A constant stream of new applications requires more technically sophisticated connectors with more engineering content-and that means continued good profit margins.
BY RONALD BISHOP
In 2001, the connector industry experienced a devastating 19.1% sales decline, followed by a 9.6% decline in 2002. These two years set industry records for negative growth, and knocked $9.4 billion off the world demand for connectors. This record-breaking downturn in business caused a large displacement of people and caused connector companies to increase their emphasis on low-cost manufacturing. The transfer of manufacturing to China took on a new sense of urgency.
Since the beginning of 2003, however, the connector business has been in a lot better shape, and is now completing its fourth consecutive year of growth, fully recovering from the 2001 and 2002 “dot-com” meltdown; the near-depression-like conditions that existed in the telecom market sector, and the recession present in world economies.
 FIGURE 1. A significant amount of the growth within these “Top 10” manufacturers has come from the acquisition of smaller companies. |
Since the turn of the century, the connector industry has experienced boom-bust-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.
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. In 2000, industry connector sales reached a record $34.9 billion. The year 2000 was also a record for percentage growth in the connector industry, at 18.1%. In 2001, a record was set for the largest decline, at 19.1%. In 2005, the industry finally reached sales levels last achieved in 2000.
Some significant events were triggered during the major peaks and valleys in connector demand between 2000 and 2006:
- Connector prices declined sharply;
- The transfer of manufacturing to China increased significantly;
- Medium and small connector companies began to look for strategic alternatives; i.e., mergers with larger, global companies.
Price erosion
Historically, connectors average about 2 to 3% price erosion per year. In 2001 and 2002, prices declined an average of 7 to 8%-more than twice the historical average rate of decline. In 2003 and 2004, as demand began to increase, erosion was reduced to the 4 to 5% range, which was still about double the historical average. In 2005, price erosion was back to the normal 3% range.
 FIGURE 3. Overall world sales reached an all-time high in 2000; it took until 2005 to reach that dollar figure again. |
This year, some price increases were implemented based on rising raw materials costs for copper, plastics, energy, and precious metals. We believe these price increases will reduce price erosion in 2006 to around 2%.
The transfer of manufacturing to low-cost regions has been occurring for years; however, the loss of jobs and manufacturing facilities in Western economies accelerated significantly during the 2001 and 2002 downturn. The speed at which manufacturing migrated to China was almost breathtaking.
 FIGURE 4. One of the major contributors to lower price erosion in 2005 and 2006 is the rising cost of materials, including copper, plastics, precious metals, and energy. |
Since 2000, North America has lost $2.7 billion in connector sales and dropped from a 37% share of the world connector market to a 25.6% share. Europe and Japan also lost market share, but the loss was significantly less than that of North America. Asia/Pacific and the rest of the world gained small amounts of market share.
China, on the other hand, gained $4.9 billion in sales, and went from a 4.6% share in 2000 to a 16.4% share in 2006.
As noted, most of the lost share in the West came from North America, which means primarily the United States. The U.S. connector industry lost approximately 30,000 jobs since 2000.
By 2010, China will have connector sales of $14.3 billion (26%) versus $11.6 billion (21.1%) for North America.
The Top 10, and consolidation
A close examination of the top connector manufacturers since 1990 provides a window into the connector industry as a whole during that time (See Figure 5). For example, in 1990 the top 10 manufacturers accounted for 40.7% of the world demand for connectors. By comparison, in 2005 the top 10’s collective market share was 53%.
Some of the increases in the top 10’s market share resulted from internal growth as large, multi-national OEMs directed more business to large connector companies with global manufacturing and engineering footprints. But a significant amount of market-share gain came through acquisitions, as smaller companies merged with top-10 manufacturers.
Since 1990, we have recorded more than 200 acquisitions in the connector industry. Many were companies acquired by top-10 manufacturers. For example, Tyco’s (AMP) more significant acquisitions were M/A Com, Elcon, as well as Siemens’ and Thomas & Betts’ connector businesses. Amphenol has purchased dozens of smaller connector companies, including most recently Teradyne’s connector business. FCI is a company built from scratch by acquiring many connector companies, the largest of which were Burndy Corporation and Berg Electronics. Molex recently acquired Woodhead Industries. We estimate that more than $3 billion of acquisitions have been added to the sales of the top-ten connector companies.
This trend will continue as many smaller companies find it more difficult to be competitive in an increasingly complex global economy. This means that top 10 connector companies will continue to grow market share.
This does not mean, however, that smaller companies will not survive. On the contrary, the connector industry is a “niche-rich” environment because of the thousands of electronic applications and literally thousands and thousands of connector products. Small, well-managed companies that have high-quality products and stick to their market niche will thrive and be quite profitable. Many companies continue to grow profitably in this industry.
The outlook is good for the industry because of the proliferation of electronics in our daily lives. Electronic connectors are used everywhere, and there is a constant stream of new applications. Connectors are also becoming more technically sophisticated, requiring more engineering content. This means connectors will continue to produce good profit margins in a growing market, ensuring a strong and profitable industry for the long term.
RONALD BISHOP is founder and principal of Bishop & Associates Inc. (www.connectorindustry.com).
