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That was Wednesday. By Friday, the U.S. had escalated its trade war with China and the supply chain was recalibrating its expectations ̶ again.
The latest announcement ̶ a 25 percent tariff on $200 billion worth of U.S. goods ̶ came as most EDS attendees were preparing to fly home. But one U.S. manufacturer immediately weighed in on the latest development.
"As an electrical engineering and manufacturing provider, we rely specifically on imported resistors, capacitors and printed circuit boards (PCB), which are the building blocks of any electronic device,” said George Whittier, president and COO of Morey Corp.
“So, the tariffs on electronic components like these, combined with an already limited supply thanks to a global shortage, can affect procurement costs, product design and production timing,” he said. "The impact was small at first, but has increased as suppliers' inventories deplete and we're forced to increase the amount we import."
Still room for growth
Tariffs aside, there are still reasons for optimism in the electronics supply chain, according to EDS attendees. Electronics content continues to increase in big vertical markets, said Michael Knight, president of the TTI Semiconductor Group and senior vice president of corporate business development.
Component demand from the automotive market is on an upward trajectory, Knight pointed out. The advent of 5G will require a brand-new communications infrastructure, he said, both terrestrial and in the cloud. The robotics market is booming and consumes a lot of electronics devices, and automation, in general, is proliferating.
An equitable resolution to the U.S.-China trade war, Knight posited, could bring component demand back to 2018 levels – a high water mark for the industry.
U.S. purchasing and supply chain executives continue to forecast growth this year, according to the Institute for Supply Management’s Spring 2019 Semiannual Economic survey. Fifty-five percent of ISM respondents said they expect their revenue will be 4 percent higher than in 2018. Still, this is down 1.7 percent from the December 2018 forecast of 5.7 percent; and 1.8 percent below actual revenue growth in 2018. Procurement managers also expect capital expenditures to remain fairly stable -- respondents are looking at a 5.9-percent increase in capital expenditures in 2019, nearly even with the 6-percent increase predicted in December 2018.

Source: Institute for Supply Management
Nearly 60 percent of ISM respondents believe that tariffs have raised the price of goods an average of 6.8 percent. Thirty percent believe tariffs have caused delays and disruptions in the supply chain.
Caution ahead
Even before the tariff war escalated, Wall Street was cautious about the semiconductor supply chain.
“We see the combination of excess inventory and weaker demand once again pressuring estimates into Q2,” Morgan Stanley said in its Q1 survey of distributors. “Stocks have rallied sharply on hopes of a second-half snapback, but this doesn't appear to be grounded with any tangible data points.”
Following two years of constrained component supply, inventory is once again building up in the channel and lead times are contracting, the firm said.
A market change is underway in the global components space, said Michael Long, CEO of Arrow Electronics Inc., during its Q1 conference call. “We’re seeing this in the form of less favorable regional sales mix and less favorable product sales mix within the regions. The near-term impacts are lower margins and delayed cash flow.”
The distributor reported sales of $7.16 billion, up 4 percent from $6.88 billion in Q1 2018. Net income was $141 million, compared with $139 million in the prior-year period.
Arrow also found customer sentiment was changing.
“Exiting the third quarter of 2018 the tone was positive,” Long said. “Exiting last quarter, the portions of customers saying, they had too much, too little or the right amount of inventory were in line with long-term averages. Exiting the first quarter, we saw a large portion of customers say they had too much inventory and a very small portion say they didn’t have enough."
Component segments to watch
There are indications that customers are beginning to deplete their inventory, which should clear build up in the channel, Morgan Stanley said. Nonetheless, this will weigh on estimates as [Q2] plays out.
The firm also reported:
- Distribution expectations for microcontrollers in Q1 declined, with 32 percent expecting quarter over quarter (QoQ) growth, down from 42 percent last quarter and 66 percent in the year ago quarter.
- Connector expectations for Q1 also dropped, with 30 percent of respondents now expecting sales to be up QoQ, down from 35 percent in the prior quarter and 54 percent in the year ago quarter.
- Analog growth expectations remained virtually unchanged with 51 percent expecting QoQ growth compared to 50 percent last quarter and 70 percent in the year ago quarter. There was also a downtick in the percent of respondents expecting sequential declines, with a sizeable increase in those anticipating flat growth.
Tariffs continue to impact distributor/customer order patterns and are likely driving some pre-builds, Morgan Stanley added. Fifty seven percent of respondents reported that recent tariff uncertainty has impacted their order trends, while 51 percent said that it has impacted their customers’ orders and inventory management.
In addition, 11 percent of respondents mentioned that they believe customers are building inventory ahead of tariff deadlines.
Regionally, unit sales are still strong in Asia, distributors reported, but the channel is mostly moving commodities and low-margin products. The industry can expect a slowdown in the U.S. and possibly in Europe for the second quarter as book-to-bill ratios in those regions have declined.
“We don’t think [2019] is going to be an overall disaster,” Long concluded. “I guess that's the way [I'd describe it.]" Knight predicts 2019 will be bumpy, but it could improve if the U.S.-China trade war was resolved.