Expectations for an upturn in electronics component demand have been pushed out to the second half of 2020, and the road to recovery passes directly through global trade policy, leading analysts say.
The outlook for Q4 is grim as component demand deteriorates further, Morgan Stanley said in its Q3 distribution survey. “The narrative of a 2H snapback has all but disappeared with investor focus shifting to outcomes regarding China-U.S. trade negotiations.”
Sentiment throughout the supply chain has been negative regarding quarter-over-quarter (q/q) growth, Dale Ford, ECIA chief analyst, told a gathering of executives earlier this week. Although the level of intensity varies region-by-region, there is widespread consensus that global component demand will pull back in Q4.
High inventory levels and contracting lead times are two culprits for a below-seasonable Q4, Morgan Stanley said. However, the long-term forecast for electronics manufacturing – and thus the supply chain – is tied to macro events, according to Cliff Waldman, CEO of New World Economics. The U.S.-China trade war is generating the highest level of uncertainty “by any policy in living memory,” he told ECIA conference attendees.
Growth expectations for Q3 and next quarter are now at or near historical lows for analog, MCU and connectors, according to Morgan Stanley. Distribution expectations for MCU in Q3 declined, with 19 percent expecting q/q sales growth, down from 21 percent in Q2 and 49 percent in the year-ago quarter. “This is the worst MCU growth outlook since we started tracking the data,” the firm said.
The automotive market has remained soft; manufacturing indexes are at or near historic lows; and data center and smartphone demand have been weaker than expected, Morgan Stanley said. Connector forecasts for Q3 dropped, with 19 percent of respondents expecting q/q sales growth, down from 21 percent in Q2 and 40 percent last year. Analog growth expectations have declined the most, with 19 percent expecting sequential growth compared to 31 percent in Q2 -- and 71 percent in the prior-year period.
Tariffs continue to influence order trends and inventory management for customers and distributors, but the impact has become less pronounced, according to Morgan Stanley. Fifty-two percent of respondents said that recent tariff uncertainty has impacted their order trends, down from 69 percent; while 54 percent said that it has impacted their customers’ orders and inventory management, a decrease from 63 percent in the prior quarter. Eight percent of respondents believe customers are building inventory ahead of tariff deadlines, down from 21 percent last quarter.
The long term
Still, tariffs have increased costs for electronics companies. The IPC electronics trade association found businesses have seen a 31 percent increase on the dollars they spend on imported products. Twenty-five percent said more than half the dollars they spend are facing higher tariffs.
The industry is united on holding China accountable for its trade practices. The nation has been stealing IP and blocking access to its markets for decades, Waldman said. However, other global economies – not just the U.S. – should confront the nation. “Forecasters have underestimated the impact the U.S.-China trade war has had on manufacturing,” he said. U.S. policies are driving unintended consequences.
“Tariff impacts are complex,” Waldman said. “They can cause changes in demand, changes in suppliers and changes in the configuration of supply chains.”
Such moves are not easily reversed, and U.S. supply chains are already shifting. Electronics companies that manufacture in China have, or are planning, moves to Japan, Vietnam or Taiwan. In September, EMS provider SMTC Corp. said it would wind down its Chinese manufacturing operations when its Dongguan, China facility lease expires in December 2019.
At the same time, companies are delaying capital expenditures because of the uncertain market. Capex dropped precipitously during the first half of 2019, Waldman reported. A good portion of that investment is earmarked for upgrade or replacement of IT systems, communications networks and high-tech manufacturing equipment.
“I agree with most analysts who say that the biggest short-term impact is not from the tariffs themselves but from the uncertainty created by the U.S.-China trade war,” he said. “This is clearly having a dampening impact on business investment and thus manufacturing.”
U.S. manufacturers are facing some specific hurdles, he added, including a chaotic trade battle, a slowing global economy, and an elevated dollar. A strong dollar means U.S. goods are more expensive in foreign markets. Growth will be flat through 2020.
The next big thing
The electronics industry needs a shot in the arm, and 5G is poised to deliver one, said ECIA’s Ford. Combined with IoT and the cloud, 5G represents a triumvirate of electronics opportunities.
5G is viewed as a “fabric” that connects everything—enhanced mobile broadband, mission-critical applications and a massive “Internet of Everything.” In addition to the communications infrastructure, electronics devices such as computers and smartphones will have to be upgraded, Ford said.
By 2035, 5G’s full economic benefit should be realized across the globe in a broad range of industries – retail, education, transportation and entertainment. Up to $12.3 trillion worth of goods and services will be enabled by 5G mobile technology.
Ironically, this transformation depends on global cooperation and unfettered trade. “To truly understand the global economy, think about supply chains, not countries,” Waldman said.” “Every company is now impacted by many more countries and regions than just the ones where its customers, suppliers, and competitors reside.”