






As the electronics industry plows through calendar Q4, murmurs of uncertainty around 2019 are surfacing. Analysts say there’s a possibility that demand for electronic components will cool in 2019, and tariffs continue to fuel uncertainty throughout the electronics supply chain.
“Semiconductor memory ASPs are going to fall. Semiconductor sales are going to decline. The U.S economy is facing a probable downturn,” wrote Semico’s Morry Marshall. The Institute for Supply Management’s factory index for October reached a six-month low of 57.7 percent. Although any number above 50 indicates the industry is expanding, new orders, production and exports all cooled in October.
No signs of softening
Original component manufacturers (OCMs) and electronics distributors see no signs of a softening market. Ad hoc executive interviews during the recent ECIA Executive Conference were consistent — components remain in high demand. Although lead times are stabilizing, they’re not contracting, and many continue to stretch beyond 30 weeks. Capacity for parts in the highest demand is slow coming online, and there’s little evidence customers are double-ordering. Those trends were confirmed by distributors Arrow Electronics Inc. and Avnet Inc. in their quarterly analyst conference calls.

Avnet's President, Electronic Components, Phil Gallagher
Global distributors typically carry hundreds of component suppliers and reach millions of customers. Avnet’s book-to-bill ratio remains positive at 1 to 1.04 and Arrow’s at 1 to 1.03. “We feel pretty good about [overall demand],” said Avnet's President of Global Components Phil Gallagher during the ECIA conference. “5G is coming, automotive keeps going up and the government continues to expand in defense and aerospace. If anything, [the industry] will have a soft landing.”
There are some indications that component shortages are beginning to impact OEMs, however. A computer and electronic products executive told the ISM that in October, “all electronic components are having shortages and much longer lead times that impact our production.” Component makers see the opportunity to increase prices due to market demand, and many OEMs are still very concerned about continuing supply.
A Kemet Corp. customer is taking the unusual step of securing capacity with a $36 million interest-free loan. “We have now entered into one long-term contract with a customer, guaranteeing additional capacity above and beyond that which they currently purchase from us,” said Kemet CEO Per Loof during Kemet’s FY 2019 Q2 analyst call. “This particular customer has a current run rate of 6-billion pieces annually, and through the agreement Kemet is to provide an additional 6-million pieces annually for the next 10 years.”
If there’s any area of concern, it’s semiconductors. Texas Instruments Inc. and Maxim Integrated indicated demand for their products softened in the September quarter. IC Insights forecasts semiconductor market growth will decline from 23 percent year-over-year in Q1 2018 to 6 percent in Q4 2018. Year-over-year IC market growth dropped to 14 percent in Q3.
“Our AlphaWise quarterly survey of distributors suggest Q2 was the peak reading of cyclical indicators,” said Morgan Stanley. “Q3 was robust but exhibited some cooling on a rate of change basis. We remain cautious on semis and expect any trading bounces to be faded as estimates get revised down in the coming months.”
MLCCs tight for two more years
But interconnect, passive and electromechanical (IP&E) components — which account for 80 percent of a typical circuit board — are still in short supply. IP&E vendors are still struggling to shrink lead times, but Kemet expects the supply of ceramic capacitors won’t meet demand for another two years. “To fill today’s gap in MLCCs it will take a $3-billion investment [industry-wide], and this is without any additional demand growth beyond today’s level,” Loof told analysts.

Per Loof, CEO, Kemet
Distributors expect that some geographic or vertical markets will decline in 2018, but “backlog remains significantly up year-over-year,” Arrow Electronics' CEO Mike Long told analysts. “The rate of growth slowed for the second straight quarter as we expected. Customers are getting the parts they need when they need them. They're feeling less of an urgency to put in longer duration orders.”
And those tariffs...
But tariffs remain a wildcard for the U.S., even though there’s been little direct impact on component makers and distributors. In fact, one OCM executive at ECIA said tariffs appear to be having some negative impact in China. The economy there is worsening, many workers are looking for employment and news outlets report manufacturing activity in China declined in October. The leverage the U.S. is exerting on China appears to be working. On the other hand, it’s unlikely that the U.S. will see significant re-shoring due to tariffs, the executive added, because of the investment many manufacturers have made in facilities and equipment.
The electronics supply chain has been nimble in its response to tariffs. Suppliers are increasing their output in regions not affected by tariffs, and distributors that have multiple global warehouses have flexible shipping options.
Avnet ships direct from Hong Kong when possible, Avnet CEO William Amelio told analysts. Avnet has set up a Guadalajara warehouse in record time and is “funneling shipments through there that go to customers that historically would have gone to the United States and then maybe went to Canada, Mexico, Latin America and South America. Now [shipments] will go through either Hong Kong or Guadalajara.”
Avnet is also setting up a free-trade zone and working with suppliers on importer of record. “If we get our suppliers to be the importer of record,” Amelio explained, “the tariff to our customers will be less than if we're the importer of record.”

Arrow Electronics' CEO Michael Long
Demand hasn’t changed with the onset of more tariffs, Arrow’s Long told analysts. “We have been helping customers and suppliers mitigate this burden on their business. At their request, we're assisting customers who are moving manufacturing locations and rerouting supply chains. We've been using our information advantage to help suppliers manage tariff-impacted customers.”
“I will tell you right now that these tariffs have not substantially hurt our business because most people are reacting to them as they should,” Long added. “And anything that is artificially created we're against. We believe that tariffs are a bad thing in general. But if one government anywhere in the world decides that they're going to increase tariffs, don't be surprised that worldwide manufacturers move their manufacturing around. I don't see why that would be a surprise to anybody. And unfortunately, that sneaks up later in terms of jobs and things like that.”
Arrow’s Q3 sales increased 9 percent year-over-year to $7.48 billion, and net income grew 32 percent to $177 million. Avnet’s sales increased 9.2 percent year-over-year to $5.09 billion, and net income grew from $58 million to $84 million.
"Returning to the near market condition, leading indicators remain healthy," Long concluded. Based on Arrow's visibility, "things look pretty good going into next year."