Unshakable
Japan’s Connector Industry Demonstrates Strength Amid Difficult Times
By Lou Lipomi, Bishop & Associates Inc.

Almost 13% of the world’s connector supply is consumed in Japan. Several large connector manufacturers, including JST, JAE, Yazaki, Hirose, Yamaichi, Honda, and Fujitsu, are based in Japan. Almost every major connector supplier has engineering, marketing, and manufacturing facilities in Japan. So it follows that the tragic March 11^th earthquake and tsunami have had, and will continue to have, an impact on our industry, as well as every other aspect of the connector and broader electronic components market. The question is, how big has this impact been, and how long will it affect the global connector market?

These considerations, of course, pale in comparison to the tremendous losses suffered by the people of Japan. Bishop & Associates joins the rest of the world in extending our sincere condolences and hopes for a speedy recovery for our friends and colleagues.  

The most significant issue for connector suppliers is the impact on their sales into the Japanese markets, which as stated above, represent 13% of the total world consumption. Earlier forecasts were for sales exceeding $6 billion. That number may now be cut by as much as 25%, or by $1.5 billion.

TE Connectivity (formerly Tyco Electronics) estimates that the events in Japan could have a negative sales impact of $225 million, or roughly 23% of their projected sales for that region. Approximately 75% of the shortfall will be in the automotive sector, with the balance coming from their communications and industrial solutions group. Most of the shortfall in the automotive sector should occur in the second quarter of this year, as a return to full production by Japanese automakers is anticipated by year-end. The remaining question is whether the interruption will result in lost sales and market share for those companies, or will it generate pent-up demand, resulting in a sales recovery in the fourth quarter of 2011 and the first quarter of 2012.

Amphenol, which has a smaller percentage of its business in Japan, does not anticipate a measurable impact. 3M, however, does anticipate a decrease in sales in the second quarter as a result of power rationing and other logistics issues affecting their customers in Japan. They see this situation being resolved relatively quickly, with a potential increase in orders in the third and fourth quarters due to pent-up demand.  Molex, with 18% of sales and 24% of their manufacturing footprint in Japan, has reported no damage or disruptions at their facilities, most of which are located outside the areas most severely affected by the earthquake and subsequent tsunami.

To date, none of the Japanese-based manufacturers have commented on the impact to their connector business.  However, Fujitsu has taken an 11.6 billion yen ($143 million) reserve to cover repairs, fixed costs during non-operational periods, and disposal of damaged inventories. They have also reported a decrease of 13 billion yen ($160 million) due to decreased sales. The direct impact on connectors, which represent less than 10% of total sales, has not yet been determined.

Hirose, with three facilities in the Tohoku region, may have suffered the most impact to its manufacturing capacity. While reporting only minor damage to their facilities in Koriyama and Ichinoseki, both of which were promptly repaired and back in production, two of their 70 suppliers in the area were completely destroyed, and a third were shut down temporarily, due to the incident at the Fukushima nuclear power plant. They have not, however, disclosed any negative impact on their business performance.

Neither JAE nor JST reported any disruption in production. The only impact would result from infrastructure and transportation interruptions. Neither has commented on the status of their suppliers, nor the impact on their business in the region. Honda has not reported any impact on either production or sales.

Based on the above, it appears that the greatest impact is on sales into the Japanese market. Toyota’s announcement regarding production interruptions is an excellent example of the effect the disaster has had not only on Japanese industry in general, but also on a large consumer of connectors and a broad range of other electronic component products. While not totally escaping damage to facilities, it appears that the most significant impact on supply has come from disruptions in transportation and infrastructure.

Electronic component distributors are also dealing with a number of significant issues. Japanese distributors are, of course, dealing with the most severe disruptions at every level. Their customer base is primarily comprised of Japanese-based companies. And, while many have moved their production facilities to China and other low-labor-cost countries, a significant amount remains in Japan. A large percentage of the products they sell are manufactured in Japan, and in all cases, they are dealing with transportation and infrastructure disruptions.

Distributors in other regions are dealing with a number of other issues only indirectly related to those previously discussed. Few major distributors, other than Avnet, have a significant sales or operations footprint in Japan. Interruptions to production in that country, therefore, have had little or no impact on sales. Several component categories, however, depend much more heavily than connectors on Japanese production. Distributors are dealing with both the real and perceived consequences of potential shortages of those products.

Japanese-based suppliers of interconnect and electromechanical products represent a relatively small percentage of sales outside that country. That is decidedly not the case for semiconductor and passive components. Five of the top 20 semiconductor suppliers are based in Japan. Most others have significant manufacturing facilities there as well. More significantly, however, many of the essential raw materials come from Japan. Disruptions in production there have knocked out 25% of the global silicon wafer production.

The same is true of passive components, where such major suppliers as Murata, Nichicon, and Kyocera, are based in Japan. Once again, many essential raw materials, including ceramic dielectric, tantalum oxide powder, and foil used in aluminum electrolytic capacitors, will affect global manufacturing capacity.

Based primarily on concerns about supply, Arrow included the following risk factor in their SEC filing for the first quarter: “As a result of the effects of the earthquake and tsunami that recently occurred in Japan, including the resultant nuclear crisis, certain of the company’s vendors may be unable to deliver sufficient quantities of components or deliver them in a timely manner. Further, depending on the length of these disruptions, we may need to locate alternate suppliers to fulfill our customers’ needs. While it is too early to predict what impact this crisis will have, it could have a material adverse affect on the company’s business.”

Avnet included a similar statement in their fiscal third quarter (calendar first quarter 2011) report. “Adverse effects on our supply chain, shipping costs, customers, and suppliers, as a result of issues caused by the recent earthquake, tsunami, and related potential business interruptions in Japan [have impacted our business].”

Beyond these real issues, distributors are also dealing with the perceived issues of shortages, long lead times, and lost capacity. These fears have generated panic buying and created a “run on the bank” scenario for parts. Montreal-based Future Electronics, for example, has seen a big increase in demand, and has begun reviewing orders to determine which ones to fill. Lindsley Ruth, corporate vice president, said, “After the quake, we had customers that wanted to buy a year’s supply of parts. The customers that have partnered with Future get immediate support.” Regarding other companies, he says, “We are trying to see what we can do to support them to keep production lines running.” 

Michael Knight, vice president of marketing and product management at Fort Worth-based TTI, sees a similar situation. Customers are trying to “buy up all the inventory they can get their hands on. Customers are coming in with a kind of a panic forecast. We have to go through them one by one and try to strip out speculative buying and hedging.”

Another reason distributors are acting cautiously now is that the panic buying will stop and when customers realize that product is once again available. If, as many of the suppliers and distributors believe, the situation is remedied by the third or fourth quarter of this year, the perceived shortage will become a perceived glut. Customers will once again strive to have as little inventory on their shelves as possible, and will, in many cases, try to cancel or push out the orders placed immediately after the quake. Where there are established customer-distributor relationships, the parties will be able to agree on mutually acceptable solutions. Customers who do not normally buy from a particular distributor will have little motivation to work things out and may try to leave the distributor “holding the bag.” The situation could be worse with customers who only buy from distributors in a panic situation and have no appreciation for the need to manage inventory. And even worse, brokers who are just trying to profit from a difficult situation may be involved.

Despite panic buying and other emotional responses to the situation, it seems that, due to the relatively limited production in the region, along with little dependence on raw materials and sub-assemblies, the connector industry has escaped much of the impact from these tragic events.

To be sure, sales into the Japanese market were down in the first quarter and are expected to be down again in the second. But what will the third and fourth quarters be like? Projections are for a bounce back to normal levels, with a possible spike due to pent-up demand. Impact on production has been minimal. Even the Japanese-based suppliers, while having to deal with supply issues, have already managed to resume production. And finally, due in part to the above-mentioned factors, along with their typically strong connector inventory position, distributors have not seen the panic buying that will continue to disrupt the passive products.

Japan’s ability to keep business flowing as usual despite an extraordinary situation is admirable, demonstrating once again why they play such an important role in the connector industry.

Lou Lipomi Bishop & Associates Inc., Managing Director—Distribution Research Lou Lipomi joined Bishop & Associates Inc. in 2010. As the managing director, he is establishing a new division for Bishop & Associates focused on the connector distribution channel. Lou has more than 25 years of sales and marketing experience in the interconnect industry. He began his career as a salesperson for a local electronics distributor in Cleveland, Ohio, and has held sales and marketing positions for Amphenol, Burndy, Berg, and FCI. Lou has had direct responsibility for distribution programs at the local, regional, national, and global levels. Lou can be reached at llipomi@bishopinc.com.