said Camden.
One example is C&K’s new KXT series of ultra-low-profile top-actuated switches for wearables and portable electronics. The new switches measure 3 x 2 x 0.58 mm, which makes them suitable for a host of small devices including wearable electronics, hearing aids, ear buds, mobile phones, and other portable electronics. The momentary action switches are rated for a range of operating forces - 100gf (±30), 180gf (±50), and 240gf (±70) - with an operating life of 300,000 cycles.
C&K also has a smaller switch under development aimed at the wearables market.
Automotive also is expected to be growth driver. The market for connected cars is to forecast to reach $131.9 billion globally by the end of 2019, driven by the awareness of the safety and security provided by these cars and their Internet connectivity, according to the latest research from Transparency Market Research.
The report also cites specific safety features including emergency calling and stolen vehicle tracking that are gaining in popularity. Other growth drivers in the area of services include traffic information, weather information, gaming, entertainment, notification of speeding, notification of crashes and location information.
Camden said the connectivity boom in automotive began with simple communications connectivity – plugging existing, external devices such as mobile phones into the network.
Since then there has been increased connectivity of internal systems for security and safety, such as ABS, forward radar, seatbelt tensioners, driver awareness/alertness, and drive/shift/brake by wire, he added.
“All these systems are now being coordinated. Automakers brought them on one-by-one, but they’re now being connected,” Camden said. “They’re also starting to tie these into some of the external connectivity – GPS, traffic management, etc.”
All these advances are pieces of the puzzle leading up to driverless vehicles. “They have to try them out as individual systems and make them flawless,” said Camden. “You can’t have 99 percent success rate in driverless vehicles.”
All of these emerging applications - IoT, wearables, and automotive connectivity - that use switches could help drive growth in 2016, but it's too early for optimism as switch manufacturers face lower prices and slower growth at the end of the fourth quarter.