Distribution Market Outlook: Cautious Optimism For 2012 Prevails

Following a stellar 2010, 2011 is closing the year on an up note for most distributors of electronic components, though the outlook going into 2012 is for even more modest growth ahead.

The recovery from the 2009 recession continues to be muted in comparison to historical economic recoveries, but the news is not all bad going forward, William Strauss of the Federal Reserve Bank of Chicago told distribution executives at the ECIA Executive Conference in Chicago in October.

Strauss told attendees that although he expects slow growth and high unemployment into next year, encouraging signs remain—especially in the manufacturing sector, where he said he does not expect a major slowdown any time soon. Through October, the manufacturing sector had expanded for 27 months and was growing at more than twice its trend rate of growth, Strauss said.

The Institute for Supply Management’s (ISM) Purchasing Manager’s Index (PMI)—a key economic indicator—registered 50.8 in October, down slightly compared to September but still above the 50-point threshold indicating growth in manufacturing activity.

Eight sectors of the manufacturing economy reported growth during the month: computer and electronic products; petroleum and coal products; food, beverage, and tobacco products; nonmetallic mineral products; primary metals; fabricated metal products; paper products; and machinery.

In addition, Strauss says the automotive industry remains somewhat of a bright spot, as increased production and sales are expected in the fourth quarter and into next year. This comes on top of an ongoing slow recovery in the housing market.

But slow growth means a predominant feeling of hesitancy—among the business community as well as consumers. The fact also remains that although manufacturing is still growing, it has slowed from its moderate pace of growth through much of the recovery.

“[We expect] a deceleration to a 2% annual rate of growth in the final three months of 2011, largely because of inventory rebalancing in the electronics and motor vehicle industries, which faced supply disruptions earlier in the year,” Manufacturers Alliance/MAPI chief economist Daniel Meckstroth said in analyzing the October ISM report. 

“Pent-up demand for some consumer durables, rapid growth in business equipment purchases, and the turning of the private construction cycle should offset the weakening impact of the European debt crisis on U.S. trade,” Meckstroth added.

Seeking Growth In Europe And Beyond

Electronic components distributors have felt the slowdown, but are cautiously optimistic about the year ahead. After starting the year strong, business conditions began to weaken in the spring and have continued at a slow pace, Digi-Key president Mark Larson said in an interview at the ECIA conference in Chicago. Despite the slowdown, Larson expects Digi-Key to finish the year up slightly over 2010.

“But I don’t expect we’d get a lot of sympathy because we did grow 64% [in 2010],” Larson said, adding that he expects growth in the 8% to 10% range in 2012. “I am basically optimistic because as long as we’re gaining market share, that’s all it takes to make me happy.”

Larson said Digi-Key looks for regional growth in Europe, in particular, next year.

Mouser Electronics’ vice president of technical marketing Kevin Hess said he’d seen an uptick in business through the end of October and is anticipating slow growth in the first two quarters of 2012, followed by a pickup in business in the second half of the year. Mouser continues to see its strongest growth in Europe and Asia.

“Company-wide, we’re adding close to 590 new customers a day,” said Hess, pointing to Mouser’s growth in Europe in particular.

Mouser has nine locations across Europe and expects to add one or two more before focusing subsequent growth on adding more people in Europe. He said Mouser’s Web traffic is growing in Europe and Asia as well, although Mouser continues its multi-pronged approach to selling by offering online, print, and CD catalogs as well as live sales support.

“You have to have all of those options available,” said Hess. “[Customers] will use your Web site, they’ll use your print catalog.… We want to give customers options on how to source products, not just point them in one direction.”

Navigating A Flattening Market

Chuck Magee, executive vice president of America II Electronics, expects the fourth quarter to remain flat until the pent-up inventory is burned off. America II is a broad-line independent distributor focused on active and passive commercial components and inventory management services. He added that 2011 has been “a strange year” following one of the best years on record for the industry and for America II.

“In the second quarter, there was a fear of the supply chain being severely disrupted, and that caused customers to over-inventory and buy more than [they needed],” Magee explained, pointing to the high buying activity following the Japan natural disasters in March.

“Although Q2 was great because of that, it put Q3 and Q4 in receding numbers. But book-to-bills are starting to improve, so we’re optimistic for the first part of next year,” he said.

Magee said he expects growth in all of America II’s worldwide markets next year.

“Overall, the prospects going forward for Q1 are healthy. The semiconductor industry continues to thrive and grow. We continue to see new, emerging markets in Asia, India, South America,” said Magee. “So I’m very optimistic going forward. It’s a growth industry and it has been for a long time.”