Performance and Outlook of the World Connector and Cable Assembly Industries

The following is a synopsis of one of the keynote presentations given by David Pheteplace of Bishop & Associates to the WHMA Conference in Orlando, Florida, on February 25.

The Interconnect Industry Historical Performance
Looking at the performance of the connector industry over the last 30 years, we find an industry that has only had five downturns. The most significant of the five downturns occurred in 2009, with a decline of 21.8 percent, following the 2001-2002 downturn of 19.1 percent. The financial crisis of 2008-2009 was the major influence behind the most recent downturn; the dot.com crash initiated the fall in fortunes in 2001.

Year-To-Year Change in Connector Sales

The worldwide market for connectors has grown from $8.6 billion in 1980 to $34.4 billion in 2009. This represents a compound annual growth rate of 4.9 percent over a 29-year period. If that growth rate was computed at the end of 2008, the rate would have been six percent, which shows how significant the 2009 downturn was worldwide. The most important change in regional sales during this time period was the shift of manufacturing from North America, Europe, and Japan to Asia Pacific—and China, in particular. The compound annual growth rate of Asia Pacific was 10.9 percent over those 30 years, and China’s growth rate has been over 27 percent in just the last 10 years.

The major change in the sales channels during this time was the growth of contract manufacturing. This channel grew from consuming 7.5 percent of the connector sales in 1980 to 28.3 percent in 2008. Distribution remained constant between 20 to 22 percent, and sales to OEMs declined from 72.5 percent to 48.9 percent.

The connector industry is very profitable. While the cost of goods sold has increased as a percent of sales, the connector companies have trimmed their SG&A costs to maintain a constant net income. Net income has averaged between eight to 10 percent since 1980. Few industries do as well.

There are over 1,000 connector companies worldwide, with 228 located in the United States. The top 10 connector manufacturers hold 54.5 percent of the market share. The tilt is in their favor. This is driven by four trends:

• Industry consolidation through acquisitions. The larger connector companies want to diversify.

• Globalization of the customer base has driven the desire for companies with a worldwide footprint.

• Outsourcing to contract manufacturers. They want to limit the number of suppliers.

• Consolidation of vendors. Most customers want to restrict their supply base.

There have been 270 acquisitions since 1990. Amphenol alone has acquired 50 companies in the last 10 years. From 1995 to 2000, targets included companies in telecommunications, consumer, computer, and automotive markets. From 2001 to 2008, the targets were in medical, military/aerospace, and industrial markets. In 1980, all top 10 connector manufacturers were from North America. Today, only four are from North America.

The connector market is very niche-oriented. By region of the world, the ranking of the top 10 manufacturers varies greatly, as shown below. There are also significant niches by end-use equipment market and by product type.

Connectors represented about one percent of the worldwide electronics market of $4.4 trillion in 2008. The cable assembly market was approximately 2.7 percent of the electronics market. The cable assembly market, combined with the connectors not used on cables, is $143.7 billion, or 3.3 percent of the electronics market. At the 2008 market size, interconnect is approaching the size of the semiconductor market.

The 2008 cable assembly market was $117.6 billion, with a five-year compound annual growth rate of 9.2 percent. Europe was the largest region, with approximately 29 percent of the market, followed by North America at 22 percent. The largest market segment by end-use equipment was automotive, at 28 percent, followed by computer/peripheral equipment at 18 percent.

The Interconnect Industry Today

2009 saw the biggest decline in connector sales in 30 years. The downturn started in October 2008, with a 21 percent decline in orders, and bottomed out with a 50 percent decline in January 2009. There were five consecutive months in 2009 where sales declined more than 30 percent year-over-year. The decline began to ease in August, and continued to ease through the rest of the year. The total decline in sales for the year was 21.8 percent, equaling a $9.5 billion loss.

The cable assembly industry saw sales decline 26 percent*, losing $30 billion in value. The largest decline was in automotive, which lost over a third of its value, equaling $11 billion.

However, the current outlook for the industry is now seeing positive signs. Bishop & Associates’ World Connector Confidence Index (CCI) has been positive since July 2009. The industry book-to-bill ratio has been positive since April 2009. The year-to-year change in bookings has been positive since October 2009, and the year-to-year change in sales has been positive since November 2009. Other positive signs include six consecutive months of growth in the semiconductor industry, and gross domestic product growth in most of the major industrial countries.

The Outlook

The outlook for 2010 is cautiously optimistic. The Bishop & Associates’ Connector Confidence Index is in the 75 to 96 percent positive range, when industry respondents are asked how optimistic their view is of the market six months from now. Respondents from China are the most positive, and those from Japan are the least positive.

The worldwide connector market is expected to grow 11.3 percent in 2010 to $38.3 billion. China will have the largest growth at 23.7 percent, and Europe the least, at 6.2 percent.

In 2010, the worldwide cable assembly market is expected to grow 11.3 percent to $97.1 billion. China will again have the most growth at 23.3 percent. North America will have the least growth, at just under six percent.

In developing these forecasts, some of the positive signs include:

• U.S. GDP grew in the last half of 2009 and is forecast to grow two to three percent in 2010.

• Worldwide GDP growth of one to three percent in 2010.

• Housing has probably bottomed out in most markets.

• The consumer’s sentiment has improved, and they are spending more.

• Stock markets have improved significantly from their low points.

• Semiconductors are achieving sequential months of year-to-year growth.

• Major governments are spending billions to strengthen their economies.

Some of the issues to watch include:

• China’s moves to tighten their credit markets could cool off their economic growth.

• Sovereign credit default, particularly in Europe, could drive down the financial markets and rekindle the recession.

• The economies worldwide stagnate and one to three percent GDP growth is not achieved.

• Unemployment stagnates or increases.

• The housing market in the U.S. does not improve or gets worse.

The bottom line:

• The interconnect market is certain to grow and begin to recover from the shocks of 2009.

• Interconnect sales in the first quarter of 2010 will be about the same as fourth quarter 2009.

• Growth will be modest and shift toward the later half of the year.

• Regionalization and cost pressures will continue to shift sales to China and Asia Pacific countries.

* The 2009 market numbers for cable assemblies are in the process of being finalized.