May 2010Only innovation helps against the crisis*Downturns allow rethinking and readjusting strategies and resources. Looking ahead, Europe has lots of good opportunities to rebound, not in the traditional mass markets of computers, communication equipment or consumer devices, but in 1000s of industrial applications where the „old“ continent is still world-leading in innovative technologies A review of the recent world economic crisis (of which nobody knows if it is really over) and its effects on our industry reveals the following:the European Electronics industry has seen bigger downturns in its 50-year history. However, none of them was as sharp as this one: almost minus 30% in the first half of 2009. Interestingly enough, none of the previous downturns experienced such a fast recovery either. It looks as if the second half will be much better, based on the current forecast. In total, the European electronics industry will finish 2009 with a minus of 20%. This sounds like a lot, but from 2001 to 2003, the decline was at least as deep. And some readers may remember the memory crisis back in the 1980 where the downturn was even worse, as were the industry effects. The current crisis teaches us that Europe is losing significance in the world with regards to electronics production. From once 20% share of the world electronics production Europe will decline to a share of 10% in less than 10 years. And regionally, Italy currently seems to experience a shift of production offshore (to Eastern Europe and Asia) that already affected UK and France over the last 10 years. What normally goes first is the mass production of goods, and of that Italy had more than enough in white and brown goods. Distribution Trends In distribution, the trend is not dissimilar. The first three quarters of 2009 showed a decline of over 25% across Europe (different by country and region) and 2009 will end with a minus of 20 to 25% versus 2008. From the all-time high in 012007, the quarterly turnover of the European components distribution has come down by over 35%. The recovery is on the way, but to reach 2007 levels again will be a matter of years instead of quarters. The crisis had made no difference between channels, whereas in former cycles, distribution and the OEM reacted somewhat differently. In summary, distribution this time did not gain any shares against the direct channel or contract manufacturing. What has certainly intensified is the further consolidation and concentration of business at the top level. The top two distributors have strengthened their position and own a significant portion of the entire components distribution market, either by organic growth or pointed acquisitions. This will probably continue in the future, but there is room for local specialists or niche-players. Manufacturing is gone…. Back to general market trends. What we learn is that downturns may enforce existing trends but they do not trigger them. In Europe for example, outsourcing or off-shoring are not new. We will see a short term cost-related increase, but the big bulk of manufacturing has gone long ago. Can some production come back? It depends. Whoever goes to find new markets in Asia or elsewhere might feel the force to produce there. Whoever goes to find cheap production only in other regions of the world may come back at some point in time -for reasons like quality, intellectual property and total cost of ownership calculations. In fact, increasingly, sustainability discussions and the mounting pressure from customers, consumers and authorities will lead to a rethinking of some, purely, cost-driven measures and favour a return of production to Europe. Near-shoring is the new buzzword. Innovation drives the sector More importantly, during the crisis Europe has not ceased to be innovative. Especially in industrial electronics we see new products and technologies everywhere, driven by energy production, energy saving, waste management, power management, security and/or communication. This is not about big platforms like mobile phones; it is about applications that barely touch 1 million pieces per year. But in their combined variety, complexity and innovation they will define Europe‘s future electronics industry structure. Examples of potential growth markets for Europe are vast. According to Avnet‘s own estimations, there are dozens of areas of high potential growth where complex electronics technologies like high-end MCUs, Programmable Logic, Sensors, Opto-electronics or Wireless devices will play a big role, either solitary or in combination. These industry segments with cross-technology usage with the biggest potential over the next decade (see table 2) not only have business potential in Europe, but to some extent will help regain a global leadership position of European innovators, whether by equipment export or by patent utilisation. It remains to be seen how fast electric vehicles from European car makers will „hit“ European streets in huge numbers, but the areas where European companies lead the industry (in green)are more than enough to occupy the electronics supply chain for a while. Interestingly, in some of these cases, the exploitation of available growth potential depends on governmental decisions which could either propel the market dynamics or block it due to indecisiveness. A distribution-operated market Due to the eroding role of Europe in an electronics world production scheme and market, the next decade will also experience a potential change in channel mix. This trend is already on the way in many smaller markets in Europe and inevitably will hit the big ones as well. By nature, manufacturers need big platforms to develop new architectures and drive technologies. As the future European electronics industry does not offer them (rather a huge variety of small platforms smaller than 100k pieces/year), Europe will turn into a distribution-operated market much more than it is today. From a customer perspective, distribution can offer the full service spectrum from design support to end-of-life management concepts. And from a supplier‘s viewpoint, it can aggregate the requirements of many thousands of customers to comprehensive market intelligence. Is that a bad thing? Not at all: Service levels in distribution are excellent, specialisation becomes even higher. The involvement of distribution in innovative fields will be very rewarding for customers and suppliers as distribution today is able to handle the most complex design support challenges, vertical market developments or supply chain set-ups. Under the current circumstances a growth of distribution influence would be natural, as it would have been in the last 10 years. But distribution is still stuck in its 25% quarters. Sometimes it seems as if the value proposition of disti is either not understood properly or simply a victim of market forces that are concentrating purely on pricing. It is apparent that the components industry in the last years has been a buyer‘s market and distribution has not been able to sell its service portfolio for a proper price. It is also apparent that the balance of financial and legal and burden is not working properly (in environmental or patent issues, distributors are looked upon by the EU authorities in the same way as manufacturers, although their responsibility cannot be executed upon without the help of manufacturers or customers). It is upon the distribution industry to help clearing its roles and responsibilities rather than taking business at any cost. It is not just that innovation strategies are necessary IN distribution but also FOR distribution. Otherwise, the next decade will end with a similar observation about the value of distribution, just at lower return rates. W. ENDRICH
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