Adjusting to Dramatic Changes Occurring in the Interconnect Market - What’s Next for the World of Interconnects?
Copper Applications in Electronic & Communications
Notes From the Fleck Connection Congress Presentation
by
Ken Fleck
Chairman, Fleck Research
September 15-16, 1998
La Quinta, California
World Economy - The interconnect market has cause for concern with respect to the world economic environment. South Korea is in a financial crisis that is impacting electronic production in all sectors. There are financial problems in other parts of Asia as well, namely Malaysia, Thailand and Indonesia. Japan has all the ingredients for deflation, i.e., sluggish consumer demand, falling worker income, and an electronics slowdown. The Far East financial crisis is having a deepening impact on US electronic companies. These US companies are reporting poor earnings, are having to downsize. The Semiconductor Industry Book-to-Bill ratio is at a record low (0.65). In addition to Asia, Latin America is beginning to experience financial problems. Softening of the world economies is almost certain to negatively impact US electronics companies.
The South Korean connector industry is down 28% (in local currency) for the first two quarters of 1998. Measured in dollars, the decline may be as much as 60% for the full year. The Japanese connector industry is down 16% (in local currency) for the first two quarters of 1998. Measured in dollars, the decline may be as much as 25% for the full year. In addition, connector production is migrating from the US to offshore factories. There is continued price erosion in electronic connectors due to the excess capacity in manufacturing. The world connector market is expected to decrease by about 5% in 1998, from $35.981 billion (1997) to $34.202 billion (1998). Presently, it is not being considered a major downturn.
OEM Consolidation - OEM customer consolidations are also impacting the electronic connector industry. A listing of the top OEM business deals include: SBC's proposed acquisition of Ameritech, AT&T's acquisition of Tele-Communications (TCI), Worldcom's acquisition of MCI, AT&T's acquisition of Teleport Communication's Group, AT&T and British Telecom's joint venture to create new Internet system, Compaq's acquisition of Digital Equipment, Nortel's (Northern Telecom) announcement to acquire Bay Networks, Tellabs' acquisition of Ciena, Quest Communications' acquisition of LCI International, AirTouch Communications' acquisition of US West Media Group's domestic wireless operations, Alltel's acquisition of 360 Communications, and Alcatel's acquisition of DSC Communications. In addition, there were countless other deals of less monetary value.
Contract Manufacturers - A third major influence upon the electronic connector industry is the OEM's shift towards Contract Electronics Manufacturers (CEMs) as opposed to in-house manufacturing. So far in 1998, twelve major OEM manufacturing plants were sold to CEMs. It is expected that a total of 25 OEM manufacturing plants will be divested before the end of the year. Presently, CEMs are producing 15% of the electronic equipment in the US ($34 billion in 1997) and 14% worldwide ($81 billion). Over the past ten years, the CEM industry has grown at an annual growth rate of 22%. This rapid growth is expected to continue.
Connector Company Consolidation - Three large mergers are occurring within the interconnection industry. Allied Signal is attempting to acquire AMP Incorporated. Framatome (FCI ) and Berg have agreed merge to become the world's second largest connector manufacturer. Sanmina and Altron have merged as well.
Worldwide Market - Shipments from the worldwide interconnection market was $35.981 billion in 1997. By region, North America shipped the lion's share at 42%, Japan shipped 25%, The Pacific Rim (excluding Japan) shipped 24%, Europe shipped 23%, and the Rest of the World (ROW) shipped 6%.
By product category, connectors accounted for 67% of the total shipments, cable assemblies accounted for 38% of the total shipments, backplanes accounted for 5% of the total shipments, and interconnect devices accounted for 5% of the total shipments.
By electronic demand sector, worldwide shipments (in billions) were as follows:
| Computer: | $6.52 |
| Datacom | $5.59 |
| Telecom | $4.94 |
| Automotive | $3.98 |
| Communication | $3.05 |
| Consumer Electronics | $2.28 |
| Military Electronics | $2.23 |
| Industrial Electronics | $2.04 |
| Commercial Aircraft | $1.77 |
| Test & Measurement | $1.35 |
| Medical | $0.82 |
| Other | $1.41 |
| Total | $35.98 |
The top-ten connector companies supply 30% of the worldwide market. They are ranked by percent worldwide shipments as follows:
| 1. | AMP | 10.7% |
| 2. | Molex | 4.2% |
| 3. | Framatome (FCI) | 2.3% |
| 4. | Berg | 2.2% |
| 5. | Amphenol | 1.9% |
| 6. | Hirose | 1.9% |
| 7. | JST | 1.8% |
| 8. | 3M | 1.6% |
| 9. | ITT Cannon | 1.5% |
| 10. | JAE | 1.5% |
The second tier suppliers include Thomas & Betts/Augat, Fujikura/DDK/Alcoa, Hon Hai (Foxconn), Labinal/Cinch, SMK, Packard Hughes Interconnect, Hosiden, Harting Elektronik, Lucent, and Honda.
Economic Developments - The connector industry is experiencing a mild economic slump but new economic events could produce more serious problems. The connector industry's OEM customers are reporting slowing sales and profits. Some are downsizing and/or restructuring. Electronic distributors are also experiencing profit declines. As a result, many electronic connector companies are responding by also downsizing, closing factories, and moving production outside of the US.
The growth of the electronic connector market is categorized by region and arranged by timeframe that includes a forecast by Fleck Research for the remainder of 1998:
| Annualized Percent Change in US dollars | |||
|---|---|---|---|
| Region | 1997 | 1st Half 1998 | 2nd Half 1998 |
| North America | +6.6% | +3.1% | +0.9% |
| Europe | -6.1% | -3.1% | +0.7% |
| Japan | -4.8% | -18.9% | -25.9% |
| Pacific Rim | +8.9% | -4.1% | -3.0% |
| Rest of World | +1.3% | -1.2% | -2.6% |
| TOTAL | +1.6% | -4.3% | -5.6% |
China produced $5.3 billion of connectors and cable assemblies in 1997 that accounted for 14% of the total worldwide production. China's labor rate ($0.17/hour) is creating price erosion of about 13% across most product lines. Fleck Research forecasts that it will continue to be a soft market for the connector industry during the remainder of 1998. In response to this, expect US connector companies to move factories and jobs to China over the next ten years. Connector manufacturing in China is projected to increase to 19% of the worldwide market over the next five years. This translates into continued downsizing in the US.
The Japanese Yen has fallen below 140 to the dollar and could fall further (to 150 and beyond). This could trigger a third round of currency devaluations starting with China and Hong Kong and spreading to Thailand, Indonesia, South Korea, and Malaysia. The US electronics and automotive industries, along with the connector manufacturers will be negatively impacted.
High Speed Connectors - High-speed digital circuitry (>1GHz) is making conventional connectors unusable.
In the worldwide board-to-board connector market, conventional connector designs are expected to grow from $4.18 billion (1997) to $5.33 billion in 2002 (CGR of 5%) and then to $6.31 billion (2007). More significant growth is expected from high-density and high-speed connectors. High-density connectors are expected to grow from $0.45 billion (1997) to $1.43 billion in 2002 (CGR of 26%) and then to $2.69 billion (2007). High-speed connectors are expected to grow from $0.26 billion (1997) to $1.29 billion in 2002 (CGR of 38%) and then to $2.54 billion (2007).
Five Year Outlook - Fleck Research expects the constant growth rate (CGR) for the connector industry to be 5.6% over the next five years (1997-2002). Broken down into demand sectors, the best growth is expected to be from the communication and datacom sectors. See the table below:
| Sector | 5 yr. CGR 1997-2002 | 2002 $ Billion |
|---|---|---|
| Computer | -0.6% | 6.33 |
| Datacom | 11.8% | 9.75 |
| Telecom | 6.5% | 6.76 |
| Automotive | 5.1% | 5.11 |
| Communication | 12.6% | 5.53 |
| Consumer Electronics | 4.4% | 2.83 |
| Military Electronics | -9.4% | 1.37 |
| Industrial Electronics | 4.4% | 2.53 |
| Commercial Aircraft | 6.6% | 2.45 |
| Test & Measurement | 6.1% | 1.82 |
| Medical | 7.4% | 1.17 |
| Other | 3.3% | 1.66 |
| Total | 5.6% | 47.28 |
For more information:
Ken Fleck
Chairman, Fleck Research
info@fleckresearch.com
www.fleckresearch.com
Also in this Issue:
- Adjusting to Dramatic Changes Occurring in the Interconnect Market - What’s Next for the World of Interconnects?
- The Metal of Civilization Standards B115 and B49
- Copper Motor Rotor Research Update
- Copper: Technology & Standards
- New Copper Alloys - Summer 1998