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Mid-way into 2016, the electronics supply chain continues to be hammered by numerous challenges, many of them versions of old problems but which still pack the capacity to do extensive damage to sales and profits at OEMs, component manufacturers and distributors alike. Some of the current difficulties facing electronics makes, however, are emerging from new technologies and services that the industry itself has introduced without a full understanding of the likely disruptive impact on current revenue streams.
Semiconductor sales for 2016 will decline, falling sequentially from 2015 and weakening on uneven demand in the various market segments and declining in all regions, led by the Americas, which continues to face pressures as IC consumption shifts to lower cost China, according to a report from World Semiconductor Trade Statistics (WSTS). IC sales in 2016 are projected to decrease to $327 billion, down 2.4 percent from the prior year, with the largest decline occurring in the memory and logic IC sectors, offset by higher demand for sensors, analog ICs and optoelectronics. The industry association predicts tepid growth in 2017 and 2018 of approximately 2 percent each year.
Seasoned industry executives know by now that the positive growth projected for 2017 by the WSTS may not materialize. This has become an industry where any forecasts exceeding a 90-day period must be taken with a pinch of salt. The rapid spread of electronics and other technology products into most segments of the global economy is heavily impacting and skewing the ability of industry researchers to predict demand for products. This, combined with numerous technological changes, mergers and acquisition activities, regional political and economic developments and uncertainties and ineffective response by industry leaders, have made the environment even more complicated for manufacturers and their suppliers.
Ken Bradley, Founder, Lytica Inc.
“There are way too many unknowns in the technology market today and recent M&A actions have made planning even more difficult,” said Ken Bradley, chairman and founder of components pricing and supply chain analytics information provider Lytica Inc. “Situations are developing in the market that companies can’t even respond to because the factors involved keep changing while they are planning a response.”
So far, the U.S. has been the strongest pillar of the global economy. The International Monetary Fund (IMF) believes it will continue in this capacity for a while longer despite some structural challenges that are now raising concerns at the organization. Christine Lagarde, managing director of the IMF, announced last week that the U.S. economy will grow at a 2 percent or higher rate in the year ahead, helping to keep the rest of the globe humming. However, she also expressed concerns about the tightening labor market as well as the growing divide between the richest segment of the society and the poorer folks.
“The current situation is positive and despite some recent setbacks, we believe that the U.S. economy is in good shape,” Lagarde said during a conference call last week. “The four forces that will impact growth in the United States going forward, and which need to be addressed in order to improve the situation for the medium-term … are not PPP, they are PPPP. What do I mean by that? Labor force participation declining, productivity growth falling, polarization in the distribution of income and wealth, and finally, high levels of poverty. So you have the four Ps: participation, productivity, polarization and poverty.”
Those factors are impacting other regional economies too and are directly influencing buying trends in the electronics industry, too. Electronics makers and the supply chain are certainly being impacted by global economic conditions, including a slowdown in China’s growth rate, currency fluctuations in many parts of the world and geo-political turmoil in Europe and elsewhere, according to observers. All these make forecasting demand even more difficult than at other normal times.
The uncertainty is further complicated by the fact that the numbers projected by regulators and independent observers often differ widely. Take the example of China. The Conference Board forecasts the country’s economy will expand approximately 3.7 percent this year but that’s about half of current projections by the Chinese government.
“What’s the real impact of China’s recent economic turmoil amidst currency devaluation and indicators well below market expectations?” asks Andrew Polk, a senior economist with the Conference Board. “We see both good news and bad news. First the bad news. We don’t project a sustainable pickup in China’s economy over the next decade. The good news is that most of the downward adjustment has already happened. What does this mean for multinationals investing in China? First, expect volatility. That means you must stay on top of risks and understand potentials for problems at every level of your supply and customer chains.”
M&A Blues
One of the more difficult operational challenges electronics makers are contending with this year has to do with the spate of mergers and acquisitions conducted by consolidators over the last couple of years, especially in the semiconductor market. The shrinkage in the ranks of suppliers pose a particular headache to OEMs and contract manufacturers because it can result in the loss of second-source options, said Lytica’s Bradley.
“The amalgamation of businesses is putting a lot of wild cards in the supply chain,” Bradley said in an interview. “Manufacturers could be held hostage through the changes that take place following a merger or acquisition. Anything that changes the normal order can inject uncertainties into the supply chain.”
The M&A actions, which accelerated last year and has continued strongly in 2016, have also triggered “what if” scenario planning at OEMs and EMS providers worried that the purchase of a preferred supplier may result in the elimination of certain components and force a redesign of their own equipment. Acquisitions can also result in a firming of prices as the number of component manufacturers dwindle – a boon to suppliers but a dreaded development for component buyers.
Although the electronics market growth rate is expected to be tepid for the next several years some segments of the industry are seen racing rapidly ahead. The market for connected products, or internet of things, is surging, according to IHS Inc., which estimates the sector had more than 8 billion devices in 2015. These includes smartphones, tablets, PCs, TVs and audio devices, the research firm said in a press statement.
“The proliferation of media-enabled connected endpoints has implications for media consumption, media production, broadband infrastructure, and the business itself of network management and traffic discrimination,” said Merrick Kingston, principal analyst-connected home, at IHS Technology in the statement. “It drives media consumption, IP traffic and more.”
Connected devices aren’t the only products in hot demand. The industrial equipment market is also seeing a boost as companies embrace the use of electronics to improve productivity. In China, where the economy has been slowing, demand for industrial semiconductor rose only slightly in 2015 but sales are projected to surge in 2016, IHS said. Sales in 2015 were almost $42 billion, rising only one percent from 2014 when the market grew nearly 12 percent from the prior year. The disappointing 2015 performance in the industrial semiconductor market will be reversed this year on continued strength in the U.S.
“The flat growth in the industrial semiconductor market last year is a bit discouraging, after a period of such robust growth, but there’s hope on the horizon,” said Robbie Galoso, associate director, industrial semiconductors, IHS Technology in a statement. “The industrial market showed resilience in 2015 and all signs are pointing to improving growth in the future.”
