Cautiously confident

On the surface, the latest Afdec forecast is positive, in line with the City, but critical worries about matching supply to demand remain, reports Paul DempseyThe annual forecast from Afdec, the UK distribution trade body, is usually one of the sector's most thoroughly thumbed documents, balancing the association's natural tendency to talk up the industry with some cool economic analysis. Its latest figures*, just published, bear the same hallmarks.The headline news makes generally positive reading, Afdec's new optimism being perfectly in synch with the upbeat City statements made in the past few weeks by leading plcs such as Abacus Polar and Electrocomponents.First, the downturn in 1999 is not expected to be as bad as was previously feared. Afdec believes that UK distribution will end the year having suffered a 3.8% contraction in the Distribution Total Available Market (DTAM) to #1.62bn and a 5.2% contraction in the Total Available Market (TAM) to #6.74bn. These short-term forecasts compare with last year's predictions of falls of 9.4% and 10.1%.Second, Afdec is now more bullish about the prospects for 2000 and 2001. DTAM is expected to rise 8.9% next year to #1.76bn and by a further 10.1% in the year after.Third, the association has picked out a number of broadly favourable economic indicators.On the macro stage, it notes that the threat of a global economic crisis - presaged by the collapse of hedge funds like Long Term Capital Management and regional problems in the Far East and Brazil - has been largely averted. The keystones for recovery have been strong budget management from the likes of Federal Reserve chairman Alan Greenspan and our own `prudent' chancellor Gordon Brown, as well as a faster-than-expected recovery in Asia and the Pacific Rim.Fourth, on the electronics-specific level, it notes the emergence of shortages in areas such as semiconductors and tantalum capacitors; a general slowing in falling component prices; continued buoyancy in sectors such as telecoms; and a possible resurgence in data processing.But without over-stating them, it is important to note that the report does contain several caveats.Introducing the latest data, Gary Kibblewhite, Afdec chairman, highlighted two that should importantly be applied to the area of product shortages."My personal feeling is that a lot of the shortages which are beginning to hit - in areas like DRAM, SRAM, EPROM - are tending to be application-specific. We are not seeing the kind of across-the-board shortages yet that would really point to a rapid upward swing."With tantalums, for example, demand there is really being driven by just two types of product, set- top boxes and mobile phones."The other factor is that we haven't yet really seen price erosion go away on a broad scale. We are probably at the bottom of the hockey stick, and we might be about to start kicking up. If we do, prices could rise very quickly. But that hasn't actually started to happen just yet."Taking the detail of the report, several more issues emerge. Concerns remain about the ability of component manufacturers to efficiently manage output to avoid disastrous gluts such as that which hit the semiconductor market.Then there is distribution's ability to take advantage of customer re- assignment where manufacturers finesse their direct client's over to the distribution channel. This trend in the semiconductor market "now seems to be reaching the end of the process", says Afdec.But it adds that: "Emphasis is switching to implementing a similar policy for passive and electromechanical components. The process this time is being driven by customers, having observed the benefits with semiconductors working through the distributors."TAM-to-DTAM shift, as the process is often referred to, is a hotly debated issue, particularly as most component manufacturers are eager to move inventory out of their own stores. But from 1999 until 2001, Afdec expects distributors' total share of the UK component market to remain flat at 24%.Then, Afdec says sector polarisation between large broadline and small niche distributors is expected to continue. One reading of this comment would suggest that mergers & acquisition activity and its attendant ability to cause short-term customer confusion can be expected to remain part of the market for the foreseeable future.Finally, in an abbreviated list, whatever the degree of the upturn, margins are expected to remain tight. Kibblewhite, again, notes the current continuing disparity between often sharply rising unit sales and falling average selling prices.The impact of these factors can be overstated. Afdec accepts that there remains an inherent conservatism in its DTAM and TAM growth projections."They could easily be higher," noted Kibblewhite.Similarly, the issues raised here are ones that distributors have already had time to master, as Afdec notes, many offsetting erosion, margin and capacity pressures with effective cost- down programmes. Nevertheless, such issues continue to apply pressure.Afdec also offers sector-specific comments. On semiconductors, there are favourable observations that "the over- capacity situation seems to have ended, delivery times have extended and prices have shot up". The effective reduction of the memory market to three big suppliers also suggests that "some degree of ordered growth" could be achieved, although worries over capacity management again remain.Looking at one specific semiconductor subset, the report does note that optoelectronic should do "quite well" next year, achieving 18.9% growth, against a product group average of 11.4%.Comments on passives return to the impact of the tantalum capacitor which, on its own, could add 3.5% to an overall 6.3% projected growth for capacitors overall in 2000. The situation with these components, according to Afdec, is that, having suffered comparatively less than semiconductors, a resurgence in Far Eastern demand is therefore likely to produce less of a short-term upswing.In the third group, e-mech, Afdec sees growth continuing to be focused in connectors."Relays," it adds, "remain in the doldrums and switches are expected to grow slowly in 2000. Like other components, relays have recently been suffering price reductions as a result of Far East demand falling off. The prices of switches have been firmer than most."In conclusion, there is an undeniable - and wholly understandable - `once-bitten, twice-shy' feel to Afdec's comments. The central debate in electronics remains whether or not the sector can match supply to demand more effectively than in the recent past.As the report correctly notes, there is evidence that this is the case. But Afdec's own conservatism, not to mention the murmurings it cities from other forecasters, suggests that nobody yet has total confidence to call this sector of the market.Amid all the good news, then, it is hardly surprising that one of the most intriguing sections of the report is entitled `Considerations relating to the difficulties of forecasting'. Good news, then, with reservations.* The Afdec Forecast is available at #95 per copy from Afdec, Owles Hall, Owles Lane, Buntingford, Herts SG9 9PL. Tel: [phone]. Fax: [phone]. E-mail: [email protected]