It seems certain that the year for the electronics industry is going to end with a whimper. 2014 finished strong in all regions, setting the stage for a solid start to 2015, but by the second quarter the strengthening US dollar and the possibility of interest rate increases where slowing the overall economy in the U.S. and in turn slowing the industry which, these days, tracks the overall economy. The sudden slow down of emerging economies like Brazil added to the malaise and evolving concerns about China’s real growth rates served to further depress the industry going into the third quarter. Product lead times remain short and economic environmental factors, end customers’ forward visibility into demand remains murky, resulting in buy-as-you-need and negotiate-everything approach. Collectively, these factors have undermined industrial production rates, and GDPs, of the prime global economies, and by extension, the component industry the back half of this year going into the first half of next.
There are bright spots in 2015, which are carry forwards from prior years. The transportation industry is one, especially the commercial vehicle segments that include agriculture and construction vehicles, light and heavy-duty trucks, rail, recreational vehicles, hybrid electric vehicle, buses and motorcycles. But even this is taking a hit in second half as orders for new construction equipment slow causing manufacturers like Caterpillar to contract. The aerospace industry is another bright spot as backlogs for both commercial and business jets grow, and the defense side of aerospace swells demand for components, driven by the expanded electronics systems in the new platforms.
Industry bleak spots for the year are lead by the oil and gas sub segment of the industrial market. This year there was a swift contraction in both exploration and development caused by oil prices that were cut in half in the final months of 2014, and haven’t managed to sustain any kind of recovery this year. Low oil prices have also curtailed the strong growth in green energy technologies like solar and wind, both of which rely on electronics that are especially rich with the products we sell. Inexpensive oil lessens the financial imperative for green energy infrastructure development. The rest of the industrial market segment is just limping as that customer base is heavily tied into the slowing pace of the overall economy.
Looking ahead into 2016 and beyond, no meaningful lift in the industry is expected until the middle of the year when industrial production rates in the U.S. and other economies are forecast to begin perking back up. For the electronics industry, it has been some time since the last killer apps, which were tablet computers and personal fitness devices, created some buzz and momentum. It isn’t obvious when or what the next will be, but there are some technology-based trends that will ultimately be the drivers of the next cycle of strong industry growth, regardless of whether or not another killer app emerges.
Chief among them is the growing interconnectedness of all things. Gartner has forecast a 30X increase in internet-connected physical devices by 2020. This interconnectedness extends well beyond machine-to-machine communication, which has been a major application of electronic components, especially in the industrial customer base. Traditional non-electronic things ranging from appliances, doorbells, thermostats, eyeglasses and clothing are having sensors and communication capability integrated in them so that they can collect data and share information through apps. All of this is being enabled by advances in low energy electronics, low cost, precision sensors, and new releases of data transmission protocols like Bluetooth and NFC.
And there is even more proliferation ahead of us as new battery technologies with great energy capacity-to-size densities, faster charging times, and extended cycling reach the market, combined with inductive charging hard ware that will be built into work, home and public space surfaces. We will be able ditch the various cords and power converters we carry today and have all of our devices constantly top up their charge inductively as we move through our environment. The sensing and communicating devices that will be incorporated into the things we wear and the tools we use, will at some point be self charging through energy harvesting technology that taps into our motion and even our body heat to accumulate the low amounts of energy that are needed for recharging.
Another great example of electronic component rich applications that will take off as a result of these new technologies is autonomous vehicles. The electronic content of traditional, actively piloted cars and trucks continues to grow rapidly. In 1970, less than 4% of a car’s cost consisted of electronics – a radio and an alternator. By 2017, it is estimated that the electronics in a typical car will represent 35% of its cost, and by 2030 that will climb to 50%. In market value terms, car and truck electronics where a $157B industry in 2010, and will grow more than 50% to $240B in 2020, which is just around the corner. Add in the non-automotive and truck portion of the transportation market, and the numbers just get bigger.
When truly autonomous vehicles become common place (widely forecast to occur in 2035) they will drive a massive demand for electronic components extending beyond the vehicles themselves to the monitoring and communication infrastructure needed to support the rolling “hive”. By then, most vehicles will be electric, further increasing the demand for both vehicle and infrastructure electronic content.
Roads, billboards, light posts, roadside buildings, and parking spots will all have electronics built into them, and new satellites will be launched specifically to support the traffic network. Legacy cars that are not fully autonomous will need to be retrofitted with sensing and communication electronics so that they may work within the field of truly autonomous cars and trucks around them.
For as far ahead as I can imagine, I believe that electronic components will be a better-than-growth industry, and the distribution part of the industry in particular will remain a great way in which to participate. As supply chain logistics become ever more complicated with globalization and business process outsourcing, the customer need for the services of authorized distributors will continue to drive more and more of the business through the channel. For the component manufacturers, distribution will also continue to be the most efficient way for them to service the long tail of customers that is growing ever longer as technology incubators, development kits, reference designs, and crowd funding enable startups to burst onto the scene daily, and build a customer base and a market as fast as one can dream up a new product and company name.
But as the industry becomes an ever more significant piece of developed country’s GDP’s, the industry’s up and down cycle will closely track those of the overall economy, which means soft business conditions for us the back half of this year, and the first half of next.
Reprinted with permission from Electronics Sourcing North America,