Connector makers grapple with persistent downturn

Connector makers grapple with persistent downturn
As 2002 comes to a close amid forecasts for another year of depressed sales, connector makers are fighting to stay afloat with measured actions that offer longstanding customers more for their buck even as the suppliers tap into other growth opportunities.

These actions have become even more essential for connector vendors. Weak demand, severe price erosion, and the disruptive impact of production and consumption shifts to low-cost China have cut deeply into sales.

To survive, companies like Tyco Electronics Corp. are integrating connectors with other functions, for instance magnetics, to offer customers more product value.

Others, like ERNI Components Inc. and Radiall Inc., are avidly diversifying into the aerospace/military or industrial automation sectors. "People are looking at where they can refocus their business," said Wendy Wuerth-Griggs, vice president of marketing and sales at ERNI Components, Chester, Va., a subsidiary of Germany's ERNI Group.

Industry analysts initially projected that the market for connectors, backplanes, and cable assemblies would rise slightly in 2002 from a dismal $34.9 billion in 2001. Now, a revised 2002 estimate calls for a decline of 13.8%, to $30.1 billion.

"We thought 2001 was the disaster of all disasters and expected 2002 to show a bottoming and a modest upturn," said Ken Fleck, an analyst at Fleck Research, Santa Ana, Calif., which this week hosted the annual Fleck Connection Congress here.

Conference participants said 2003 is also likely to be a tough year as OEMs and EMS providers continue to consolidate their supplier base. Even industry leaders like Tyco, a unit of Tyco International Ltd., Bermuda, feel increasingly challenged.

"Demand has become more unpredictable," said Minoru Okamato, vice president of global communications for computer and consumer electronics at Tyco, Harrisburg, Pa. "You have to be flexible."

Diversification required

Fleck Research expects connector revenue to grow at a 7% compound annual rate over the next five years, reaching $42.2 billion in 2007 but still below the industry's record $45.1 billion in 2000.

Only the military/aerospace market has shown some sales growth in 2002. Key markets such as computer, telecom, consumer electronics, and datacom are expected to post double-digit percentage declines, forcing connector suppliers serving those sectors to diversify.

While ERNI Components has targeted many of its recent products, such as high-speed backplane connectors, at telecom, the company is now looking at industrial automation and other sectors, Wuerth-Griggs said.

Radiall has managed to shield itself to some extent by expanding into the military market. The company derives half of its revenue from telecom, but despite focusing on specialized RF coaxial connectors and cable assemblies rather than commodity devices, the company's telecom revenue has slid 30% this year as service providers cancel or delay infrastructure investments, according to Dominique Pellizzari, vice president and general manager of wireless communications and RF interconnects at the Paris-based company.

Ken Fleck noted that even without a possible sales boost for connector makers from a Middle East war, there's been a ramp-up of fighter and surveillance aircraft programs in the past year, with smart bombs slated to get more attention in the near future.

Price erosion Still, connector suppliers won't be able to avoid the pricing pressure that has crushed margins the past two years, according to William Jensen, global director of sales and marketing at Delphi Connection Systems, Irvine, Calif. Although Delphi is diversifying into military and medical electronics, as much as 90% of its revenue is generated from the price-sensitive automotive market. "Price pressures are constant," Jensen said.

Fleck Research estimates that global average selling prices have eroded 8.2% this year, and have fallen an average of 16% in China. The research firm expects connector prices in 2003 to fall a more normal 3.5% globally and 10.3% in China.

Meanwhile, the scramble of OEMs and EMS companies to relocate production facilities to China continues at a frenzied pace, further hurting North American connector manufacturers. Sales of about $1.4 billion have shifted from other countries to China this year alone, according to Fleck Research.

Another challenge facing connector vendors is how to meet the build-to-order, short-cycle requirements that OEMs like Dell, Cisco, and Sun are imposing as they shift to a demand-driven rather than supply-driven strategy, said Jerry Labowitz, an analyst at Merrill Lynch & Co. Inc., New York.

At Cisco Systems Inc., a virtual manufacturing operation that requires its EMS and supply partners to pull inventory only as needed has been instituted, said Bill Bender, strategic commodity manager for global supply management at the San Jose company. This strategy favors suppliers with global manufacturing and warehousing services, a wide product line, and low pricing, Bender said.