Uncertainties in the global macroeconomic environment add to the list of complications facing electronic component distributors.
The electronics industry cyclical correction is in full swing. Some observers would even say another upcycle may have started with expansionary activities in key segments of the semiconductor industry, including processors for artificial intelligence and memory devices. Observers say inventories are falling across the channel and at suppliers as well as OEMs, a development that could spark vibrant stock replenishment activities within the next several quarters once demand begins to pick up again. The improvement was observed in the latest financial results of publicly traded electronic component distributors, including Arrow Electronics and Avnet Inc., both of which reported better-than-expected sales for the December quarter although revenue growth remained elusive.
The revenue slides at the top-tier distributors have dwindled to single-digit levels, heralding improvements ahead, according to industry executives. “Our book to bill ratio is now just shy of parity on a global basis with two of our three operating regions exiting [the fourth quarter] at or near one-to-one,” said Sean Kerins, president and CEO at Arrow Electronics, while presenting the company’s latest financial results. “Rescheduling and cancellation rates have fully normalized. Our visibility is steady, and our backlog is stabilizing. Lastly, industry wide data points suggest ecosystem inventory levels continue to decline, albeit slowly.”
The complete picture is hazier, though. Inventory and supply chain challenges remain intractable, despite efforts by suppliers and OEMs to draw down stocks. Growth in the semiconductor sector is limited to two key segments, AI processors and memory. Others remain under pressure, a situation many expect to persist for one or more quarters. While some in the semiconductor market are celebrating a rebound in total industrywide sales, pockets of deep malaise continue to interfere with growth at suppliers that are not focused on AI-related products.
Distribution is swimming against the current in this situation, observers said. Acknowledging that his company’s performance in its recently ended quarter exceeded expectations, Avnet CEO Phil Gallagher said market conditions remain difficult. Distributors like Avnet continue to excel because of their laser focus on supply chain management services that are helping suppliers and customers improve their operating conditions, he said. “Although market conditions are challenging, the value we add at the center of the technology supply chain has never been more important,” Gallagher said. “We remain focused on helping connect our suppliers’ technology solutions to the increasingly complex requirements of our customers.”
Changing macroeconomic landscape
The global economic environment has changed dramatically in the last several months. Many economists believe the old order is being redrawn as political leaders in Europe and North America question the fundamentals of old alliances or attempt to forge new ones. America’s role has begun changing rapidly under a new administration, raising the level of uncertainty for many business leaders. For the electronics industry, the primary issues the industry has been grappling with for many years now include challenges such as the volatility of the semiconductor business, supply chain disruptions, changes in architectures and platforms in some markets, rapid products rollout as well as component obsolescence, rules and regulations for product shipments and consumer confidence. The competitive environment has also been changing with the advent of new players from all corners of the world, combined with efforts by established players to expand their offerings into adjacent and fresh market sectors, including AI, industry sources said. These are all issues that distributors must grapple with despite being unable to control or influence how they may impact their operations, they said. “The wild card is the broader market overall,” noted Arrow’s Kerins. “That one we can’t call, and we can’t control.”
As if the electronics industry does not already have its hands full with its demand-supply constraints, macroeconomic challenges have quadrupled in recent months. These will occupy all sectors of the electronics industry in 2025. The advent of a new administration in the United States has been marked by numerous policy changes that are impacting the industry and that are expected to indirectly impact distributors. Aside from policy changes that directly affect the industry, executives are now facing uncertainties about how customers and suppliers will react to new government directives, rules and regulations that have been issued in the last two months.
Observers said economic directives from the new US administration have raised concerns about how the global economy will fare in the next year. Like other economic players, electronics manufacturers, too, are on the alert for the likely impact of these policy changes on their operations and on consumers, according to economists. “The latest Chief Economists Outlook reveals a global economy under considerable strain,” said Aengus Collins, Head of economic growth and transformation at the World Economic Forum. “The growth outlook is at its weakest in decades, and political developments both domestically and internationally highlight how contested economic policy has become.”
Perhaps the greatest challenge the industry faces over the next year is staying atop the changing macroeconomic environment while keeping current on new rules and regulations that are impacting customers. Distribution executives typically avoid commenting on political challenges impacting their operations, preferring to delegate this to association spokespersons while they themselves speak on the immediate issues they can control such as inventory management and other supply chain practices. This doesn’t mean they are not closely watching events in the larger market, however. An industry executive who wanted to speak on condition of confidentiality and anonymity said his company was keeping an eye on the “changing dynamics” of global economic events and tracking how these will affect the “production schedule” of suppliers and customers. For an industry that is still trying to restore inventory equilibrium, this is an important issue to address constantly. The distribution executive said his company has tens of thousands of OEM and EMS customers spread across the globe and in various market sectors. “We talk regularly with them to gather information, but we also lean into their extended customer base to see how we can translate the intelligence we gather into action that will support them,” he said.
