Connector tags will be stable in '06

Gina Roos -- Purchasing, 11/17/2005

Buyers can expect connector prices to remain stable in 2006, despite rising materials costs.

While material costs continue to rise, particularly for copper and plastic resins, most connector manufacturers don't anticipate raising prices in 2006. Some connector companies increased prices on select products earlier this year because of higher raw material costs. In addition, the after effects of Hurricane Katrina are impacting raw materials used in connector production and may result in price increases by the end of 2005, but tags should be stable in 2006.

"There are chemical plants in the Gulf Coast area that were hit really hard by the hurricane," says David Rupnik, director of operations for commercial products in North America, at Tyco Electronics in Harrisburg, Pa. "They provide a lot of chemicals that go into raw material resins used in the connector industry as well as other industries."

As of late October, some of the chemical factories were just getting electricity back so there could be an impact on the connector supply chain and on prices, says Rupnik.

Katrina aside, raw material prices have been increasing due to growing demand from Chinese manufacturers, says Ron Bishop, president of connector industry researcher Bishop & Associates in St. Charles, Ill.

"Raw material prices have been going up for the past couple of years and connector prices have been going down, which is not a good combination for profit margins for connector manufacturers," says Bishop.

However, connector companies are "fighting tooth and nail to hold their prices with these large, global OEMs," Bishop says. "But OEMs are starting to realize there isn't a whole lot more to squeeze so we're starting to hear about price stability and some opportunities for companies to increase prices."

What appears to be happening as a result of rising materials costs is price stabilization instead of significant price hikes. Connector prices tend to decrease 2-4% per year. Rising material prices are preventing prices from declining more.

However, connector manufacturers including Tyco and Molex, implemented selective price hikes in 2005, primarily based on material content of the component. Tyco, for example, increased prices about 3-5% for selective products based on metal and resin content. A heavily metal-weighted product got a little more of a price increase because metals pricing has increased more significantly than resins, Rupnik explains.

Rupnik says copper prices were about $1.00-$1.20 per pound last year, and are now in the $1.70-$1.80 range. "We've tried to selectively pass along appropriate price increases but it's difficult because we're all faced with a very competitive landscape with offshore competitors. It's not an environment for easily accepted price increases based on material costs," he says.

Molex feels the same pain. "We're certainly grappling as are our customers with the fact that materials costs are going up and how to deal with it by either changing materials or coming up with ways that still provide a lower cost solution," says Mike Picini, director of strategic planning, Molex in Lisle, Ill.

He says Molex is focused on driving "more innovative solutions and newer products." Those products tend to have higher prices and higher margins and aren't as prone to price erosion.

Picini says OEM buyers are looking for better terms and conditions, including more discounts if payments are made in shorter periods.

One way suppliers are competing is by keeping leadtimes short. Leading connector manufacturers face stiff competition from Chinese suppliers and believe short leadtimes give them an edge. Bishop & Associates estimates that there are about 250 connector suppliers in China.

"Leadtimes have definitely stabilized and we continue to look at ways to reduce those whether through manufacturing processes or better planning within our own internal operations. We continue to look at ways to make that a competitive advantage by lowering our leadtimes," Picini says.

Despite competition from China and price erosion, the global connector market is forecast to reach $35.4 billion in 2005, up from $33.4 billion in 2004, according to Bishop & Associates. Bishop says connector sales were slow in the first half of the year, but business picked up in the third quarter.

A big growth driver in 2005 is the replacement market for cell phones along with laptop computers, he says. In addition, military and aerospace is growing and telecommunications infrastructure has come back some, he adds. However, there is softness in the automotive market.