Ups and downs of the connector industry

The global interconnect market has gone through two recessions in the last decade and four recessions in the last three decades.

In the 1980s and 1990s, the downturns were brief and the loss of industry value was less than 3%.

Recovery of market value after the recession usually took a year and year-over-year growth tended to be saw-tooth, as the comparisons were harder or easier, depending on the preceding year.

The decade of the new millennium, however, has been different. The recession of 2001/2002 saw an industry decline of 27% over the two years from 2000 levels and it took three years to recover the lost industry value.

The recession of 2008/2009 had a year's decline of 21.8% and then a one-year recovery of 23.6% in market value.

This was a very volatile decade.

It is interesting to note that the worldwide GDP growth rate has only contracted once in the last three decades, in 2009.

The interconnect industry sales growth tends to cycle every five to seven years. On average, the industry growth tends to be one to two times the GDP growth by country or region.

The growth rates in the emerging economies, and particularly in China, were noticeably less affected by the 2009 downturn. As no surprise, the major G7 economies and the euro zone, as a region, were most heavily affected by the recession.

The situation leading into the 2008/2009 recession was unprecedented and positively impacted the market in the five years preceding the recession, then resulted in the bust.

Market value that did not actually exist was created in the housing market through risky subprime loans, which led to escalating housing values. These loans were packaged together and sold to investors.

The homeowners, at the same time, borrowed money on the increasing equity in their homes based on the rising prices and spent this money on other goods and services.

The bubble burst in 2008 and trillions of dollars of value was lost in the housing market and stock markets over the next year.

Some of the effects of the mortgage crisis we are still living with today, in whole or in part, include:

• Large sovereign debt-to-GDP ratios in many countries;
• Historically high long-term unemployment;
• Austerity budgets at all levels of government;
• Historically low consumer confidence.

The result in the interconnect industry was a 10-year compound annual growth rate of 2.4%, which is well below the 30-year average of 5.7%. The total interconnect industry grew from $104 billion in 2000 to $138 billion in 2010.

Year 2011 started off better than expected. Year-over-year growth in 1Q11 was 10.6% - almost twice the 30-year average and 60% higher than anticipated in January 2011. However, the growth dropped off steadily in the second half of the year and was negative in 4Q11.

The Bishop Connector Confidence Index, a survey of industry personnel's perception of present connector business conditions, likewise dropped off as the year progressed, although remained slightly positive.

The industry growth in 2011 was affected by several factors including:

• Unemployment remained high in Western economies;
• Sovereign debt crisis in Europe undermined global financial markets;
• Political stalemate in the US over the debt ceiling and budget deficits;
• Consumer confidence at historic lows in Western economies.

The total interconnect industry grew 6.6% in 2011 to $148 billion. The cable assembly market was two-thirds of the total. Europe had the highest growth at 9.6%, due to a strong motor vehicle and industrial market. The strongest market sectors worldwide were motor vehicle, industrial, transport and telecom/datacom.

This year is expected to be a year of modest growth. Bishop’s Future Expectations Index, looking six months out indicates that most regions will have a positive outlook, except for Europe and all are trending up, except for Japan.

GDP outlook for the next five years is for modest growth. The worldwide GDP growth rate is forecasted by the International Monetary Fund to range between 4% and 5% through 2016.

The highest growth will be in China, in the 9% to 9.5% range, and in the emerging economies, including China, in the 6.1% to 6.7% range. The G7 economies are projected to have growth of less than 3%, and the euro zone, in particular, is seen at less than 2%.

The big three connector companies, TE Connectivity, Amphenol and Molex, are projecting in calendar 1Q12 a combined sales forecast for a year-over-year decrease of 2.4% and a sequential increase of 0.9% from 4Q11.

Amphenol provided calendar full-year 2012 guidance of sales growth in the range of 2.7% to 5.3%.

Bishop projects the interconnect industry growth at 3.5% for 2012. What happens in 2012 and beyond is dependent on the outcome and progress in many areas:

• Sovereign debt credit crisis in Europe;
• High deficits in Western economies;
• High long-term unemployment;
• Stagnant housing market in the Europe and US;
• Social/political unrest in the Middle East impacting oil and gold prices;
• Contentious political environment in US - little legislative progress;
• Low consumer confidence in Western economies;
• High inflation rates in China and India.

The company expects the worldwide market for cable assemblies to grow in 2012. The majority of the growth will be in China and Asia-Pacific.

The market sectors expected to grow the most year-over-year are computer and peripherals at 5%, and telecom/datacom at more than 4%.