Connector industry to grow 5% despite price erosion
Gina Roos -- Purchasing, 4/17/2003 2:00:00 AM
After two consecutive years of negative growth, the connector industry is slowly on its way to reaching at least 5% growth in 2003, say connector manufacturers and analysts.
In addition to dealing with sluggish demand, connector manufacturers have faced price erosion and shorter delivery demands over the past year. Yet, most connector manufacturers continue to move ahead with investments in new product developments to ensure they are ready to meet new customer requirements in all market sectors.
"We started 2003 off with the order incoming rate up 15% over January 2002, but it continues to be a very poor business environment," says Ron Bishop, analyst for Bishop & Associates. "Businesses are being very cautious; they're keeping inventories very low and order leadtimes are two to four weeks."
Analysts and connector manufacturers agree that OEMs are placing orders with very short leadtimes and are placing smaller orders much more frequently. "OEMs are fighting for price concessions and are absolutely trying to do with the minimum to manage their business because they don't see future visibility and they don't see huge market drivers," Bishop says.
Last year was a tough year, down 9.6%, especially since the market was down 19% in 2001, he adds.
"As a result of the 30% drop over the past two years we're back down to 1997 levels and it's proving to be a tough environment for everybody," says Martin Slark, president and chief operating officer for Molex Inc.
"It has stopped getting worse but it's not getting better at any great rate," Slark adds.
Although Bishop believes that the connector market will grow in the 5-6% range in 2003, he says it would be easy for the industry to have negative growth again this year because there are no big market drivers.
The automotive industry has been flat over the past couple of months, companies are watching their IT spending, commercial aircraft is still going through great trauma although the military aerospace business will most likely grow due to the military force build-up, Bishop says.
Yet, some connector makers such as Molex are expecting to grow at twice the industry rate this year. Slark says the two factors that helped make last year better than 2001 were that consumer confidence held up so the consumer electronics industry (including cell phones) did better than what was anticipated, and zero percent financing helped the automotive industry.
Slark believes the ongoing trend of increased mobility, the proliferation of digital electronic products and automotive telematics will continue to create opportunities.
The industrial and commercial sectors are also expected to grow this year despite continued price erosion. Jack Voelmle, vice president of sales and marketing for Tyco's North American industrial and commercial businesses expects about 3-5% growth in the industrial and commercial businesses.
A lack of business due to a sluggish economy has put the market in a position where everybody is so hungry to participate in any business that it has put buyers who have some volume at an advantage to play havoc with pricing which causes price erosion, Voelmle says.
Another positive sign for the connector industry is that most companies have worked out their inventory issues and are starting to report positive year-over-year sales and profit numbers.
Yet, the computer and telecommunications sectors don't show any signs of recovering, Slark says. That will require an increase in business investments which will only happen when companies start to see more positive financial results, he says.
Barring any dip in the economy or negative impact from the war in Iraq, Slark expects to see some pick up in capital expenditures this year which will start to drive a replacement cycle for computers and infrastructure that companies have delayed for some time.
A buyers' market
While the industry may post modest growth this year, it will remain a buyers' market for all of 2003. Buyers are asking for shorter deliveries and are getting them as connector makers compete for what few orders are out there. Plus, buyers have been getting better pricing with average price declines of about 3-8% depending on connector type.
To deal with quick delivery demands, connector manufacturers are working on reducing their manufacturing cycles and moving their raw materials for plastics and metals to just-in-time programs.
Slark says about 60-70% of Molex's shipments in a month are ordered that same month. "Everybody got caught with so much inventory that they are very nervous about making any long term commitments and since they know the capacity is available there is no reason for them not to do it."
The biggest issue is the change in demand visibility, agrees Tom Pursch, vice president of Teradyne Connection Systems, Components. "We can see maybe about four to six weeks out."
As a result, Teradyne has modified its internal manufacturing structure to be very flexible. Typically, when customers call they aren't building to forecast, they need product right away so we've had to lower our cycle times and leadtimes as well as put in buffer inventories when there is no risk to design changes, Pursch says.
One advantage that Teradyne has over some of its suppliers is that it can build a product up until the last process when it's customized to meet customer requirements, and it has put vendor-managed inventory (VMI) programs in place with its suppliers to ensure supply is available when needed.
Teradyne has also acquired the assets of one of its metal stamping and molding suppliers, Precision Concepts Inc., which gives the connector company a little bit more control over the supply chain.
Driving customers to look at the total cost of acquisition is another way that Teradyne is competing, by having them look at not only unit price but reliability, quality of product and providing services such as VMI and electronic data interchange (EDI), says Brian McGowan marketing manager for Teradyne Connection Systems, Connector Business Unit.
Moving to China
To offset lower pricing demands, many connector makers are moving high volume manufacturing to lower labor cost regions such as China. Bishop says only Asia Pacific increased sales in 2002 because of the manufacturing shift to China.
One challenge is ensuring that sales aren't lost after a connector is designed in North America.
"As subcontractors moved to Asia we had to make sure that we moved with them in both sales and manufacturing and that we had a seamless transition from North America to Asia to ensure that we didn't lose any business or market share," says Tyco's Voelme.
While consumer products have moved to China, some connector manufacturers believe that companies will continue to make subassemblies for the automotive and industrial markets, but even now the automotive connector market is seeing signs of a move to offshore manufacturing in Asia.
The move to China is beginning to significantly affect the automotive industry, says Tom Michalski, director of sales and marketing for Tyco's North American automotive group. Case in point: Ford and GM have already announced large initiatives in China, he says.
Some OEMs are building in China and they want the supply base in the region to support their vehicle builds. There is pressure from all major OEMs to look for component parts such as connectors and relays to be produced in China, Michalski says.
Tyco, for example, expects to start manufacturing some of its automotive connectors in China this year. And Teradyne expanded its presence in China with the creation of a new Shanghai facility in March 2003 to provide test and inspection systems for PC-boards, complex system integration, test services and manufacturing of high-density connectors and backplanes.
While many connector manufacturers agree that more manufacturing is being driven offshore, some of them such as Molex plan to transition only labor intensive and low-tech product to Asia. Yet, Slark says for the first time China became the largest recipient of foreign direct investment, which is the first step on the road to becoming the largest economy in the world.
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