Five years after the crash, the interconnect industry is a vortex of price pressures, global operations, and lean practices.
BY PATRICK McLAUGHLIN
As 2006 draws to a close and economies around the globe are a half-decade removed from the crash of 2001, a close examination of the market for connectors and affiliated products-including cable assemblies and wiring harnesses-unveils a vortex of activity still largely resulting from the collapse five years ago.
Much like any one segment of the connector industry might falter while another flourishes, one region of the world may experience hard times while another region enjoys abundant growth. On the whole, markets are in a growth phase. But the dynamics behind that growth are ever-shifting, and perhaps now as much as any time in the past, innovation is a requirement for business survival.
That innovation does not always take place in the form of new connector products for new applications. Often, it is a matter of innovative business operations, lean production, and quick adjustment to changing conditions. Such is the case in the connector industry today.
Boom-bust-boom
“Since the turn of the century, the connector industry has experienced boom, bust, and boom business conditions; severe connector price erosion and steeply rising raw materials costs; displacement of people and loss of manufacturing capacity in the West; and consolidation of small connector companies,” observes Ronald Bishop, founder of Bishop & Associates (www.connectorindustry.com), a research and analyst firm that covers worldwide connector markets. “Demand for electronic connectors from 2000 to 2006 hit industry-record highs and lows, making this a very difficult period in which to manage a connector company,” he adds.
Such volatility quite literally shook many individuals and some companies right out of the industry, and when growth commenced again in 2003, that growth took place within an industry whose landscape had changed. The metamorphosis continues today, as mergers and acquisitions occur with some regularity in the connector industry.
“This trend will continue as many smaller companies find it more difficult to be competitive in an increasingly complex global economy,” Bishop projects.
As examples of this long-term consolidation trend, which predates 2001, he points to Molex’s recent acquisition of Woodhead Industries; Amphenol’s purchase of Teradyne’s connector business; acquisitions by Tyco Electronics that include M/A Com, Elcon, and portions of Siemens and Thomas & Betts; as well as the development of FCI as a company built via acquisition.
Whenever these acquisitions are made, public statements include predictable words and phrases such as “synergy,” “complementary,” and “opportunity.” Richard Schneider, president of Amphenol TCS-the connector business of Teradyne purchased late last year-reports that those semantics have shown to be more than just buzzwords in the months since the deal.
“The Amphenol deal gave us access to an entire set of product groups that we did not previously have access to, including power solutions, as an example,” he explains. “The business is running as it has before, the sales channels have not changed, and our customers have responded positively.”
Schneider adds, “The challenge going forward is that there are a lot of opportunities, and we must choose what to focus on. You cannot wait for a market to establish itself before you develop product to serve it.”
In that vein, Schneider reflects on business conditions of the late 1990s and the subsequent freefall: “Between ’99 and 2000, our business just about doubled, from $400 million to just under $800 million. Then in 2001 we went back to between 400 and 500 million. In those conditions, some big-investment, high-risk projects got pulled back.” Teradyne [at that time] was by no means alone in retreating and, in fact, probably exemplifies the reaction across the connector industry.
Eye on efficiency
After another down year in 2002, 2003 saw a bounceback to the tune of 11 percent worldwide. By then, “the landscape had changed,” says Schneider. “The focus became achieving more efficiency.”
Amphenol TCS’ vice president of marketing and product development, Tom Pitten, further explains the dynamics and how his company develops products to accommodate: “Our product platforms have been greatly increased. We used to have one major line-the VHDM. Now, we have many flavors of it to address a number of market segments. Users are doing all they can to leverage their installed base.”
Schneider adds, “Of course, everything comes back to achieving lower costs.” That price pressure has caused higher-than-typical erosion, as Bishop explains: “Historically, connectors average about 2 to 3 percent price erosion per year. In 2001 and 2002, prices declined an average of 7 to 8 percent. As demand began to increase in 2003 and 2004, erosion was reduced to the 4 to 5 percent range-still more than the historical average.”
Choosing China
Many manufacturers have found global operations (read: Asia/China) to be a major part of the solution to such pricing pressures. Bishop notes, “Since 2000, the North American market lost $2.7 billion in connector sales and dropped to a 25.6 percent share of the world connector market, from a 37 percent share. Europe and Japan also lost market share, but the loss was significantly less than North America. China, on the other hand, gained $4.9 billion in sales and went from a 4.6 percent share in 2000 to a 16.4 percent share in 2006. Most of the lost share in the West came from North America, which means primarily the U.S. The U.S. connector industry lost approximately 30,000 jobs since 2000.”
Those statistics are a fact of life for the industry as a whole today-manufacturers, purchasers, and distributors. That fact of life probably has been the most significant seismic shift in the overall industry landscape, and it has forced changes in all phases of business operation, from materials acquisition all the way to final product distribution.
Following the food chain
In the case of Amphenol TCS, Pitten points out that the market force of consolidation (Amphenol acquiring the unit of Teradyne) played into the hands of the China-manufacturing shift. “Amphenol had a longer history of operating in China than Teradyne did,” he says. “While we had been there for approximately five years, Amphenol had been there for 20.”
Pitten notes that obtaining materials for manufacturing in China has not been difficult. “The food chain travels according to where the demand is,” he states, meaning that because so much manufacturing is taking place in China, connector makers’ suppliers have moved there in lockstep with their customers.
For connector makers, it means not having to seek new suppliers in what for many is a new place of business. For the suppliers, it means keeping the customers to whom they supplied products in North America for decades.
By many indications, conducting manufacturing operations in China has proven to be a combination of art and science. There are some hard-and-fast best practices about efficiencies gained by producing some products in China and some elsewhere. At the same time, selecting supervisors and establishing appropriate oversight of plant operations is a less scientifically calculable task, but is no less vital to the success of manufacturing processes.
Despite the fact that Chinese manufacturing gets the lion’s share of attention and press in today’s connector marketplace, significant and critical operations continue to take place in North America, Europe, and other parts of the world. Regardless of where connectors are produced, the concept of efficiency in manufacturing processes pervades.
Amphenol’s Schneider notes that while much has changed especially since the turn of the millennium, some things have not. For example, for approximately 10 years, his organization has modeled its innovation and product-development efforts after the book Revolutionizing Product Development: Quantum Leaps in Speed, Efficiency, and Quality, authored by Steven C. Wheelwright and Kim B. Clark.
Another book that has been cited and used as the basis for gaining both quality and efficiency is Larry Rubrich’s How to Prevent Lean Implementation Failures: 10 Reasons Why Failures Occur. Rubrich presented a seminar based on the book at the Electrical Wire Processing Technology Expo in May to a crowded and attentive room. Both books focus specific attention on the global nature of today’s economy.
As that global economy moves forward and Bishop & Associates forecasts a return to double-digit growth in worldwide connector demand this year, those producing connectors-as well as those using them in their designs-face the current conditions in a considerably different environment from that which existed prior to 2001.
The direction in which the connector industry is headed, as well as the drivers pushing it there and the dynamics within the marketplace, lay challenges at the feet of every element in the process, from material supplier through to the ultimate user of the manufactured equipment.
Editor’s note: The comments from Ronald Bishop come from correspondence with Connector Specifier. More detailed commentary from Mr. Bishop, in the form of a feature article covering worldwide connector markets, will appear in our next issue.
Also, we encourage you to share your experiences with product development, innovation, and efforts at achieving efficiency in the connector industry. While this article quotes executives from Amphenol TCS, we realize every organization has its story to tell and we would like to hear yours. Please send commentary to chief editor Patrick McLaughlin, patrick@pennwell.com.
