ecsn sees low growth and lengthening lead times in 2021

Uncertainties concerning Brexit and COVID-19 have limited ecsn’s visaibilty for next year and it has confined itself to a provisional guidance of a flat market to 6.5% growth in the second half of next year.

Brexit concerns are also leading to component buyers telling suppliers and distributors to bring forward orders originally for delivery in January and February next year into December this year. This demand is already pushing out lead times on products.

“Key components for electric vehicles and infrastructure including SiC diodes, MOSFETs and IGBT parts are already in short supply, some microcontroller parts are already on 20 weeks lead times,” commented one distributor. “We may well hear the allocation word very soon.”

“There is a wide range of “unknown unknowns” and uncertainties created by Brexit, the ongoing pandemic, US / China trade war and global economic instability,” commented ecsn chairman Adam Fletcher. “We do however plan to firm up our ‘best guidance’ towards the end of Q2’21, when we hope the visibility in the global electronic components market will have improved”, added Fletcher said.

“2019 was a year of correction after two years of exceptional growth in 2017 and 2018”, said Aubrey Dunford, ecsn Market Analyst: “Our members believed that a market upswing would commence in 2020 but what we saw was a sharp market decline primarily as the result of a global economic slowdown caused by the COVID-19 pandemic, which was not a forecastable event in December 2019”.

ecsn’s afdec distribution members’ visibility in the electronic components market remains very limited due to the almost total absence of clear guidance from their customers, and there is understandably a wide and diverse range of opinions on the likely outcome for 2021.

“It’s always our aim to provide the electronic components markets, our members’ customers and investors with the most accurate information possible,” Dunford said “but forecasting in the current conditions is particularly challenging. Our best view is that we will see a slow return to low single digit growth throughout 2021 and that the first half of 2021 will be more or less ‘flat’ compared to the first half of 2020. We’re hopeful that growth will increase into the second half of 2021 and the year will end showing Billings growth of around 2.7%”.

“Although it now seems clear that 2021 will see Joe Biden take over in the White House it is far too early to see what effect that will have on the ongoing trade war between the US and China, and what will be the consequent effects on the global electronic components market”, continued Dunford. “However, what is clear that even as we enter into 2021 global demand - driven particularly by China and Asia-Pac - is rising and that lead times are extending on some key ‘commodity’ electronic components. The ‘Book to Bill’ ratio was positive in Q1’20 but declined slightly in Q2’20 during the major part of the first lockdown before it slowly improved during Q3, and into the final quarter”.

Adam Fletcher remains confident that the trajectory for the electronic components markets in the mid-term is up and to the right: “If we assume that the final outcome for 2020 will be a Billings (sales revenue) decline of (8%) when compared to the previous year, then the performance of the UK electronic components market and the wider electronic industry will have been fairly remarkable given the dreadful economic environment in which we are all currently operating”.

Fletcher adds that stronger underlying growth will return but cautions that the odd ‘bump’ along the way will be inevitable.

“I predicted that any growth is likely to adopt a hockey-stick shaped curve towards the end of 2020 and into 2021 and in my opinion this curve has now simply shifted by a further 12 to 18 months, due primarily to COVID-19 but also to the uncertainty over Brexit and the US / China Trade War, which is delaying the roll,-out of 5G, but is also a reflection of a weakness across many markets sectors - particularly civil aviation, which is likely to remain slow until 2023 - and automotive, which is only just beginning to return to growth. On the plus side, the Medical sector is experiencing strong growth along with the military/avionics and cloud computing / high performance computing sectors. Thee industrial sector is now also showing positive growth signs for 2021”.

Fletcher is primary concerned about the pattern of the return to growth across global electronic component markets. He believes that the shape of the growth is unlikely to change, but its magnitude could. And therein lies a potential problem.

“It’s very likely that the European, US and Japanese electronic components markets will all be following very similar trend lines into the second half of 2021, which means that the global demand for electronic components will not be countercyclical and all markets will experience an uptick in demand at the same time”, Fletcher said: “When the growth in demand driven by the roll out of 5G handsets and infrastructure, which is likely to occur at the same time, is factored in manufacturers’ output of electronic components will simply not be sufficient to meet global demand, which could make current lead-time extensions appear marginal. In a worst-case scenario manufacturer lead-time for most components might extend rapidly to well over 20 weeks. Even modest growth in 2021 might trigger a major supply problem in the global electronic components market”.

Looking even further ahead, Fletcher is confident that UK electronic components markets will continue to return to growth over the next few years but at a rate lower than the global average rather than at the top of the curve. He believes that stronger international economic growth, the impact of mega mergers and acquisitions and continued underinvestment in manufacturing capacity for complex electronic components will once again drive extended lead-times and shortages of some electronic components.

“The pendulum of supply and demand continues to swing very erratically and will continue to cause a ‘stop-start’ effect on our industry”, Fletcher concluded. “Until the entire electronics industry starts to really collaborate effectively and share its business intelligence throughout the supply network, we will all be at risk from these extreme market oscillations. I’m certain that stability will return, in 2021 but we should expect a few bumps along the way.”

John Macmichael, Managing Director of ecsn members Solid State Supplies & Pacer Electronics commented, “It’s always been recognised that it pays to be cautious when quoting forecast information. Never has this been truer than in today’s uncertain world. Covid-19 has played its part not only in causing the shutdown and in some cases the failure of companies in the electronics supply and manufacturing industries but it’s also contributing to the component shortages that are staring to be reported. A lack of wafer starts and investment brought about by this widespread uncertainty will undoubtedly impact distribution billings in the first half of next year. This, together with the uncertainties and impending difficulties of Brexit, is likely to exacerbate the shortages in the market. In short, our ability to forecast even the first half of next year let alone the whole year must be brought into question. That said, whilst I am sure the measures that Solid State Supplies and Pacer Components have taken to ensure that stock is in place will enable us to outperform the forecast, I do believe that overall the ecsn forecast represents the best consensus for the industry, based on its factual and empirical inputs”.

“Our industry has been through much turmoil in 2020 and we’ve face daily challenges to both our work and personal lives, “added Graham Munson, Vice President EMEA Customer Service at distributor Mouser Electronics. Each quarter different dynamics have impacted the electronic components supply chain and the UK economy. We began to see small signs that material costs may increase, and lead-times for some components may lengthen at around the end of October but as we approach the end of the year the dynamics have changed significantly. We now know that material costs are increasing and that lead-times are very likely to extend by many weeks. While the economy remains in its current dark place it will be difficult to predict what the future holds. It’s not surprising that we find ourselves in a dilemma as we try to determine what the market will see as a growth in the coming months and forecast as accurately as possible, our performance in 2021. Nevertheless, the Asia-Pac market remains buoyant and things are improving in the Americas, which in turn should have a positive effect on the supply chain. One thing we can be sure of: 2021 will be an interesting and dynamic year for everyone in our exciting industry, driven by supply and emerging markets”.

Graphic shows UK and Ireland DTAM (Distributors Total Avaialble Market) over the past 35 years. ecsn says it could climb to £1.3bn in 2021.