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Growth continues, for now

At the last Asia-Pacific Economic Co-operation summit, held in Papua New Guinea earlier this month, the US and China again locked horns and far from reducing tension around the prospect of a trade war, proceeded to ratchet up the rhetoric.

US vice-president Mike Pence attacked China’s trade practices in the region and voiced sharp criticisms regarding allegations that China is involved in forced technology transfers and intellectual property theft.

For their part the Chinese were equally combative. Chinese President Xi Jinping criticised aggressive US actions on trade and argued that: "Unilateralism and protectionism will not solve problems but add uncertainty to the world economy."

Commentators and economists, many who had been expecting the APEC meeting to have thawed relations between the two countries, were left disappointed.

As a result, there’s a growing risk that president Trump will now impose further tariffs on Chinese exports to America and the technology sector is looking increasingly exposed.

But while this trade spat between the US and China is of global concern, there are other issues impacting the distribution market, from the on-going drama in the UK around Brexit, which is now only a matter of months away, to a broader economic slowdown – recent falls in technology stocks in the US also suggest the market might well have peaked.

When it comes to Brexit, Bank of England policymakers have warned that UK firms aren’t ready for Britain to crash out without a deal or a transition agreement and the Bank’s chief economist, Andy Haldane, has warned that firms are worried about a no-deal Brexit that will not only hurt investment but impact on broader economic growth.

While not enough companies may be planning for Brexit there are a growing number who are taking it upon themselves to organise and prepare for a possible no-deal Brexit. Electrocomponents, the parent company of RS Components, has recently revealed plans to spend £30million on stockpiling components in warehouses in the UK and in Europe. According to the company, a ‘no-deal’ would see increased border checks between the UK and Europe resulting in delays for customers.

According to Steve Rawlins, CEO, Anglia Components, "We are having to work closely with our customers to understand their demand going forward, to make sure that we put in place the right stock profile and are able to keep supporting them whatever the market does in the longer term."

However, despite Brexit and macro-economic and trade issues causing concerns for distributors, their financial performance over the past 18 months would suggest that the market is still growing strongly.

In fact talking to several distributors New Electronics was told that if you couldn’t make money in this market, "you shouldn’t be in distribution."

In terms of products, distributor Mouser has seen a 53 percent jump in semiconductor orders, while the demand for passives is up by 59 percent, and connectors are ahead 25 percent. According to Mark Burr-Lonnon, Mouser’s Senior Vice President of Global Service & EMEA and APAC Business, "While these are impressive figures, the increased trade tensions we’re now seeing between the US and China could start to have an impact.

"The connector industry, for example, where connectors are manufactured in China and then imported into the US are open to the 25 percent tariff being proposed by the US administration. There has been less impact on semiconductors, because while the wafers may be produced in China most of the backend work is down elsewhere."

"From our perspective the market has been very strong," said Ian Wallace, Digi-Key’s Sales Director for the UK, Ireland and South Africa. "We’re seeing global growth of over 40 percent and in Europe we’re ahead by over 50 percent, and as our model continues to evolve and we continue to add lines I think 2019 will be just as good. However, we are certainly seeing a softening in parts of the market. The Internet of Things remains strong, as is industrial and medical, while automotive remains relatively strong."

Wallace is certainly concerned by the issue of Brexit and suggests that until we know whether it’s a "hard or soft Brexit", we simply don’t know what the implications of the UK leaving the EU will be.

"We need clarity, our customers need clarity and while we are putting contingency plans in place the uncertainty around this remains challenging."

Headwinds

Speaking at electronica earlier this month, Kevin Sellers, Chief Marketing Officer, Avnet, said, "That while the Chinese economy is certainly slowing, it’s not yet clear whether that’s related to the imposition of tariffs or to broader economic trends. It feels like a bit of both and we’re seeing additional capacity being re-directed – but, whether that’s because of US trade policy remains unclear.

"Automotive regulations in Europe are also causing problems – in the form of new EU regulations on carbon dioxide (CO2) emissions - and market unpredictability brought on by Britain’s impending exit from the bloc isn’t helping either. Despite that there remain pockets of extremely strong growth such as industrial IoT, automation, defence and aerospace. These are all examples of markets that are doing well."

According to Sellers, unlike a few years ago, information visibility is pretty good.

"We don’t tend to get the inventory shocks that we did," he suggests. "Now we tend to know whether we are sitting on too much or too little inventory. At present I’d hazard that inventory levels are fine for current levels of demand – but if things were to slow down then inventory could become an issue."

Parts of the market – passives, for example - remain a problem, but even here there has been movement.

"It is clear that lead times on chip capacitors and resistors are now shortening – we’re being quoted 12-13 weeks now in some cases," says Rawlins. "Weaker iPhone demand and a softening of the Chinese economy, whether that’s in the face of sanctions or not, are two of the factors behind this. We will use this opportunity to rebuild inventories that we’ve been using to keep customers supplied during the shortages."

According to Wallace, "We’ve certainly had to contend with shortages of components and extended lead times. There are still issues regarding passive components and while I had hoped that would have been addressed by now – problems will extend into 2019, perhaps 2020 – you have to accept that it takes time to increase production and to make the necessary investments in productive capacity.

"We’ve seen more companies looking for help in acquiring and managing stock; others have wanted lead-time updates and better information from manufacturers and despite our model being a self-service one, we have looked to support them where we can."

Pricing has been an issue, according to Wallace, and where pricing has been affected by manufacturing costs price increases have had to be passed on to customers.

"At Mouser we have managed to avoid raising prices, at least in the short term, due to effective inventory management and by buying significant amounts of components," explained Burr-Lonnon, "but depending on how the trade spat between the US and China evolves, that could change."

Both agree that distribution is a very competitive market with the high service space coming under pressure from broadliners and newer distributors entering the market, as well as competition from independent distributors.

Independent distributor Fusion has benefitted from what they describe as a period of extreme shortages.

"It’s been good for independent distributors," said Tobey Gonnerman, Executive Vice President, Fusion Worldwide. "When there are a lot of shortages and gaps we look to smooth out the inefficiencies of the market. We can respond to patterns of demand as they become more apparent and we’ve been able to adapt quickly and flexibly when issues have arisen. In the case of some components we’ve seen lead times approaching between 40-70 weeks that have been caused by uncertainties in supply.

"Strong organic growth in demand from automotive, big data, industrial automation and the like have all come together to create a perfect storm and manufacturers are now tending to wait for demand to appear before investing in manufacturing capacity."

Beyond 2019 Sellers said that industry needs to be, "looking at the bigger picture going forward, at the forces that will drive demand over the next 20 years. In the short term and at least for the next few years, global electronic markets are poised for further growth."

Author
Neil Tyler

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