With some component lead times stretching as far as 30+ weeks, OEMs and EMS providers are booking orders farther out than usual. Although this generally spurs unbridled optimism in the supply chain, some analysts are concerned about the validity of this demand.
When component availability gets tight, OEMs and EMS providers have, in the past, placed the same order with two or more suppliers. Double ordering contributed to an historic electronic component inventory glut in 2001 on the heels of the dotcom boom. Although the supply chain has built in practices to flag double-ordering, financial analysts are leery of some demand forecasts.
One industry report noted that several suppliers have cancelled some OEM and distributor backlog on double-booking concerns. Demand signals remain favorable, the report said; however, several channel players indicated they could not identify the source of demand strength. Others expressed concern on how much of the backlog expansion is driven by stretched lead times versus true end demand.
Executives of Avnet Inc., which reported fiscal 2018 first quarter sales of $4.7 billion, said they believe underlying demand is solid. “Avnet’s book to bill ratio remains strong at 1:04 to 1.00 and if it were lower we might be concerned,” said Phil Gallagher, president of Avnet’s Core Distribution business. “We do check [order patterns] and we are watching our [customer] cancellations closely. There’s nothing to indicate cancellations are anything outside of the norm and there’s also no indication that lead times are coming in. That’s good for us,” he added, “I’d say things look good into the March and June quarters.”
Avnet’s Q1 sales increased 13.2 percent year over year driven by strength in the EMEA and Asia-Pacific regions. That business offset a 14.5 percent decline in the Americas, which experienced supplier defections and problems with ERP implementation. “Our EMEA region delivered a fourth consecutive quarter of double digit year-over-year organic growth as revenue increased 14.3 percent in constant currency while Asia grew nearly 10 percent organically. Premier Farnell also delivered higher than expected results during the quarter,” said Bill Amelio, CEO of Avnet.
Supplier realignment cost Avnet about $1 billion for the year and heavily impacted the Americas. “The remainder of the [Americas] decline is primarily due to the cumulative impact of the ERP implementation that negatively impacted our gross profit and operating income margins,” Amelio said. “We are, however, encouraged that the Americas team is regaining momentum as many metrics for our customer service levels have begun to improve to pre-ERP implementation levels. Given our performance in the Americas this quarter, we are accelerating previously announced cost reduction initiatives to ensure we meet our fiscal 2018 commitments. With our international regions performing well and our digital ecosystem delivering higher margin growth, we believe we are positioned to drive improved financial performance exiting this important transition year.”
The automotive and industrial markets were particularly strong during the quarter, Avnet executives said, and overall, design registrations increased 41 percent. Many of these wins were generated with suppliers that have replaced departed vendors. Additionally, catalog distributor Premier Farnell is generating sales leads that Avnet expects will become volume business.
However, distribution margins overall remain under pressure. Although some suppliers have increased prices between 5 percent and 10 percent, distributors say margins are unchanged.
Financial analysts are expecting calendar Q3 will be at the high‐end or above revenue expectations for component makers and distributors. Calendar 4Q growth guidance should be better than expected as book‐to‐bill ratios remain elevated and demand signals remain positive. However, analysts remain cautious on late 2017/early 2018 due to bookings stronger through the channel than through end customers; bookings at least partially driven by stretched lead times; and capacity additions planned due to stretched lead times. Avnet’s calling for its fiscal Q2 sales to be in the range of $4.25 billion to $4.55 billion.