A Tough Year for Connectors

Electronic News, July 2, 2001 by Ronald Bishop

First-quarter 2001 connector sales resulted in a 2.3 percent year-to-year increase. This increase was a result of continued good demand for connectors in the fourth quarter of 2000. In effect, fourth-quarter orders were sufficient to provide a backlog for growth in shipments during the first quarter.

However, since January 2001 new orders have declined dramatically, representing the worst drop-off in business we have ever recorded in 20 years of covering the connector industry. During the January through May time period, many connector companies reported order declines of more than 30 percent compared to last year.

New orders in the telecom/datacom market have virtually stopped. The market sector is in a depression. Service providers such as AT&T, MCI and Sprint have virtually stopped ordering telecom capital equipment. System providers such as Cisco, Lucent and Nortel are reporting large inventories and have begun to write-off billions of dollars in equipment. As an example, online auctioneer eBay has 41 pages of Cisco Systems Inc. equipment listed, which is selling at steep discounts.

The automotive market is very soft. We have been told that orders are off up to 15 percent. The PC business is growing at low single digits. Dell, Compaq, Apple and HP are all reducing prices. Sales of high-end systems that support data communications have slowed dramatically. Some bright spots include military/aerospace, commercial aircraft, industrial, test and measurement, and medical equipment markets. These market sectors continued to have growth in the single digits.

North America and Japan have shown the largest declines; European business is good but has now begun to show signs of slowing. Asia and China continue to have some growth in electronic equipment. In North America, orders have been very soft in the January to May time frame. This means sales in the second quarter of 2001 will be down significantly from the second quarter of 2000. Our projection is that sales will decline 19 percent for the quarter -- and this may be conservative. We have been told repeatedly about the lack of visibility going forward. OEMs are uncertain about when business will improve in the telecom/datacom market; the consensus is not until the fourth quarter of the year.

Under this scenario, we are forecasting 2001 connector sales will decline 12 percent. Unless business begins to improve soon, this may be too conservative. Connector companies with a large percentage of sales in telecom/datacom products will take the largest hit. Companies with a large presence in the mil/aero and industrial markets will fare better. We have heard a lot of theories about why this large and sudden downtum has occurred. Some of these include:

* The interest rate increases implemented by the Federal Reserve in 1999 and 2000 slowed the U.S. economy.

* The stock market decline eroded consumer confidence and spending has slowed.

* The high stock prices for dot-com companies were used for acquisitions and capital to fund the purchase of Internet infrastructure equipment. When the dot-com business model failed, and stock prices plummeted, the capital required to fund equipment purchases vanished.

* Service providers (AT&T, MCI, etc.) were spending billions on equipment, systems and software to increase bandwidth and offer high-speed access to consumers. The improved services were offered at bargain-basement prices to gain market share and increase the subscriber base. New subscribers have not signed-on at the levels predicted, and the low prices for services have resulted in losses. Pricing and other market strategies are now being reviewed, and new capital expenditures have been delayed.

There are plenty of other theories floating around about why this showdown occurred. One thing is certain, OEM equipment inventories are very high, some in excess of one year, and demand

Ronald Bishop is principal of Bishop & Associates Inc., based in St. Charles Ill.