Rising costs for metals, resins and transportation are proving to be a thorn in the side for connector buyers and manufacturers.

Shari Kolker, director of commodity management for Celestica in Toronto, says connector materials such as copper, gold and tin are getting pricier. She notes that market analysts have boosted the forecast for copper prices by 50 cents to $3.50 per pound on average for 2008. Prices for other meals such as nickel could rise as well. Those increases are making it harder for connector manufacturers to make a profit, even as some are raising their prices.

Suppliers are taking steps to mitigate rising costs by using alternative materials in connectors, making process improvements and opening plants in low-cost regions in Vietnam and China.

Suppliers are also trying to improve their value propositions to buyers by emphasizing services such as leadtime programs and design services.

Despite rising costs and economic uncertainty, especially in the U.S., the global connector industry is on pace to grow about 7.3% to $45.9 billion, according to researcher Bishop & Associates in St. Charles, Ill.

"There is a huge disjoint between the economic news in the press, which is all bad, and business on the ground. At the half way point, connector industry sales were up 12.3% which is outstanding," says Ron Bishop, president of Bishop & Associates. "The only market suffering is the U.S. market."

The top three public connector companies—Tyco, Molex and Amphenol—forecast nearly double-digit increase in revenue for the third quarter. "This year is shaping up to be a better year (for suppliers) than we thought, but there is a big concern about a possible slowdown in the second half," says Bishop.

Because of a possible slowdown, many—but not all—suppliers are being conservative about making capital expenditures. In fact some are closing smaller plants and trying to make larger ones more efficient by reducing operational costs.

Molex in Lisle, Ill., for example, is consolidating three facilities in China into one factory with 1 million square feet of manufacturing capacity, which should be completed by year's end. The company also completed its first plant in Vietnam and is planning a second one in that country.

Molex located to Vietnam because of rapidly rising wages in coastal China and because key Japanese consumer electronics customers moved to the region. By moving closer to customers, Molex can improve service and communications with customers, says Pete Krehbiel, president, connector products division, at Molex.

By the end of its next fiscal year, Molex expects to have more than 60% of its manufacturing footprint in low-cost countries with more than 70% of employee head count in those regions. At the same time, R&D and capital spending at Molex is up—$170 million in R&D and just under $250 million in capital over the past fiscal year—to drive product innovation and capacity at new facilities in China and Vietnam, says Krehbiel.

FCI Electronics, based in Hertogenbosch, Netherlands, has also concentrated a lot of its manufacturing in low-cost labor countries such as China. While labor rates are increasing in China, and there are other countries with lower labor rates, there are other dynamics that come into play when making footprint considerations, such as existing infrastructure and presence of vendors.

Another dynamic is the total cost of fulfillment. With rising fuel costs and surcharges, the total cost of fulfillment is becoming much more expensive for connector suppliers. It costs more to build a product in Southeast Asia and then ship it to the U.S. Many connectors built in China, Vietnam and other Southeast Asian countries are consumed there as well.

Buyers in the U.S. can expect to see a lot of connector manufacturing stay in Mexico or be re-located there for products that will be sold in the U.S. Buyers can also expect connector suppliers to focus more on services as they compete for business. "You have to be faster, be able to supply the parts and make it easier for customers to find the fit-for-purpose product," says Bavo Teunissen, global market communications director at FCI Electronics.

He says FCI has had healthy growth due in part to its services. "We have offered customers more services, lower minimum order quantities (MOQ) and we have worked with customers to try to offset rising materials costs. Our share with those customers went up," says Rob Poort, global business line director for commercial products at FCI.

One example is FCI's Basics program, which addresses leadtime issues by informing buyers of the current leadtimes of parts, and the availability of technical and design information.

Poort says FCI's recent microsite launches are playing a central role in offering its customers greater service.

Poort says more of its business is with electronic manufacturing service (EMS) providers and with distributors and those two channels that need services.

Molex is also working more closely with its customers, particularly early in the design phase to help them lower the overall cost of their designs. Some of that design activity involves connectors that use alternative materials. To help mitigate rising raw material costs, many top connector makers are looking at alternative materials. Some buyers are looking at plating alternatives such as palladium-nickel with a gold flash, while others have opted to replace gold with silver, or moved to thinner gold plating.

"A lot of customers have never been more open to initiatives like replacing gold with silver," says Krehbiel of Molex. "It was historically a European automotive-only niche and now it's moving into other industry segments and product lines."

Krehbiel says the performance of silver is on par with gold, and tarnishing is an issue buyers are becoming more comfortable with. "Tarnishing is a cosmetic issue not a performance issue," he says.

There is also more innovation in the area of thinner gold plating with enhanced lubricant packages. "The thinner the gold gets the more porosity becomes an issue," he says. "With various lubricants you pass a lot of the environment tests with ever-thinner plating to reduce precious metal consumption."

On the resin side, there is very little opportunity for change in materials.