Supply Chain Management

Electronic components markets – an introduction 

Author: Adam Fletcher, Chairman, Electronic Components Supply Network (ecsn) 

The Leadership Group and members of the Electronic Components Supply Network (ecsn) congratulate Electronics Specifier on the launch of Procurement Pro and thank the publishers for inviting the association’s Chairman Adam Fletcher to contribute to the first issue of the new magazine. In his first article, Adam introduces Procurement Pro readers to ecsn and to the way the electronic components supply network functions, both in the UK and internationally.  

The Electronic Components Supply Network (ecsn) was founded in 1970 as a ‘not-for-profit’, ‘member managed’ industry association, initially with a remit to promote the use of the wide range of electronic components manufactured by leading global companies and supplied and supported by the UK’s network of authorised distributors. The intervening years have seen the association embrace the ‘circular economy’, supporting the sustainability of components and materials from ‘cradle to grave’ and ‘re-birth’. Our trade association model has been emulated internationally and many of these associations are members of the International Distributors of Electronics Association (IDEA), an influential body of international electronic components industry associations that actively collaborate to resolve complex industry issues and share best industry practice.  

Electronic components markets

The ‘shape’ and ‘structure’ of an electronic components market is principally defined by its customers – most often ‘Systems Integrators’ – whom the industry ranks in three Tiers’ based on the value of their purchasing spend. The ‘shape’ of the UK market is represented by a triangle with a very wide base and short height, because we have very few Tier 1 customers, a situation happily offset by the number of influential Tier 2 customers and a mass of Tier 3 customers. Almost all electronic components markets in the developed world are triangular in shape but in markets dominated by Tier 1 customers the triangle is larger, taller, and has steeper slopes. Currently there are over 30,000 ‘Systems Integrators’ in the UK producing electronic equipment, primarily sourcing the wide variety of components they require from manufacturer authorised distributors. ecsn member companies serve 98% of these customers and account for >85% of the DTAM (Distributor Total Available Market).  There are a small number of ‘outlier’ customers who are primarily supplied directly by the manufacturer but even here, the buffer inventory on which they rely to ensure continuity of supply is usually backed up by manufacturer authorised distributors.  

Supply Network or Supply Chain…?

In the electronic components market the differentiation between a ‘Supply Network’ and a ‘Supply Chain’ is often misunderstood, overlooked, or misrepresented. Agreements between the largest, high volume manufacturing organisations and their direct customers almost always contain clauses for unliquidated damages related to failure to supply on time (amongst other factors), meaning both parties are effectively ‘captive’ and are therefore ‘locked’ within a ‘Supply Chain’. For example, a components manufacturer supplying a Tier 1 automotive manufacturer on a ‘just-in-time’ delivery basis will face severe financial penalties if they fail to meet an agreed delivery date and the failure negatively impacts the customer’s production schedule. However, the vast majority of customers for electronic components operate within a ‘Supply Network’ where they are able to partner with the supplier offering the best business terms for them, yet they have the freedom to negotiate a mutually acceptable solution if a problem arises – with delivery for example. If for any reason the two parties cannot reach a satisfactory agreement, the customer is able to simply move his business to an alternative supplier able to meet the requirements. This distinction holds true in electronic components markets throughout the world. 

The ecsn UK/Ireland electronic components market forecast for 2024

At the end of last year, ecsn members predicted that the UK & Ireland electronic components market will not follow the historical cycle and will remain essentially ‘flat-to-down’ in the first half of 2024. They predicted ‘Billings’ (Sales Revenues) growth of between (3%)-to-1%, with a mid-point growth of around (1%) before growing modestly in the range 1%-to-8% in the second half. In their opinion, the year will end showing growth in the range (1.5%)-to-4.1% over 2023, with growth at the mid-point of 1.4%.

Historical changes in the UK’s Distributor Total Available Market figures are shown in the blue bars in the graphic ‘DTAM By Quarter for 2017 – 2024’. The dark blue bar is an estimate of DTAM figures for Q4’23 while the yellow bars show ecsn’s DTAM forecast for 2024 by quarter. 

Returning to normal?

Historically, US, Japanese, and European markets for electronic components see their strongest growth in the first half of the year. Japan, for instance, sees its strongest growth in Q’2 each year while Asia-Pac – which includes China – experiences its highest growth towards the end of Q’3 and into Q’4. This counter-cyclicality is to be welcomed because it goes a long way towards balancing the global demand for electronic components. Sadly, the recent COVID-19 pandemic exacerbated on-going supply problems and all but destroyed this annual cycle: once the emergency abated, demand in all geographic areas returned at the same time and simply could not be met by the available capacity. It seems likely that markets will return to their normal historical cycle but when exactly is difficult to predict due to the ‘headwinds’ being created by very high levels of geopolitical instability and declining international GDP growth forecasts. 

The global electronic component supply network has begun to slow following three years of strong growth, some of which has surely been predicated on fictitious customer demand as ‘Systems Integrators’ sought to secure more than their ‘fair-share’ of the available electronic components. With product availability returning to ‘normal’ levels, components manufacturers and their authorised distributors are now being asked to meet the ‘real’ rather than the ‘inflated’ customer demand seen earlier in this growth cycle. Customers are therefore actively reducing their order backlogs and running down their in-house inventory. If the stronger growth in 2H’24 forecast by ecsn comes true and is reflected across Europe and the US, the likely result will be manufacturer lead-times extending out once again. 

I’m confident that stronger underlying ‘real’ growth will return to global electronic components markets in 2025, which leaves ample time for all parties to collaborate on their demand planning initiatives, which can go a long way towards mitigating future supply and demand imbalances in the market. At a time when many geopolitical and economic uncertainties threaten to impact the market, I encourage all organisations dependent on our industry to play their part in its continuing success by participating and contributing to the collaboration process, both up and down their supply network. There is very little additional cost involved in collaboration but the improvements it can make to an organisation’s competitive advantage promises much for them, their business partners, and the UK/Ireland economy as our industry moves into 2024 and beyond.

This article originally appeared in the February issue of Procurement Pro.