Rosy outlook loses some luster

Electronic News, Jan 5, 1998 by Bernard Levine, Fred Guinther, Ann Steffora

Distributors are still counting on a good 1998, but many seemed more nervous during interviews conducted right before the start of the new year than they did just a month ago.

While growth projections for '98 sometimes reached as high as 15 to 20 percent in interviews conducted for our recent Distribution Trends 1998 special supplement (EN, Dec. 1), later prognostications made for this special outlook article were more likely to fall in the 10 to 14 percent range, with everyone keeping their fingers crossed.

What happened in the intervening weeks? The Asian financial flu, an intensifying price squeeze on DRAMs and other commodities, and reports of lackluster Christmas retail sales have all come together to raise the anxiety levels of many top distribution industry executives, although most insist that prospects for the new year remain solid.

"To be honest, I think we've gone from a very optimistic outlook for 1998 based on results through mid-November, to a cautious view of next year, reflecting the cloud of uncertainty blowing in from the problems in Asia," said Craig Conrad, VP, sales of Fort Worth, Texas-based passives specialist TTI, in a late December interview. "The jury is still out on how those conditions will affect the industry overall, but TTI is still looking for a good year ahead whatever the impact from the Far East."

Arrow's chairman/CEO, Stephen Kaufman, noted as '97 drew to a close that "underlying demand remains healthy, but not overwhelming," with "continuing price pressure."

One Firm's Great Optimism

Still expecting "significant growth" this year is Nu Horizons President Arthur Nadata, who--like many of his counterparts--believes his own firm will outperform the overall industry. "The industry growth expectation for '98 that we hear is about 12 to 14 percent for the market in general, and we believe we should outperform the market, so we're looking for about 20 percent. The industry consolidations we've been seeing should be good for companies like Nu Horizons who specialize in the middle to lower tier. Also we have many design situations that should begin to produce results in the new year and that should add to our strength."

However, those who earlier predicted overall industry growth in 1998 approaching 20 percent may be disappointed, according to George Perris, president of Sierra Marketing Group. He warns that '98 "probably won't be as optimistic a year as many analysts predicted. It won't live up to the expectations of analysts who predicted in excess of 16 percent growth for semiconductors. I think 12 percent is more realistic for all components."

How do distribution execs view last year? While 1997 overall was more sluggish than expected, there had been reports of some pick-up early in the fall, and mixed reports afterwards. Some marketers detected slowing business by December; others didn't. A number of distributors have reported or warned of disappointing quarterly results in recent weeks.

But one distributor who hasn't seen a slowdown is Burton Katz, president of Avnet passive unit Time Electronics, who said in the middle of last month "business continues to be very strong." He added "Time is having a strong record performance so far in December. Of course, we have to take into account that the last week of the month will be much slower due to the holidays."

Strong Growth In Passives

A number of marketers note a strong passives growth rate. According to TTI's Mr. Conrad: "This past year is the second in a row that passives will have outperformed semiconductors in components growth, what with the upheaval in the average selling price of DRAMs and some others that has come out of conditions in the PC market and elsewhere. I think we're looking at 1998 double-digit growth for passive components--how high in the double digits depending a lot on the Far East--with probable single-digit growth in semiconductors."

The start of the new year may prove crucial. Ben Schwartz, VP of strategic marketing at Jaco Electronics, sees 1998 as "a challenge year. Growth in distribution should be in the low double digits, probably around 12 percent. The beginning of the year will set the pace of how the year goes. It certainly won't be thought of as the year of memory, because a tremendous oversupply of DRAMs and flash products will prevail. But the low price of memory may spur growth in some of the driving factors that will have to kick in early in the year. These are set-top boxes, cable modems, digital PCS, the $1,000 to $1,200 PC and personal information accessories, the largest consumers of semiconductor production, and if they have good growth they will generate demand that will allow distribution to pick up the pace. Jaco is positioning itself to double its sales by the end of the next three years."

Mr. Schwartz added that November-December was weak, but after the first of the year, "there will be a pick-up, with momentum gained throughout the year. It will be a start of better times."

At Bell Industries, "general business conditions" have hurt fourth quarter earnings, according to President Gordon Graham, and if things don't pick up, the first quarter of '98 could be affected at its Bell Milgray distribution operations.