Buyers of electronic connectors will have to work hard to find negotiation leverage, but the time for hard work is now. In the 12 months ending December 2001, the U.S. connectors industry (SIC 3678) increased its average product prices by 0.9%, up from 0.4% in 2000. Price pressures appear to have been strongest in three distinct product lines: subminiature, cylindrical and special purpose connectors.

In 2000, higher prices were clearly justified as direct costs to manufacture connectors rose 3.8%. Costs continued to rise in 2001, up 1.9%, but the rate of manufacturing cost inflation peaked early in the year and has been slowing ever since. This slowdown in cost inflation, thanks to a 2.1% drop in imported materials costs, may give negotiators a chance to challenge any price hikes that suppliers might float in 2002.

Demand remains weak and, so far, shows little sign of turning around. In 2000, domestic end markets grew 36.3%. In 2001, the industries that make communications, search and navigation, and telephone related equipment suffered a 5.4% decline. With demand so weak, buyers appear to have gained some market leverage. However, it won't be easy for buyers to exercise this leverage. For every $100 worth of product sold, the connectors industry spent $50.25 on direct manufacturing costs (excluding energy) at the end of 2001, according to Thinking Cap Solutions. That's down 37 cents from December 2000, but remains above the industry's five-year average. Bringing inflation-adjusted profit margins back to levels held in December 2000 implies a 0.6% price cut. But to push margins back to their five-year average level, prices would have to increase 2.4%.