The Top 10 Industry Trends

Trend #2: Consolidation Changes the Industry Landscape
Just about every industry has gone through consolidation in recent years. Examples include banking, defense, automotive, contract manufacturing, distribution, computers, telecom, and software.

The reasons for consolidation are compelling: 

• Increased market share

• Lower costs, increased profits

• Expanded geographic presence—globalization

• Expanded product lines—additional new products

• New customers

• Better able to influence selling price

• Increased technical capabilities

Consolidation has been pervasive in the electronics industry, influencing the total supply chain (OEMs, CEMs, distributors and suppliers) and significantly changing the competitive landscape:

• OEMs are consolidating and are becoming very large global entities. Examples include: Hewlett Packard acquiring Compaq; Daimler Benz acquiring Chrysler; IBM sells its PC business; Sprint and Nextel combine, as well as AT&T and SBC.

• Contract electronic manufacturers (CEMs) have also gone through consolidation, reducing their numbers from dozens to less than 10 major CEMs that account for annual sales of over $100 billion. They include Foxconn, Celestica, Flextronics, Sanmina, Solectron, STG Microelectronics, and Benchmark.

• Electronic distributors, traditionally categorized as national, regional or local, numbered in the hundreds. After a decade-long acquisition binge, the combined sales of Avnet and Arrow (global distributors), is larger than the total sales of the next hundred.

The impact on component suppliers is not, in our opinion, always positive, because large global OEMs and CEMs:

• Have more purchasing power, which translates into lower prices for component suppliers.

• Reduce the number of suppliers, favoring large suppliers over smaller suppliers. This has caused many small suppliers to seek larger partners, fueling the consolidation trend in the connector industry.

• Create an environment where it is more difficult for small suppliers to achieve “vendor-qualified status” (design-in on next-generation products requires global capabilities, i.e. design-in in multiple geographic locations and global manufacturing and logistics capabilities). It is also more difficult to get on the line card of global distributors and receive the mindshare required for success.

The complications created by the consolidation of the customer base and the supply chain favor big connector companies. As a result, connector companies have been acquiring each other. Since 1990, we have recorded 249 acquisitions.

Connector Industry Acquisitions By Year

During the 1990-2006 period, the top 10 connector companies increased their share of the world market from 42.8 percent in 1990, to 53.7 percent in 2006. That is a 10.9 percent gain in market share (see below).

Top Connector Manufacturers Market Share

Sales of the top 10 connector manufacturers were $21.6 billion in 2006. Approximately $2.6 billion of these sales were achieved by acquisition. In effect, the top 10 acquired 6.5 market share points ($39.9 billion market divided by $2.6 billions of acquisitions), and 4.4 market share points were achieved by internal growth.

 Only three of the top 10 companies have been active in acquisitions since 1995 (Tyco, Molex, and Amphenol).

• Tyco acquired M/A-Com, Elcon, Thomas & Betts’ connectors, Siemens Connectors, Adfex, and others.

• Molex acquired Cardell, Beau Interconnect, Cinch SA, Woodhead, and others.

• Amphenol acquired Teradyne Aerospace, Advanced Circuit, Sine Companies, SV Microwave, Alden Products, Teradyne TCS, and others.

The above analysis does not include any top 10 market share gain that may have been added by FCI, whose acquisition history is significant: Burndy, Jupiter, Souriau, Schmid, Daut & Reitz, Pontarlier, Racine Hydralic, Interlock, Malico, Nortel Connectors, Berg, and others. Most of these were prior to 1995, except the Berg acquisition.

Tyco Electronics has announced that acquisitions are again part of its growth strategy. Molex has demonstrated the desire to grow its industrial connector sales by acquisition, i.e. Woodhead. Amphenol will continue to grow the top line through the purchase of small and medium-sized connector companies. FCI, under the ownership of Bain & Company, will probably start acquiring companies again.

As additional insight, the Japanese companies in the top 10 (JST, JAE, Hirose, Yazaki) have not been acquirers. Delphi, ranked #8, is working through bankruptcy, and has not been an acquirer. Foxconn is busy becoming the world’s largest contract manufacturer, and has not been acquiring connector companies.

However, some important non-top-10 companies have been active acquirers recently, i.e. Winchester, Belden, Emerson, Cooper Industries, and others.

So, consolidation of the connector industry will continue, and the market share of the top 10 manufacturers will continue to increase.