Wednesday, May 27, 2009

Stocking Up: Component Orders During Turbulent Times

During the 2000-2001 technology bubble burst, inventory was a looming evil that hung over the assembly houses, dragging the sector under and preventing fast recovery. The notion of lean manufacturing, regardless of company size or end-market, took hold, and electronics assemblers have been wary of building up chip inventories ever since. With the current recession battering other sectors more brutally than it is hitting technology companies, we can ask, Did we learn a valuable lesson nearly a decade ago? One indicator is the monthly chip buying indices from the Electronic Components, Assemblies, and Materials Association (ECA) and the Semiconductor Industry Association (SIA).

“I think we are seeing adjustment of inventories from manufacturers and distributors based on market slowdown,” said Bob Willis, ECA president, adding “The industry learned a lot from the train wreck of 2000. There is more transparency in the supply chain, enabling companies to better anticipate changes in demand and adjust accordingly.” To measure the success of supply chain management, we can examine the numbers for component orders in 2009. In January, orders were in freefall, as the global recession slashed consumer demand, corporate spending, and auto sales. New projects were put on hold, and volumes decreased. Did this lead to overstock? It seems not, as component orders continued to fall in February, but not as sharply as in January, according to the monthly index compiled by the ECA. The 12-month average, comparing 2009’s results to last year’s, continued a descent that began last summer and has continued through the present. By March, orders ticked up slightly.

Worldwide sales of semiconductors were $14.7 billion in March, a gain of 3.3% from the prior month when sales were $14.2 billion, the SIA reported. ECA’s numbers confirm that component orders bounced back slightly in March from lows in the first two months of the year. “The modest sequential rebound in worldwide sales in March suggests that demand has stabilized somewhat, albeit at substantially lower levels than last year,” said SIA President George Scalise. For SIA's geographic breakdown of orders, see the above charts. So demand was lower than the prior year, but without the stocking hangover experienced in the last recessionary period.

Electronic component orders dipped again in April, ECA reported (see graph). Worldwide sales of semiconductors rose to $15.6 billion in April, SIA saw, an increase of 6.4% from March. April sales were 25% lower than April 2008 when sales were $20.9 billion. ECA's Willis thinks that many OEMs, wary of continuing uncertainty in the market, are only buying parts for which they have firm orders from customers. “As stimulus programs begin kicking in, the consumer electronics industry could see some stabilization,” said Willis. “If so, this should be reflected in new orders that would bring a slow recovery beginning in late summer or early fall.” Economic stimulus measures in the U.S. combined with other countries’ stimulus plans will begin to impact sales as we enter 2010, was Scalise’s SIA assessment.

SIA reports that sales for Q’01 2009 amounted to $44.0 billion, a 29.9% decline from the first quarter of 2008 when sales were $62.8 billion. Sales declined by 15.7% from Q’04 2008 when sales were $52.2 billion. Sales in all geographic regions except Japan showed month-to-month gains. Sales in Japan were sharply lower, reflecting a drop in the country's economic output. All geographic regions reported lower first-quarter sales compared to the same period of 2008 (see graph).

Smaller volumes and longer consumer purchasing cycles are hallmarks of recession and truly are destroying some giants of industry, particularly in the automotive sector. With component purchasing at levels below those pre-recession, no one can claim surprise. However, seeing demand rebound so quickly as to be measured in months rather than years impresses upon us that the electronics sector has made good use of hard lessons learned earlier in the decade.

Beginning with July 2008, ECA made two major changes in its monthly order index. The first change was to update the index baseline year from 1996 to 2006 to better reflects today’s market realities. The second change is to report numbers for North America only, which is expected to improve the consistency of results from reporting companies. The index has proven to be a leading indicator of market movement and sales trends. Actual sales numbers tracked by several marketing firms have shown that the index provides a four- to six-month glimpse of potential ups and downs in the market. The new index reflects more dramatic movement in the adjusted four- to five-week order trending. Results from the 12-month moving average are expected to be similar to previous reports based on the 1996 baseline. ECA Website:

The SIA Global Sales Report (GSR) is a three-month moving average of sales activity. The GSR is tabulated by the World Semiconductor Trade Statistics (WSTS) organization, an independent, non-profit organization established by the global semiconductor industry to compile industry statistics. SIA Website:

Meredith Courtemanche, managing editor

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