Throughout 2010 and 2011, European demand for electronic components has outstripped demand in the Americas, according to many North American components distributors, who expect their European business to finish the year on a high note. But slowing conditions in Europe recently have led to a prevailing sentiment of caution, and going into the fall many companies were tight-lipped about what they expect from the typically telltale industry months of September and October.
As the global financial rollercoaster ride continues, it’s anyone’s guess where business conditions are heading. This is a tricky situation for all business leaders, as short-term forecasts get more and more difficult. As a result, many North American components distributors are watching their inventory levels closely and taking steps to diversify their end markets and geographic footprints in Europe as conditions slow.
“In general, Europe has been much stronger in terms of end market demand for the last four quarters than the Americas,” says Lindsley Ruth, executive vice president for Future Electronics.
“It has been a healthy, robust market. The second quarter was stronger than many people thought, and we are not seeing the slowdown for seasonality that you would normally expect in the third quarter. Automotive has remained quite strong, but we are starting to see a slowdown in industrial,” Ruth adds.
That said, Ruth is looking to the future with a cautious eye, citing a declining market in Europe over the next couple of quarters.
“The problem is, we don’t have good enough visibility,” Ruth explains, noting that there could be a catalyst for positive growth on the horizon but conditions could just as easily get worse before they get better. “I think what’s on everyone’s mind right now is inventory. We are going to be very cautious with our inventory position. I don’t think any of us want to be in a position to be over-inventoried right now.”
Conditions Soften
In late August, TTI’s Gene Conahan pointed to the strength of the European market over the previous 18 months, noting that markets there were beginning to slow down for a variety of reasons—not the least of which was an overreaction to the potential supply chain disruptions following Japan’s earthquake, tsunami, and nuclear reactor crisis in March. Conahan is TTI’s president for Europe and Asia, and he points to customers’ over-inventorying of parts following the March disaster and the current situation in which customers are trying to run down that inventory.
“I think, overall, the general conditions have slowed down quite a bit,” Conahan says. “Some of it is a correction from the [Japan situation], and some of it is due to the summer holiday period. But overall, 2011 is going to be a very strong year for our industry as a whole and particularly for TTI.”
As of late August, TTI’s European business was up 33% over the previous year, with strong growth in countries such as Spain and Italy, where economic conditions are particularly weak. Conahan pointed to a 20% year-over-year increase in Spain and a 29% year-over-year increase in Italy. In addition, TTI’s business was up 32% year-over-year in England and 40% in Germany.
“Since the May-June timeframe, we have really seen some of this softening, although we are seeing a positive book-to-bill ratio and we are still seeing, year-over-year, months continuing to be better,” Conahan says.
Like Future’s Ruth, Conahan points to automotive and transportation businesses as particularly strong segments in Europe. TTI includes railways in the transportation sector, a particularly strong segment in Europe compared to North America.
“If you look back to ’08 and the beginning of ’09 when things really went off the cliff, automotive and transportation were hardest hit,” he explains. “I think they probably pulled in a little too much and when they rebounded, they rebounded very strong—and they continue to be very strong.”
Conahan says instrumentation and industrial markets in Europe also have performed well for TTI over the last year and a half, particularly in countries such as Germany. Markets related to consumer segments, which tend to be more reactive to negative economic news reports, are softer.
“Those things have a tendency to fluctuate up and down, whereas transportation and instrumentation businesses tend to be much more stable,” Conahan adds.
Geographically, distributors such as TTI are reaching out to new areas while also beefing up service in existing countries as a way to diversify their reach. TTI has pushed further East, opening a second branch in Poland, expanding in Hungary, and opening new offices in the Czech Republic and Romania, for example.
At the same time, the distributor has added offices in Western Europe—in Frankfurt and Berlin, for instance—to provide a sharper focus on existing territories. This “divide and conquer” strategy has helped TTI increase its customer base by 15% in Europe this year.
“With a broader customer base, we hope this mitigates some of the market softening we are seeing and gives us a better base to grow on when the market does come around,” Conahan explained.
Uncertainty Prevails
At the end of the summer, officials in Europe were indeed citing slower business conditions. For instance, industrial production fell in June by 0.7% in the 17 nations that use the euro as currency and 1.2% in the European Union. This was lower than the 1% growth analysts had expected.
Officials also reported that energy production fell 0.4% in the eurozone and rose 0.8% in the EU from May to June. Durable goods manufacturing declined 2.5% in the eurozone and fell 2.2% in the EU month-to-month. Non-durable goods production of consumer goods fell 0.5% in the eurozone and 0.8% in the EU.
Among EU member states with data available, production rose highest in Latvia and Lithuania, up 4.1% and 3.7% respectively. Production fell steepest in Denmark, down 5.8%, and Portugal, where production fell 3.5%, according to reports. In the larger European economies, total production fell 0.8% in Germany and 1.7% in France.
Also in August, Europe’s economic sentiment index fell nearly 5% to 98.3—its sixth straight decline and one that brought the index below its long-term average of 100. The results mirror waning confidence among consumers and business leaders worldwide and are creating a sense of uncertainty among business leaders that is making it more difficult than ever to plan for the future.
“Right now, I think there is such an uncomfortable feeling that people have in business today, not knowing what’s going to happen in the future,” says Ruth. “We used to be able to look out and forecast with a reasonable degree of accuracy. Now it’s difficult to look out one month, let alone a quarter. It is a very challenging environment from a planning perspective. Everybody’s being cautiously optimistic.”
The feeling of uncertainty also registers on other levels, particularly human resources. Conahan points to potential tax law changes in some European countries and their potential effect on employees. As many countries consider raising income taxes as a way to ease their debt crises, employers must be cognizant of how such changes affect employees, he says.
“I think there are some real question marks about how the overall economic problems will affect people—particularly as it relates to the income tax situations for the countries in trouble,” Conahan explains, pointing to the unique nature of the distribution business. “At the end of the day, we don’t manufacture anything. Our business is really people. We have got to have the best people, and we have got to be attuned to some of these governmental restrictions on them.”
Conahan points to a conference call he had over the summer with some of TTI’s European staff regarding potential changes to higher earners in Italy. The country was considering a “solidarity tax” on workers earning more than 90,000 euros (about $130,000) per year. Although the government abandoned those plans in late August, the country is still looking at tax changes to help balance its budget.
“We have to consider what these measures will do to our people,” Conahan explains. “So we’re dealing with those issues as well.”
