Connectors: Prices will continue to drop
By Staff -- Purchasing, 4/22/1999
Ample supply, falling prices, and more consolidation will continue to be the rule in the connector industry for the rest of 1999.Overall, the connector industry will grow 1.4% to $23.8 billion in 1999, according to Ron Bishop, an industry researcher and analyst. He says demand will not keep pace with supply. "It's going to be a tough year for connectors," says Bishop. "There's still a lot of price erosion. The European economy is slowing down, and Japan continues to be in a recession."
But large connector companies are upbeat about 1999. They note that connector demand is strong from data communications, telecommunications, and PC companies, and it seems as if the worst is over within Asia.
Paul Timashenka, vice president of sales and marketing for AMP, says while there has been a lot of price pressure, he expects better business conditions later in the year. He notes semiconductor demand is increasing, and that when chip sales rise, so do connector sales.
Demand continues to be strong from communication equipment and networking equipment manufacturers, who tend to use higher-margin parts. He also forecasts solid demand for new fiber-optic connectors.
The good news for buyers is that prices will decline about 6%-8% this year, according to Bishop. Over the last two years they declined about 3%-4%. Price drops are occurring because of oversupply in the face of less-than-stellar demand, and Bishop says the contract-manufacturing industry and supplier-base reduction also is driving prices down.
"Price erosion is a direct function of a lot of volume going to contract manufacturers, who are vendor reducing like crazy," Bishop says. "They have big orders for large connector companies, but they want price concessions." He says OEMs such as IBM, Lucent, Compaq, and various disk-drive companies are seeking price declines almost every quarter and getting them.
Bishop says large connector companies like AMP, FCI/Molex, Amphenol, and others can offer the price drops as long as volume keeps increasing. He says that those volumes will likely increase because of consolidation occurring in the connector industry customer base.
"The telecom and networking guys are buying everybody and getting bigger and bigger," says Bishop. "They want to deal with component suppliers who are big and financially strong and able to supply them on a worldwide basis." As consolidation occurs, purchasing volumes are also consolidated, improving leverage for the merged companies.
Consolidation also is likely in the connector industry. In 1980, the top 10 connector makers had 40% of the world market; by 2005 the top 10 will be responsible for 55% of all connector sales, says Bishop.
While large OEMs are buying more connectors directly from manufacturers, distribution's role in the connector industry is rising. Consider: Five years ago about 22% of connectors were sold through resellers. Today that figure is about 25%, and will grow to 30% by 2005. Many connectors require some value-added work, which many distributors offer. Most major distributors also offer material management programs for connectors as well as other components.
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