Speaking to other electronics supply chain executives in May, TTI’s Michael Knight characterized 2012 as a year in which the electronics industry “went sideways,” explaining the flat to very low growth most distributors in the sector experienced compared to 2011. This is new for an industry accustomed to sizeable year-over-year sales gains driven by new technologies and an ever-growing need for electronic content in just about all aspects of daily life.
“I think there’s a possibility that 2013 will be another ‘sideways,’” said Knight, TTI’s vice president, Americas, in a separate interview in early May. “I think we’ll see some slight ‘up,’ but that’s not how the burkindustry historically works. Plus or minus 2% or 3%, that’s just not how our industry looks. But it’s happening.”
The slow economic recovery globally, combined with political uncertainty and other pressures here at home, is the main culprit, and most distributors say they are thankful for the continued drive for more electronics, which is helping to temper the situation. The drive for smarter cars, medical equipment, appliances, and other consumer devices is helping boost sales for many companies, and so is factory automation as the trend toward producing products closer to home gains steam. It all adds up to an electronics marketplace poised for continued slow growth in the second half of the year, say Knight and others.
“It’s looking to be a very slow recovery,” says Julie Yuan, managing director of California-based regional electronics distributor Amidon. “It’s certainly become more of a challenging marketplace.”
The New Normal?
Although conditions are improving, most economists predict continued challenges in the manufacturing sector and the overall economy for the remainder of 2013. In a late May economic update, the Manufacturers Alliance for Productivity and Innovation (MAPI) predicted 3% growth in the manufacturing sector this year—a moderate pace, but about a percentage point faster than the general economy. Looking further out, MAPI predicts 3.6% growth in the sector in 2014, also about a percentage point better than the general economy.
“The major constraint on consumers in 2013 is that wages are not growing much faster than the inflation rate and spendable income is further reduced by higher taxes,” MAPI chief economist Daniel J. Meckstroth said in the update, adding that despite volatility and the struggle for growth there are reasons for optimism between now and the end of the year. Rising home prices, pent-up demand for consumer durables, and more balanced job growth between manufacturing, mining/construction and service industries are a few key reasons.
Despite that optimism, electronics industry executives look to the remainder of 2013 with a cautious eye, and many are seeking growth by expanding their reach globally. Amidon is one such company. Yuan says the distributor will open an office in Hong Kong later this year to capitalize on its growing customer base in Asia. Similarly, large catalog distributor Mouser Electronics is looking to expand in the Americas. It is in the process of opening a new office in Mexico and is conducting a feasibility study to open one in Brazil. Expansion in the Americas follows Mouser’s focused growth in Europe and Asia over the last few years.
“We’re starting to get more focused on [Central and South America], [because] we’ve seen some nice growth in Mexico and Brazil,” explains vice president of sales for the Americas Steve Newland, pointing to Mouser’s mature business in North America.
For many, mature North American markets are complicated by the slow recovery here at home. Looking at U.S. manufacturing in particular, economic activity had slowed as of early June compared to the beginning of the year.
The Institute for Supply Management’s Purchasing Manager’s Index (PMI), which measures U.S. manufacturing activity, declined steadily from February to May, when it hit its lowest point in four years. May’s PMI registered 49, a nearly 2% slide compared to April and signaling a decline in manufacturing activity. A PMI above 50 indicates growth in the sector. A PMI below 50 indicates contraction. May’s reading was the first contraction since November 2012 and only the second since July 2009. Purchasing managers interviewed for the survey indicated a flattening of demand due to the sluggish local and global economies.
Regionalization, Automation Key Factors
Rising costs are another key concern throughout the supply chain. When it comes to transportation, logistics, and labor, such increases are signaling a new manufacturing trend that bodes well for many distributors. Some North American executives point to a trend toward regional manufacturing, also referred to as on-shoring or re-shoring, as original equipment manufacturers (OEMs) seek to build their products closer to where they will be consumed, especially large, heavy products that are costly to ship around the world. The situation is heightened as labor costs increase in traditionally low-cost regions such as Asia. Avnet Electronic Marketing’s Ed Smith says the trend is helping to increase manufacturing activity in Mexico, as one example.
“I think what’s happening is, companies are saying, ‘I have certain products that are worth building in Asia and certain products I need to build in America [because] it’s not worth the logistics cost to build them in Asia and ship them back,’” says Smith, Avnet EM’s president for the Americas, adding, “I don’t know if I’d call it on-shoring or re-shoring, but there is clearly an increase in manufacturing [in places such as] Mexico. Some may view it as on-shoring or re-shoring. I think there’s just less going out and more being built in the regions where it’s being consumed.”
Angelo Hrenczuk, director of sales, thermal materials, for electronics manufacturer Laird Technologies, agrees and says he sees more automotive and appliance manufacturing returning to Mexico as well.
“The chasing of low-cost centers is going to have to end,” Hrenczuk says. “Anything that’s big and expensive to ship is coming back.”
Hrenczuk adds that an increase in manufacturing in North and Central America will also signal an increased need for factory automation as manufacturers seek to become more competitive—another boon to many electronics distributors’ business. Northern California-based Steven Engineering is already reaping the rewards of that trend, says vice president of marketing Paul Burk. The specialty distributor of electronic components and industrial automation equipment is predicting double-digit growth this year, with factory automation work driving much of it. Burk points to medical/biotech, alternative energy (mainly wind), and food and beverage processing equipment as key growth areas for Steven Engineering.
“I see automation really shaping [the industry],” says Burk. “Customers are asking to automate processes that they never have before.”