Distributor sales growth declines

James Carbone – Contributing Editor

Uncertainty caused by the trade war with China, the UK exiting the European Union and a decline in manufacturing in the U.S. means some distributors will suffer sales declines in 2019 – By James Carbone

Many distributors say component sales will end 2019 being flat to down compared to last year because of sluggish overall economic growth, excess capacity, weaker demand from some customer segments and the continuing trade war with China.

Distribution executives attending the recent Electronic Components Industry Association (ECIA) annual executive conference in Rosemont, Ill., also said that there was a lot of uncertainty in the industry which may be contributing to sluggish demand. Much of the uncertainty was due to tariffs on imported Chinese goods and Chinese tariffs on U.S. products, which is resulting in less demand for U.S. components, equipment and other manufactured goods.

Some executives at the conference said that the overall economic slowdown may get worse before it gets better, but don’t think the U.S. economy will dip into a recession over the next 12 months. However, an economist speaking at the conference said there was about a 50-50-chance of a recession in 2020.

“In my estimation, the odds of a recession have risen to about the 45 per cent to 50 per cent range,” said Cliff Waldman, CEO of New World Economics. “Yield curve behavior and a dramatic fall in the manufacturing PMI (Purchasing Managers Index) are hard to ignore.”

Economists say that yield curve inversion often happens before recession. An inverted yield curve occurs when yields on short-term bonds are higher than the yields on bonds that have a longer duration. Normally, short-duration bills yield less than long-term bonds. A yield curve inversion indicates investors are not confident in the economy short-term. There have been times in 2019 when the yield on short-term bonds have exceeded yields on long term bills.

Waldman added manufacturing PMI has declined and 2019 will end the year with negative manufacturing growth. “A chaotic trade battle, a slowing global economy and an elevated US dollar” are some reasons why manufacturing PMI has declined, said Waldman.

Don Akery, president TTI Americas – “We will have stronger growth in interconnect this year than we did last year and we had a great year last year”

Tariffs create uncertainty
He said the US.-China trade war including tariffs are “generating the highest level of uncertainty by any policy in living memory” and are contributing to slow economic growth in the U.S. and globally. “I agree with most analysts who say that the biggest short-term impact is not from tariffs themselves but from uncertainty. Uncertainty is clearly having a dampening impact on business investment and thus manufacturing,” said Waldman.

Many distribution executives agree that uncertainty is having a negative impact on their businesses. However, despite uncertainty, some distributors will grow sales in 2019 and 2020. For instance, TTI, based in Fort Worth, Texas, expects its North American sales will finish 2019 growing about four per cent.

Don Akery, president TTI Americas and senior vice president TTI Inc., said TTI posted strong nine per cent year-over-year growth in the first half, but business cooled off in the second half and “we expect to be up over four per cent in the Americas. Our book-to-bill is 1.03 to 1 so POS is still holding up in most segments,” he said. He noted that TTI’s military/aerospace segment will grow 17-20 per cent for the year after being up 24 per cent in 2018.

“Four per cent is not an off year for us. It is back to normal,” said Akery. He noted that 2018 and 2017 were strong growth years as sales grew by double digits but four per cent growth is more of a normal growth rate.

While demand is not as strong as last year, it is been healthy for certain products, including connectors and some semiconductors. “We will have stronger growth in interconnect this year than we did last year and we had a great year last year,” said Akery. “Connector demand is coming from a lot of different customer segments.”

Michael Knight, president of TTI’s semiconductor group, said demand has been strong for RF and wireless semiconductors. “The RF, the microwave piece of our business is crazy strong,” said Knight. “Part of that is mil/aero, part of that is 5G and part of it is satellites. We are with all the satellite companies and we have a lot of content in satellites and they keep putting more and more of them up,” he said.

Orders are smaller
Some distributors say their sales will be flat in 2019 compared to the previous year although the number of orders has increased. The problem has been the number of parts in each order has been smaller.

Pete Shopp, senior vice president of business operations for Mouser Electronics – “We are probably going to be putting it close to $20 million of automation equipment into the new building and will continue to add inventory”

“Instead of someone ordering 100 pieces, they are ordering 50,” said Pete Shopp, senior vice president of business operations for Mouser Electronics. “We’re shipping smaller packages with less dollars. I think people are being very cautious. There is an overwhelming feeling is uncertainty,” he said.

Much of uncertainly is due to tariffs and some of it is due to Brexit, which is having a negative impact on European business. “We are seeing some of the PMI numbers for Germany. Things are slowing down,” said Shopp. Mouser’s European and Asian business is down. But sales are growing in the mid to high single-digit range in the U.S.

The U.S.-China trade conflict and tariffs have resulted in wait-and-see attitude with business. It’s creating an overall environment of concern and is impacting things like business investment. It just kind of feels everybody’s just kind of holding on waiting to see how things shake out,” said Shopp.

Shopp added that the uncertainty is not causing any changes in design activity by OEMs and Mouser’s design business is healthy. However, demand from companies for components for small production runs is down. As a result, Mouser’s sales will finish 2019 flat compared to 2018, said Kevin Hess, senior vice president of marketing for Mouser. “However, our number of customers and lines have increased and orders are up. It’s just the dollars per order are down,” he said. “But good things happen when you’re adding customers and you’re adding new products. In 2020 we are expecting high single-digit growth,” said Hess.

Mouser expects long-term growth and is expanding its warehouse to handle additional lines and orders from its growing customer base.

“We are probably going to be putting it close to $20 million of automation equipment into the new building and will continue to add inventory,” said Shopp. “We have added another 11 vertical lift modules. We now have 55 of those, the largest installments in North America,” he said.

More customers, but fewer dollars
Another distributor that has been shipping more, but smaller orders and adding new customers is Digi-Key. However, the Thief River Falls, Minn., distributor expects it sales in 2019 will decline slightly compared to the previous year.

“We’re going to serve 30,000 to 40,000 more customers this year than last and last year was a record,” said Dave Doherty, president and chief operating officer. Digi-Key will end the year shipping more orders than in 2018, but revenue “will be down a little bit. Business is down because of fewer units per order. But we are not losing any sleep about it because all the other indicators are strong. We feel like we’re starting to see the bottom,” he said.

Doherty said there is a correction occurring after buyers in the supply-chain built inventories last year because of shortages of multilayer ceramic capacitors, chip resistors and discrete semiconductors. But the inventories are being worked off and 2020 should be a better year in terms of the size of orders and sales.

Sales growth could be strong if uncertainty is eliminated, said Doherty. “What’s going to be the trigger event that ends uncertainty? Does it take a signing an agreement with China? Does it take the election? It’s not clear.”