Hanover Fair 2008: Where are we heading in 2008?
By Arthur Visser, Bishop & Associates Inc.

The 61^st edition of the Hannover Messe took place from 21-25 April 2008. The biggest industry exhibition in the world was once more a perfect opportunity for companies from all over the world to show their products and capabilities.

German Industrial Performance
Despite weak North American markets, fears of recession, record high raw material prices, and a historically strong euro, the German economy—a driving force in industrial markets throughout Europe—proved resilient and robust in the first quarter of 2008. For many companies, including connector companies, the weakness in North American markets was offset by a good performance in European and Asian markets. For companies consolidating their European sales results in U.S. dollars, revenues were influenced by the drop in value of the U.S. dollar against the euro.

The feedback on business results from the industrial connector manufacturers at the exhibition was generally positive to very positive. Some market segments, such as renewable energy, are growing enormously and are hard to keep up with. Other segments are growing at lower double-digit numbers. For example, from October 2007 to March 2008, HARTING reported a 14 percent revenue growth of 188 million euros compared to last year.

The German industry for machine and plant equipment seems to be in good shape. The VDMA, the German association of engineers, will hold to its “modest” forecast of five percent growth for 2008 for plant and machine equipment, despite full order books (backlog > 6.5 months), 92 percent capacity utilization, and current double-digit growth—in February 2008 this sector had a +12 percent increase in orders compared to February 2007. Last year this sector grew by 10.8 percent.

Unemployment is low in Germany at the moment, and engineers are in great demand and often difficult to find. The German government is expecting 1.7 percent GDP growth for 2008 (compared to 2.5 percent in 2007). Others, like the OECD and the IMF, estimate the German economy will grow in 2008 from 1.5 percent to 2.0 percent. The export market seems to be driving growth, although other sources would claim the growth of the German economy has a much wider base.

While the German economy currently is enjoying high levels of export orders for industrial equipment, of which plant and machine equipment is a large part, the economy is nevertheless slowing compared to 2007.

The Ifo Business Climate Index for industry and trade in Germany fell in April to the lowest level since January 2006. Growth rates in the export market are slowing, and new export order intake has been contracting recently. At the same time there are indications in France that manufacturers’ confidence also dropped, and in Italy consumer confidence hit its lowest level in four years. In a European context, Germany’s economy has so far performed quite well and the economic slow-down is mostly felt in Italy and Spain, with France in between. The U.K., the last of the “big five” economies in Europe, is also showing signs of weakness.

Food-price inflation in Europe accelerated in March to 6.2 percent. Crude oil is also at record high levels, and the euro reached $1.60 in April. Despite the increased inflation in the euro-zone, the pressure on the European Central bank (ECB) to lower interest rates is increasing and we may see a lower rate within the next six months. This may create a weaker euro and increased inflation, as well as higher raw materials and oil prices for the euro-zone countries, because these commodities are traded on the world market in U.S. dollars.

ASML, the world's leading provider of lithography systems for the semiconductor industry, has reported Q108 results showing a drop in sales and orders, and forecasts a 10 percent decline in net sales for 2008. The book-to-bill ratio of 0.96 in March and 0.98 in February, according to ZVEI, shows that the German market for semiconductors is not yet showing signs of picking up. For the first quarter of 2008, semiconductor revenues in Germany were down by 12 percent. For the full year 2008, the ZVEI forecasted lower single-digit growth for semiconductor sales in Germany. Continued price pressure also affects the semiconductor markets. While semiconductor revenues decreased in certain sectors, unit sales are actually up. So, that’s the macro economic side of the story. Next, let’s have a look at some of the recent results of connector companies.

Connector companies report first quarter 2008 results.
Amphenol reported higher then expected results in Q108, with organic sales growth, excluding acquisitions and exchange rate effects, of +12 percent. Interconnect sales, 91 percent of sales, increased in all end-markets and increased by +20 percent, compared to last year.

Molex reported its Q3 (calendar Q1) results in April, and also exceeded expectations. It reported a 1.9 percent increase in sales over the same period last year, but declined in local currencies by 4.4 percent. Molex grew revenues in datacom/telecom, consumer electronics, and the automotive market, but revenue in the industrial market declined. Orders for the quarter were up by 14.7 percent compared to the prior year quarter, and +4.5 percent compared to the previous quarter, which explains why guidance for Q4 is up 7.3 percent to 12.3 percent compared to Q407.

Belden also announced its first quarter 2008 results. Belden acquired Lumberg and Hirschmann a year ago. As a result, connectivity and active components increased to 23 percent in the revenue mix of Belden. Although organic growth in the Americas was negative, this result was offset by positive results in Europe and Asia. Growth in revenue was up 52 percent, to $511.8 million, but included $167 million of acquired businesses and $15.3 million of favorable currency exchanges.

Tyco Electronics announced its second quarter (calendar Q1) results on May 1, 2008. Net sales increased 14 percent over the same quarter in 2007; excluding currency effects, organic growth was seven percent in sales and five percent in orders (the latter excluding the Undersea Telecom and Wireless Systems). The book-to-bill ratio was 1.05. Tyco’s strength in the global industrial and infrastructure markets more than offset any weakness in the consumer electronics markets. Tyco raised its outlook for 2008, and expects organic sales growth from seven to nine percent!

Radiall recorded a 2.2 percent revenue growth in Q108 compared to 2007, with an unchanged exchange rate. This translates in a decline of 2.6 percent if exchange rates are taken into consideration. The book-to-bill ratio stood at a promising 1.07 after the first quarter.

Huber+Suhner did not announce Q1 results, but sales increased by 11.7 percent in 2007, with 26.5 percent growth in revenues in the fiber optic and cable technology market, and a small decline in the RF technology segment. Sales in the Americas declined in 2007 compared to 2006. Huber+Suhner expects good results in 2008 for specific booming niches, such as solar power industry. Pricing pressure may, however, influence average prices of RF products, especially in the communications market.

Weidmueller reported revenues of 503 million euro in 2007, a 14 percent increase over 2006. Thirty percent of revenues in 2007 are realized in Germany.

Outlook for 2008
When we combine these connector company results with the macro economic data we collected, it shows there is plenty of room for discussion. Some indicators are positive, some negative, some volatile, others stable. While most macroeconomic information is negative, the connector manufacturers—almost without exception—will experience sales growth above expectations! This makes it difficult to give one single explanation for the current business climate, and even more difficult to make a single reliable forecast for the rest of 2008 without differentiation by region, by sector, and even by company. There are some seemingly contradicting indicators, and not everybody is on one line regarding the economic outlook. It is clear however, that markets in the Americas tend to be weak, while the European and Asian markets offset the results and provide overall sales growth. In addition, depending on the consolidation currency, the exchange rates between U.S. dollars and euros may have a positive or negative influence, on the results. It is far from certain, however, where we will be heading from here on. If the connector business has another strong (second) quarter, the full year results for 2008 may well be above expectations. If, however, Europe experiences a sharp slowdown, things may change rapidly, so we will conclude that it is best to remain extra vigilant about the connector market in the near future, and the 2008 forecast.

Connector companies show off their latest in Hanover
Back to the Hanover Industry Fair. At the exhibition, plenty of connector manufacturers, most of whom are obviously doing business in the industrial end-use equipment sector, set up camp and presented their new products and technologies. Among those present at the fair we found:

Molex presented their new booth unifying Molex and Woodhead as one company, and displayed their industrial network solutions, including BradConnectivity™. 

Harting demonstrated its “Pushing Performance” products, and included a “walk-through” industrial connector illustrating the inner workings of its range of Han connectors.

Belden demonstrated that they have made good progress after last year’s acquisitions of Lumberg and Hirschmann. The booth included products from Belden, Lumberg, and Hirschmann, related to various equipment markets, which was further illustrated by using different colors for each company, while emphasizing at the same time that they all belonged to the same Belden company.

Wieland further emphasized its “green image,” which was first launched in 2007 and had a clear message for all visitors: “Contacts are Green.”

Weidmueller announced its intention to invest 136 million euro in its existing sites in the next two years, of which 50 million euro will go in its headquarters in Detmold, Germany. The focal point is the establishment of a technology center which is planned to open in 2010. The company also launched its “future. Made by Weidmueller” walk-through module to present its ideas and vision for the future of decentralized industrial automation.

Other highlights during the exhibition were:

Throughout the exhibition it became clear that energy efficient technologies are becoming more and more important in the manufacturing process, and it is in these niches where we often find the highest growth potentials, also for connector manufacturers.

Solar power energy, energy-efficient machines and equipment, and (frequency) inverter technology are just a few of the growing sectors. Robotics is also an upcoming niche. At one of the stands, a nice cold beer from the tap (German beer, for sure) or a hot coffee was served by a robot arm.

Hall 25 was completely dedicated to intelligent mobile systems and components for industrial manufacturing, the public sector, and domestic applications. There was even a Robo-Cup football competition (see picture) for different categories of robots (2 legs, 4 legs, etc.).

Japan was the partner country this year in Hanover. The main theme "Cooperation through Innovation," was expressed by Japanese businesses showing hi-tech developments in industrial automation, robotics, energy, fuel cells, environmental technology, and micro- and nanotechnology.

Arthur Visser
Managing Director—Europe, Bishop & Associates, Inc.
Arthur Visser started his career in 1987 at Océ Corporate headquarters in Venlo, the Netherlands, as a product engineer assigned to provide support to the American Océ organization. In 1988, he joined OMRON Corporation at its European headquarters in the Netherlands as the European product manager responsible for industrial automation systems and components. In 1993, Arthur moved to OMRON Electronics in Brussels as a key account sales engineer, and became the product and marketing director, responsible for Belgium and Luxemburg in 1995. In 1998, he joined the connector manufacturer HARTING as managing director for its Belgian subsidiary. Arthur became an independent consultant, based in Brussels, in 2003.

Arthur has a bachelor of science degree in airplane engineering, degrees in marketing and finance, and a master’s degree in e-media enterprising. His native tongue is Dutch, but he also speaks English, French, German, and Russian.