Large vs. Small Connector Company Perspective
By John MacWilliams, Bishop & Associates Inc.

The industry appears to be emerging from its worst ever recession, with only modest recovery expected this year. Over the years, industry consolidation has been significant—276 mergers in the past 20 years, an average of 14 per year. Larger companies continue to enter new or neglected markets and applications by acquiring second- and third-tier connector companies. The number of acquisitions is a classic sign of a maturing industry. But, even as this process continues, a relatively low cost of entry and myriad connector applications still support a large number of smaller connector manufacturers. This is especially true in emerging markets, such as China. Here are some of the statistics for 2008:

Significant statistics:

• Top 10 = 54.5 percent of the total 2008 world market (average size x-Tyco ~ $1,764M)

• Top 25 = 70 percent (avg. size x-Tyco ~ $945M)

• Top 50 = 79 percent (avg. size x-Tyco ~ $546M)

• Second 50 = 21 percent of the total 2008 world market (avg. size ~ $68M)

• Smaller companies beyond the top 100 still command 13 percent, or $5.5 billion (avg. size <$25M).

• As one might expect, China and ROW had the highest percentage of companies beyond the top 100.

• There were 11 acquisitions in 2008 and 2009.

• Since 1990, there has been an astounding 276 mergers and acquisitions, an average of 13 per year.

Observations:

• The connector industry is showing signs of maturity, but the dynamics of the electronics industry continue to feed connector markets and applications.

• While the industry is very broad, it is still dependent on a few basic interconnect requirements.

• Even with all of the acquisitions, the industry remains somewhat fragmented, with over 300 suppliers worldwide.

• A lower cost of entry into the connector industry tends to encourage more entrants.

• A countervailing trend is that OEMs have pared down their supplier lists.

• This tends to be more prevalent with larger OEMs, less with smaller companies.

• The top 10 remain strong, with some fluctuation due to the 2001-2003 and 2008-2010 recessions.

• Tyco Electronics is approximately 18 percent of the total market, and 34 percent of the top 10.

• Many manufacturers have grown substantially, such as Amphenol, via both internal growth and acquisition.

• AMP (now Tyco Electronics) and FCI hit rough spots, but rebounded under new leadership.

• Small companies eke out an existence in market niches in all regions of the world.

• One example of a market niche is the test and burn-in market (i.e. semiconductor test).

• Other examples: Industrial/Ethernet, marine electronics, CATV/broadcast, RF/microwave, aviation, military/aerospace, premise wiring, electrical, and non-auto transportation.

Technology Stratification in the Industry
Connector companies’ focus on research and development (R&D) varies widely across the industry. Some were formerly into basic research on connector, and even non-connector-related, technologies. While those activities were deemed important, many R&D developments did not relate to short-term revenue generation. Thus, the “modern” industry posture is—due to economic necessity—more pragmatic in today’s highly competitive, low-cost environment. Here is a quick look at connector industry “technology stratification” as it exists today:

1. Technology leaders are typically larger firms with the resources to lead in technology development, although basic R&D is more or less something of the past.

2. Licensees are companies who typically license technology from the leaders in a second source scenario.

3. Niche technology players have developed and focus on specific niche technologies.

4. Followers are companies that follow technology leaders, or pounce on industry-standard designs in a low-cost producer, typically in an offshore production environment.

5. Mature technology players work primarily in very mature technology areas where there is still demand. Examples of these areas include machined RF, CATV or broadcast connectors, after-market avionics circular connector modifications, power plugs, etc.

Small Companies
Small companies are, to some extent, feedstock to larger firms. But they are more likely to thrive in their own market niches because of a specific technology, market application, and/or intense customer relationship. In many cases, their focus is typically beyond the broader-brush standard product and high-volume approach of larger firms. This is more evident as cost-of-sales constraints in large companies results in sales force downsizing. Manufacturers’ reps are used by smaller companies.

Here is one interesting trend: As the industry matures, there are fewer protected niches because larger firms are looking everywhere for new sales opportunities. This is particularly true in the U.S., because so much high-volume manufacturing has moved offshore. This leaves domestic organizations scratching for business. Another trend is the “AC-DC” relationship in this industry with outsourcing. In good times, it makes sense to outsource stamping, molding, and some production processes to specialty firms. In bad times, some companies tend to pull these activities back in-house. Marketing is a major differentiating factor in large vs. small companies.

Small and large company characteristics: 

Most large companies can have difficulty supporting highly specialized niche technologies that require a lot of customer engineering support. But, horizontal growth in many large companies has forced them to decentralize and develop strategies to support specialization. In smaller companies, this is a way of life.

Mid-sized companies, at least in the past, have been more likely to be acquired. This is because they were/are large enough to play in the big arena. They also have large enough sales to attract larger acquirers, or may have lacked the resources to compete against their larger competitors. In some cases, these formerly independent companies now operate as successful divisions of larger acquiring firms. In other cases, their product lines have been assimilated, eliminating duplication and a competitor.

Venture Startups
I have been involved in venture capital-like situations in and out of the connector industry. Start-up companies have a vision involving a specific “new” technology. Some come into the connector industry from related technology areas: e.g. semiconductors, flexible circuitry, PCB technologies, elastomeric/spring contacts, and even from academia. We have found over the years that the connector industry is not very accommodating when it comes to new, disruptive technologies appearing from “left field.” In most cases, startups need to first grow their own business, building, if possible, to a point of a) proven technology and b) market success. This scenario is more likely to occur than being initially acquired by a larger firm. There are a few exceptions, but also few start-up multi-millionaires, because the industry’s technology is relatively mature and it’s thought that most new ideas have already been discovered. There are a few future exceptions, such as connector sub-miniaturization to <100m. (i.e. beyond conventional stamp-and-form technology), interconnects for next-generation 3D IC packaging, and next-generation PCB technology. Some new technologies may be, technically speaking, “a solution looking for a problem.” This is because many of these developments start with an idea, not a customer requirement. Large companies are fully capable of developing their own new technologies when needed in a customer situation. Risking capital and diverting energy into new technologies may be seen as counterproductive to such companies, and in those cases, the small companies have the opportunity to step in and shine—if they have the capital and skill.

Conclusions:

• The connector industry is maturing, but still has growth characteristics relating to continuing innovation in the semiconductor and electronic equipment industries.

• The huge breadth of connector applications has fostered an equally broad industry from a product and technology perspective.

• Technology development today is more pragmatic, and more closely related to revenues.

• As a result of this breadth, there are hundreds of connector manufacturers, large and small.

• As the industry matures, and given the huge number of companies, there are ongoing mergers and acquisitions as companies compensate for lower growth with acquisitions.

• The industry has 10 firms in the $1 billion+ range, many of whom have grown via acquisitions.

• The big are getting bigger via these acquisitions, but also from organic growth.

• Offshore entrants are feeding off major cost pressures, globalization of the supply chain, open industry standards, and their closeness to local companies.

• Most “new” connector technologies have been “discovered,” with a few exceptions.

• Recent entrants and venture startups eke out a living with their innovations—mostly in niche markets, and with little support from larger connector companies, until their technologies and market niches are proven to produce significant revenues.

John MacWilliams
Senior Consultant and Analyst, Bishop & Associates Inc.
John MacWiIliams has been in the electronics industry for over 40 years. His main areas of experience have included: U.S. competitiveness programs, market research studies, authored articles, field sales and management, product marketing management, strategic marketing, new product planning, venture development, advertising and media relations, direct sales, manufacturers representative, distribution sales management, and international marketing. MacWilliams has worked with AMP, Diceon Electronics, TRW, and IRC in marketing management positions. Prior to joining Bishop & Associates, MacWilliams served as the group director of marketing and new product planning for AMP.

MacWilliams graduated from Lehigh University with degrees in business management and engineering.