Introduction

The North American switch market had a record quarter in the first quarter.  Four of eight switch types shipped and booked more dollars and units than any previous quarter measured by Switch Tacks.  Sales dollars finished 13% and bookings 16% ahead of last quarter.  The second quarter looks like it will slacken compared to Q1, as it has over the last three years.  Inflation and higher interest rates clouds darken as we approach the last half of the year.

Overall Sales and Booking Trends

Sales for the total North American switch market show a seasonal pattern over the past years with the best performance registered in the first quarter, and 2006 has stared just that way.  Measures tend to move lower through the rest of the year.  Last year followed this trend with strong capital spending in the first quarter of 2005 increasing switch sales by almost 20% over the fourth quarter of 2004. This year’s 13% improvement was enough to push totals to level not seen in the past three years.  The graph below shows the sales and booking indexes for the total switch market for Q1 2004 through Q1 2006.

Overall Switch Market Price Trends

For the period charted below, the average selling price (ASP) was at its peak in the third quarter of 2005 and recovering from a low in the fourth quarter of the previous year, 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 maintain the improvement reached in the first three quarters of 2005 and remained flat in the first quarter of this year.  Average booking prices (ABP) have faired better than sales reaching and sustaining a two-year high water mark in the fourth quarter of last year.

Performance by Switch Type

The first quarter was strong across almost all switch types.  Sales and bookings in the first quarter set many Switch Tracks highs or near highs.  The table below shows how Q1 2006 ranked versus other quarters starting with Q1 2003, except for snap action which starts with Q1 2002.

Reported sales dollars and units increased in all product types, except DIP, when compared to the last quarter.  Average selling prices went up for half and down for half of the switch types versus Q4 netting a nearly unchanged total.  Reported booking dollars increased for all product types when compared to the last quarter.  Booked units compared to Q4 improved across the board, with the exception push buttons.  Like sales, prices were up in half and off in half of the types, leading to no overall ABP change.

April Shows Signs of Weakening

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 April show that the second quarter may not be as good as the first, indicating the historical trend will most likely continue.

The April survey shows softer results in all categories except expectations for business conditions six months from now. 

	Switch Market Conditions Summary

Strong capital spending in the first quarter of this year fueled the switch market.  The following graphs look at sales and booking measures over the last two years.  Note that measures were at their one or two year highs during the first quarter of this year.  Then, April dropped off in all but expectations of future business conditions.

Improvement in new orders or bookings versus the previous month reached a low point for this year.  Bookings compared to last year show a similar trend.

Sales compared to the last month continued to fall from heights not seen in over two years but are better than last year’s mark.  Shipments compared to a year ago moved down for a second month.

The measure of current switch market business conditions hit a low for the year.   Expectations for the future jumped almost three quarters of a point and stands at a two-year high.

Potential Positive Effects on the 2006 Switch Market

This could be a positive effect or negative effect on the switch market depending on your point of view.  Switch prices will rise.  Some of this was seen last year as shown in the graph above.  The upward pressure from material costs (copper, silver, and gold) needs to be relieved.  Even if commodity prices decline, and they have, it will take time for the positive effects to work through to improved margins.  Increasing prices will help speed this up and is more controllable by the manufacturer.  Also if switch market demand remains at three year highs, manufacturers will gain pricing power over consumers enabling an increase.

Potential Negative Effects on the 2006 Switch Market

The latest economic news on the Producer (PPI) and Consumer Price Indexes (CPI) has ignited fears of inflation.  The drivers behind these trends are commodity and energy prices that are rising from worldwide economic growth and pushed a bit higher by speculators.

As the cost for commodities and energy go up, there will be stress on the prices of the goods and services they go into causing inflation that will reduce consumer-buying power and lead to higher interest rates that will continue to slow construction of new homes.  This will have a negative impact on the demand for and production of consumer electronics, brown goods, and white goods.

Corporate spending should hold up, at least for this year, in the face of inflation and higher interest rates.  Corporate profitability over the last three years has created a surplus of cash.  Companies will deploy some of this into improving productivity or growth related capital expenditures.  With cash on hand, the need to borrow and the effect of higher interest rates won’t be felt much here.  How long this spending is maintained will be dependent on corporate profitability.