The following figure (Figure 1) illustrates an alarming trend in the worldwide passive electronic components market. Vendors of passive components are having their gross profit margins eroded to a point that is coming dangerously close to that which was demonstrated during the global economic downturn of FY 2009. Based on the result of a comparative survey of the combined component revenues from the world’s top producers of passive electronic components, gross profits have declined from an average of 25% in FY 2007, to 17% in FY 2013. What is alarming about this trend is that the erosion in gross profit margins for vendors of passive electronic components in FY 2013 is only 1% higher than the 16% gross profit margins recorded during the global economic downturn of FY 2009. In FY 2009 however, the global credit markets had faced an unprecedented lack of solvency, resulting in a breakdown in significant portions of global GPD output, which eventually spilled over and negatively impacted the high tech economy, as customers could no longer afford to buy handsets, computers and automobiles.
Figure 1: Operating Profits for Passive Electronic Components Over Time: FY 2007-FY 2013
Source: Paumanok Publications, Inc. Based on The Gross Profit Margins of The World’s Top Producers of Passive Electronic Components Combined For Each Fiscal Year Noted- The Fiscal Year Ends March 31 for Each Year Noted.
In FY 2013, the market conditions are different, global stimulus packages in FY 2010 and FY 2011 resulted in a global turn around in many sectors, including components, and this had a positive impact on profit margins of the top passive component producers; which in fact increased to 20% in FY 2010 and 22% in FY 2011. However, in FY 2012, on the heels of a new global economic crisis in Europe, profitability began to slip again, and this continued into FY 2013 as gross profits began to slip dangerously low once more. However in the FY 2012 and FY 2013 downturn we see some interesting developments that are continuing to push profitability dangerously low including aggressive competition, severe price erosion, and changing end-use markets.
The following figure (Figure 2) illustrates the alarming corresponding trend in the worldwide passive electronic components market, the average cost to produce passive components are increasing as a percentage of overall sales. It is Paumanok’s conclusion that the primary costs associated with the production of passive electronic components are the variable raw material charges. However, variable raw materials charges have actually remained largely stable since early 2011, and yet the costs-to-produce as a percentage of overall sales continues to rise. The reason for this is that aggressive competition, accelerated price erosion and changing end markets are negatively impacting the profit margins of the industry as a whole and causing the cost of goods sold to increase as a percentage of overall sales.
Source: Paumanok Publications, Inc. Based Upon Cost of Goods Sold of The World’s Top Producers of Passive Electronic Components Combined For Each Fiscal Year Noted- The Fiscal Year Ends March 31 for Each Year Noted.
Total cost (TC) describes the total economic cost of production for passive electronic components and is made up of the variable costs, which include quantities produced, labor and raw materials, plus fixed costs, which are independent of the quantity of a good produced and include inputs that cannot be varied in the short term, such as buildings and machinery. In the end the total costs are equal to the sum of the variable costs plus the fixed costs. The fixed costs and the variable costs are described below.
In the passive component industry, fixed costs are business expenses that are associated with all businesses and are not dependent on the activities of the specific business at hand. Fixed costs tend to be time-related, such as salaries or rents being paid per month; or utility bills that are incurred and paid each month regardless of the activities of the business. This is in contrast to variable costs, which are volume-related (and are paid per quantity).
Variable costs are expenses that change in proportion to the activity of a specific business; in this instance the passive components industry. In other words, variable cost is the sum of the marginal costs associated with component production. In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. In passive components, the variable largest cost associated with production is raw materials.
Costs associated with raw materials consumed in the production of a finished product.
Raw Materials consumed as DIELECTRICS in the surface mount capacitor industry include:
The primary Raw Materials consumed as ELECTRODES in the surface mount capacitor industry include:
The primary Raw Materials consumed as TERMINATION materials in the surface mount capacitor industry include:
OTHER Raw Materials consumed in the production of passive components include:
Variable manufacturing overhead costs are variable costs that are not a direct cost, but indirect cost. Variable costs are sometimes called unit-level costs as they vary with the number of units produced.
Labor is in some cases considered as a variable cost, especially in the passive components industry, where part-time labor is brought on in accordance with increases in unit demand. Variable labor charges are an aspect of the capacitor industry that continues to be under scrutiny because this is where the industry usually falls short in an upturn not enough personnel to meet short term demand, which increases lead times and stabilizes pricing.
A recent survey of the top manufacturers of passive electronic components conducting by Paumanok Publications, Inc. has revealed an alarming trend, the cost of goods sold as a percentage of overall industry revenues is increasing at the expense of corresponding profit margins. The conclusion is that costs of production for passive electronic components are increasing because aggressive competition, accelerated price erosion and changing end-use market segments are having a negative impact on the bottom line for vendors of passive electronic components as an entire industry.
Dennis M. Zogbi is the author of more than 260 market research reports on the worldwide electronic components industry. Specializing in capacitors, resistors, inductors and circuit protection component markets, technologies and opportunities; electronic materials including tantalum, ceramics, aluminum, plastics; palladium, ruthenium, nickel, copper, barium, titanium, activated carbon, and conductive polymers. Zogbi produces off-the-shelf market research reports through his wholly owned company, Paumanok Publications, Inc, as well as single client consulting, on-site presentations, due diligence for mergers and acquisitions, and he is the majority owner of Passive Component Industry Magazine LLC. View other posts from Dennis M. Zogbi.