MarketEye: North American Switch Market Ends 2005 with Sales Dollars up 3% and Units 3% Better Than 2004

02.27.2006 // Posted by: Michael Schwert // Posted in: Articles, Switches & Relays

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Introduction

The North American switch market improved in 2005, more so in units than dollars. In this article the performance of 2005 will be compared to 2004. The overall trends and the drivers behind them will also be identified. This information was collected from manufacturers participating in the Switch Tracks market information service.

Overall Sales and Booking Trends

Sales for the total North American switch market show a seasonal pattern over the past two years. The best performance is registered in the first quarter then things move lower through the rest of the year. Last year followed this with strong capital spending in the first quarter of 2005 increasing switch sales by almost 20% over the fourth quarter of 2004. The graph below shows the sales and booking indexes for the total switch market for Q4 2003 through 2005.

The second and third quarters saw sales descend but less so for bookings. Sales recovered a bit in the fourth quarter despite surging energy costs that slowed consumer and corporate spending. Signs indicate that January was a good month, and 2006 may yield a first quarter with significantly higher sales than the last quarter of 2005.

Overall Switch Market Price Trends

For the chartered period below, the average selling price (ASP) and average booking price (ABP) were at their peak in the first half of 2004 and quickly hit a low in the fourth quarter of that year as the result of the weakest demand in the past two years. As demand picked up in first half of 2005, so did selling prices. Despite rising material costs and improved orders selling prices could not improve to levels reached in the first three quarters of 2004. Booking prices faired a bit better than sales but also spent most of 2005 below 2004.

Performance by Switch Type

In 2005 better than average sales growth occurred in half of the product types covered by Switch Tracks compared to 2003. DIP, rocker, tact, and toggle switches all outperformed the 3% overall sales dollar growth rate. Unit growth was far different. Tact switches was the only product type that exceeded the 5% total unit growth rate. With keylock, push buttons, rockers, and snap action shipping fewer switches in 2005 than 2004. With units underperforming dollars in all but snap action switches, average selling prices rose in seven of eight products. Regardless of this, the overall ASP was off 2% primarily due to units gains in lower priced DIP, snap action, and tact switches. The table below shows year over year growth rates for sales and booking dollars, units, and average prices by switch type.

Sales and Booking Growth By Switch Type

The top booking dollar performers were DIP, keylock, rocker and tact switches. Half of the switch types, DIP, push button, rocker, snap action, tact and toggle, realized better booking prices in 2005 versus 2004.

January Heated Up

Each month Cumulus surveys people in the switch industry (manufacturers, distributors, and independent sales representatives) concerning current sales and bookings levels, as well as, current and expected business conditions. The results for January show that the nation’s weather was not the only thing hotter than normal.

The January survey shows a significant strengthening of the switch market. New orders and shipments compared to December showed much stronger readings.

Switch Market Conditions Summary

The Institute for Supply Management’s manufacturing index (PMI) for January was 54.8 nearly the same as the 54.2 for the month of December. Transportation & equipment; electronic components & equipment; industrial & commercial equipment & computers, and instruments & photographic equipment all grew in January. The upward march of prices remained stable with 65% of purchasing executives reporting higher prices versus 63% in December. The Conference Board’s U.S. Leading Economic indicators jumped up 1.1% in December.

Last month the geopolitical situation in the Middle East worsened as Iran announced its intention to enrich uranium, and Osama Bin Laden threw out more threats. The situation there has become more precarious as Hamas has been elected to lead Palestine, Islamic protests over a cartoon published last summer have occurred all over the world, Iraq is on the verge of sectarian civil war after the destruction of one its most significant mosques, and suicide bombers take aim but fail to hit Saudi Arabia’s largest oil refineries. This continues to cause concern over reduced oil production, economic embargos, possible military action, and differences of opinion between the United States, EU, Russia, and China. This, of course, has the potential to negatively affect the global economy.
 
Improvement in new orders or bookings versus the previous month leapt to two-year highs. Bookings compared to last year strengthened and are at levels last seen in July of 2004.

Sales compared to the last month also surged to heights not seen in over two years. Improvements in shipments compared to a year ago continue to climb from May’s low.

The measure of current switch market business conditions strengthened significantly. June 2004 was the last time this level was reached. Expectations for the future hold steady.

Potential Positive Effects on the 2006 Switch Market

Increased capital spending, lower energy costs, and an increase in the number of U.S. manufacturers are economic conditions that will have a positive effect on the switch market. As we move into 2006 there are great expectations of corporate capital spending. Banner profits in 2004 and the ability to continue double digit profit growth in 2005 has left many corporations with large amounts of cash. Hopefully this will convert into needed capital improvements. There are signs that some manufacturing is returning from Asia as costs there increase and the extra expenses of inventory, freight and transit times mount. Consolidation would have a positive on the market by possibly removing some manufacturing capacity and decreasing competition.

Potential Negative Effects on the 2006 Switch Market

China is at the top of mind for many in the switch market as they feel business continues to be lost to or is migrating there. Price erosion combined with higher costs for energy and raw materials will continue to squeeze switch makers profitability. This may put pressure on less profitable manufactures to seek strategic alternatives for their businesses. As mentioned above, the situation in the Middle East is worsening. This could have negative effects on the global economy, including the switch market.

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