Spring report: Electronics supply chain optimistic for second half of 2011 though fear, uncertainty, doubt regarding Japan is evident

Respondents with a view in the decision-making process were more optimistic, while those participating in decision making were more conservative. Key decision makers scored in between, combining personal knowledge; perspective, and concerns about business outlook, inventories, and pricing and how they feel markets will develop. Component manufacturers, distribution / logistics, and semiconductor respondents were the least optimistic. Respondents are most concerned about current inventories and future profits.

One year past the end of the great recession and the outlook for the electronics supply chain has improved significantly in most areas. The survey of the electronics supply chain also points to even higher hopes for the second half of 2011. However, there is concern about current prices increasing and for profit levels in the second half of 2011.

Unlike other electronics industry surveys that cite a large organizational spend of materials cost of goods sold (MCOGS), this survey provides a balanced view from a large sample that is representative of the entire supply chain.

This survey gathered opinions from 412 executives from the supply chain, including 179 key decision makers and a further 154 participants in the decision-making process of their organizations.

This large industry survey of senior decision makers on the electronics supply chain is representative across types of organizations and end-markets active in the supply chain.

Because of this large sample, this survey provides a balanced, nuanced view into the supply chain instead of a limited view of a few respondents.

This survey drills deep into the organizations where opinions are formed and decisions are made.
Fear, uncertainty, and doubt still reign in regards to the supply chain shocks resulting from the earthquake and tsunami in Japan.

It appears this disruption was on the minds of our respondents as they thought about the current environment but most did not appear to think the impact would last into the second half of 2011.

However, automotive industry respondents were among the most positive in their outlook, even though they faced the most immediate impact in the supply chain. Also, despite the severity of the crises, the majority of respondents did not feel inventories would be greatly affected.

As seen in previous years, location within the supply chain and role regarding the decision-making process influences opinions. Primary markets and type of company have some relationship to the answers provided, even if this does not always make sense.

Among the most optimistic were PC, server, and automotive companies, as well as electronics OEMs, and electronics manufacturing services (EMS) firms and original design manufacturers (ODM). Least optimistic were networking and telecommunication respondents. (EMS / ODM firms: Submit your company to the EMS Resources Directory)

The Survey
VentureOutsource.com’s Electronics Supply Chain Business Outlook Survey for spring 2011 ran for approximately five (5) weeks ending May 1, 2011 and generated responses from 412 people. Respondents were asked 12 questions regarding their expectations about the current and future business environment: employment, business volume, and product pricing.

The survey was sponsored by Digi-Key (www.digi-key.com) one of the world’s fastest growing distributors of electronics components.

Survey respondents were asked to rate their views on these questions on a scale of 1 to 10 (1 being the most negative and 10 for the most optimistic response). VentureOutsource.com conducted a similar survey in Q1 2010 asking the same basic 12 questions. (View Q1 2010 survey results)

This survey on the state of the electronics supply chain gathered opinions from 412 respondents from throughout the supply chain and from different market segments.

Tables 1, 2 and 3 show the number of respondents by their type of company versus three other demographic categories.

Table 1
Responses by company type and product area / market segment

More than half of the respondents worked for electronics OEM or EMS / ODM companies. The next largest groups of respondents were from semiconductor firms. Electronics equipment and component manufacturers generated a combined 21% of respondents. The smallest number of respondents, 25, came from distribution or logistics firms.

Survey responses were heavily weighted toward industrial and consumer device parts of the electronics supply chain, each with just over 25% of respondents.

Military / aerospace / avionics, server and personal computing, and telecommunications segments also contributed between 10-12% of responses. The automotive electronics, medical, and networking segments rounded out the respondents.

Table 2
Responses by company type and decision-making role

While key decision makers continue to account for over 40% of respondents, similar to the last survey, more respondents reported only a view into the decision-making process.

Key decision makers accounted for 43% of respondents, while participants in the decision-making process accounted for 37%. The remaining respondents held a view into the decision-making process. This composition held across most of the company types.

Two standouts were component manufacturers and EMS / ODMs. In component manufacturing, half of all respondents had a role in the decision-making process, but were not key decision makers. In the EMS / ODM space more than half of all respondents were key decision makers.

80% of survey respondents were actively engaged in purchasing, sales, and operational decision making, thus providing a balanced view of the current and future business outlook in these supply chains.

Unlike other electronics industry studies relying on a limited number of people with high dollar levels of spending, this survey balances respondents from different levels within organizations to achieve a nuanced and balanced view of the supply chain.

Top decision makers rely on their organizations to gather insights into purchasing requirements, sales opportunities, material needs, logistics, and other intelligence needed for purchasing decisions. In fact, in most organizations, decision making is dispersed throughout the organization.

Studying just one senior executive in an organization leaves one with just the personal views and biases of that one person.

Worst, relying on a small set of respondents, whose opinions you capture for just the moment in which they are engaged with a survey instrument, may lead to false assumptions.

To understand supply chains requires respondents throughout organizations that are actively involved in the relationships that unite companies.

With 412 respondents, 80% of whom are actively engaged in purchasing, sales, and operational decision making, this survey has been designed to provide a balanced view of the current and future business outlook in these supply chains.

Table 3
Responses by company type and business level

Seven out of ten respondents said they were answering for their whole company, not just at the level of a business unit. This is up from our last survey. Electronics equipment manufacturing had a higher share of respondents answering just for their business unit.

On the other hand, 77% of EMS / ODM respondents indicated they were answering for their whole company.

Figure 1
Responses by level of decision making

Survey results
As stated above, the survey consisted of twelve core questions asking respondents for their opinions on multiple aspects of the current and future business environment, in regards to the electronics supply chain, from either selling into, or purchasing from, the supply chain.

For each of these core questions, respondents were asked to provide their opinion on a scale of from one to ten, where one was the most negative response and ten the most positive.

From these 12 core questions asked in the survey, three indices were formed to summarize respondent attitudes toward the state of the electronics supply chain and will be examined in detail below. The indices are:

• Current Index: The average of each of the respondent’s scores for their current outlook regarding the economic situation, employment, inventory levels, business volume, and prices.
• Future Index: The average of each of the respondent’s scores for their expectations regarding the economic situation, employment, business volume, and profits.
• Overall Index: The average of the two indices above.

The survey results show the outlook for the electronics supply chain is improving, a year into the recovery from the great recession, as shown in Figure 2. Respondents view the current business environment with optimism, responding on average with a 5.8 on a scale of 1 to 10, with 10 being the most favorable. This score is 9% higher than the score seen in last year’s survey.

The supply chain shocks resulting from the earthquake and tsunami in Japan were obviously weighing down this response. A contributing factor for the still muted response is probably the normal seasonality in the first half of the year that is a constant factor in the supply chain. Another issue weighing on the supply chain is likely how the media tablet explosion will impact the PC market.

Figure 2
Electronics Supply Chain Business Outlook, 2010 versus 2011

Regarding the future, the survey indicates high expectations for the second half of 2011, with an average score of 6.1. While last year, weighed down with an expected slowdown in business activity across the supply chain following the post-recovery jump seen in the first half of 2010, the survey only showed a 3% increase of the Future Index over the Current Index.

In 2011, the optimism for the second half showed a 6% increase in the Future over the Current Index. This optimism may be tied to a view of the supply chain moving beyond the tragedy in Japan but may also be tied to expectations for future opportunities related to the growth mobile systems, cloud computing, and upcoming trade shows that will launch products for the second half of the year.

One interesting point is there is a consistent view if we look at responses by the role in the decision-making process.

Respondents with only a view in the decision-making process tended to provide more optimistic scores, while those that participated in the decision-making process tended to be more conservative.

Key decision makers tended to score between these two extremes, offering a more balanced view on the supply chain, combining their own knowledge, perspective, and concerns about how markets will develop.

When looking at current versus future outlooks, we see respondents with only a view into the process had only an average of a 3% increase in the Future Index outlook versus the Current Index.

Participants in the decision-making process were more optimistic, increasing their score by 5.6%. Key decision makers were the most optimistic regarding the future, with an average increase between the current and future indices of 6.4%. This bodes well for the second half of 2011.

Figure 3
Supply chain outlook by decision-making role

Examining the Overall Index by company type and product area, Figure 4, we can see how a respondent’s location in the supply chain is influencing their outlook, even if it does not always make sense. Respondents primarily focused on the PC, server, and automotive markets held the highest opinions, on average.

These respondents averaged 6.2, 6.2, and 6.1, respectively, compared to an overall average of 5.9. This can make sense, since servers have enjoyed strong demand from corporate replacement cycles and the growth of cloud computing.

PCs remain a large part of the market and have done well following the recession.

Automotive respondents generally were the most optimistic, based probably on the recovery in the segment plus the increasing electronic content in vehicles partly driven by consumers appetites for greater uses of technology in cars and auto makers’ abilities to design greater technological functionality into increasingly smaller spaces and footprints. (Read an interview with the president of the Society of Automotive Engineers (SAE) International)

However, the automotive industry has suffered the most immediate impact from the Japanese earthquake and tsunami and was expected to be one of the areas that would have a more worrisome outlook.

Telecommunications, and especially networking respondents, were consistently the least optimistic group of survey respondents.

While the networking segment has not been performing as well as other industries, the telecommunications market is expected to grow rapidly on the back of mobile data infrastructure deployments.

Role in decision-making and market segment tend to have a greater impact on outlook than company type, which highlights the strengths of supply chains.

Over the next several years, a majority of Internet traffic will pass over mobile networks and should prove to be a shining star in the electronics supply chain.

On average, telecommunications respondents averaged 5.7 and networking averaged 5.6 on the Overall Index.

Figure 4
Supply chain outlook, Overall Index by company type and product area

By type of company, component manufacturers, distribution / logistics, and semiconductor respondents were the least optimistic, but held close to the average scores on the three indices.

The most optimistic were OEMs, EMS / ODMs, and electronics equipment manufacturers. But again, these scores stayed close to the survey-wide averages showing that role in decision-making and market segment tend to have a greater impact on outlook than company type, which highlights the strengths of supply chains.

Now turning to the current outlook, the survey indicated a Current Index of 5.8, on average. Respondents were most optimistic regarding the economic environment (average score of 5.9) and that the employment situation was improving (average score of 6.0), as shown in Table 4. Respondents also felt pricing would increase (average score of 5.8).

The most critical area, given the supply chain shock emanating from Japan, was that respondents did not expect current inventories to change significantly.

On current inventories, the average score was 5.3. This may be due to the ramifications not yet being felt from this supply chain disruption or to the general uncertainty as to the ultimate magnitude of this disruption.

As a part of this survey, an open-ended question was asked to gather insights and opinions regarding this supply chain shock from Japan. Responses varied greatly with the only real consensus are there is still a large amount of fear, uncertainty, and doubt in the supply chain. (Read opinions / insights regarding the supply chain shock from Japan)

Table 4
Current outlook question type, average responses

As shown in Figure 5, respondents focused on the PC, server, and automotive segments were most optimistic and networking respondents were the lease optimistic. OEMs and EMS/ODMs were also the most optimistic regarding the current situation. However, semiconductor firms and others farther up the supply chain were most worried about the current situation, probably feeling the impact from Japan more immediately than other players in the supply chain.

Figure 5
Supply chain outlook, Current Index by company type and product area

Turning to the future outlook, as stated above, respondents were fairly optimistic regarding the future outlook for the supply chain. The average Future Index score was 6.1, a significant increase from the Current Index. Regarding the individual components of the Future Index, respondents expect the future economic environment to improve and business volumes to improve in the second half (both had an average score of 6.2), as shown in Table 5.

This indicates demand will continue to improve among end-users, enterprises, service providers, and other technology purchasers.

Also, respondents must feel that the Japan supply chain disruption will likely subside by the second half of the year without significant impact on the market.

Among this set of questions regarding the future, future profits (average score of 5.7) is the one area respondents appear to be most concerned.

Table 5
Future outlook question type, average responses

Again the spread is fairly narrow across end-market and company type, but PC and server respondents were the most optimistic (see Figure 6). Also, OEMs and electronics equipment manufacturers were the most optimistic groups of respondents.

Key decision makers in the semiconductor market and in distribution / logistics were the most pessimistic, perhaps because of concern over what the true impact of the Japanese tragedy may prove to be.

OEMs are likely looking forward to the large shopping periods in the second half of the year.

Telecommunications respondents also continued to be more pessimistic than the rest of the market, which is curious considering the expected build-out for mobile data infrastructure.

Figure 6
Supply chain outlook, Future Index by company type and product area

As stated above, the three indices formed from the 12 core questions in this survey were all higher than the survey in 2010, indicating a more optimistic outlook among participants in the supply chain.

Looking at the individual questions shows a greater insight into how opinions have changed over the course of the past year (see Table 6). Attitudes towards employment, both current and future, showed just a 5% increase from 2010 to 2011, indicating companies are still concerned about adding resources, an attitude reflected in the broader employment statistics. (Read: EMS Industry job trends, salaries and 2011 hiring outlook)

Most other topics showed a larger increase from last year. Attitudes towards the economic situation have improved the most, 24% for the current situation and 20% for the future situation.

Compared to the 2010 survey, respondents were also more favorable in their attitudes toward future profits and business volume, growing 12% and 10%, respectively. While future profits had the least positive score among the questions on the future environment in the 2011 survey, the increase was significant from last year, indicating much higher expectations from last year.

Finally, respondents were also more certain that prices would increase in 2011, 13% higher than in the 2010 survey. This was especially true for electronics equipment manufacturers, who had an average score of 6.1, compared to 5.8 for all respondents in the 2011 survey.

The one area that bucked the trend was in current inventory levels and business volumes. The average score for current inventories was down 5% and current business volume average score was off a point from the previous forecast. Again, these scores may be where respondents showed their concern for the supply chain disruption from Japan.

Table 6
Average supply chain sentiment, 2010 versus 2011

Except for the questions regarding current inventories and volume, respondents responded with higher scores in the 2011 survey, versus the 2010 survey. The indexed scores point to the generally more optimistic feelings regarding the electronics supply chain this year, compared to 2010.

Whereas, continued weakness in the European market and the possible impacts from the Japanese earthquake and Tsunami are likely holding down respondents’ scores on current inventories and business volumes while a year ago, respondents would have been buoyed by the rebounding economy.

Overall, respondents’ confidence in their answers mellowed somewhat compared to the last survey, where 85% of respondents rated their confidence at 7 or higher out of a scale from 1 to 10. In the current survey, only 66% of respondents rated their confidence at 7 or higher. However, 56% rated their confidence at 8 or higher and nearly one fifth stated their confidence was at a 10. The average score was 7.4. (See Figure 8.)

Figure 8
Respondent confidence level in their responses

For additional questions on survey findings, connect with Mark Zetter in VO GlobalNet.

Methodology
VentureOutsource.com’s Electronics Supply Chain Business Outlook Survey for spring 2011 was put online and made available to industry clients and Website readers the second week in March 2011. The survey was also sent directly to individuals in electronics corporations, organizations and agencies that use, offer and are employed in electronics contract manufacturing and / or technology supply chain and outsourcing services or subscribe to our opt-in e-newsletter INsight. Survey participation was voluntary. Survey questions designed to define survey respondent demographics did not collect any personally identifying information. The survey closed May 1, 2011. Survey questions focusing on indicators of respondent expectations and experience were posed with a scoring basis of 1 to 10 (1 = very negative experience or expectations and 10 = very positive experience or expectations) per survey question / criteria.

The survey also included questions that asked respondents to describe the type of company they work for; what product areas their business unit or corporation are active in; their role in the decision-making process; and what level they can speak to (business ‘units’ versus overall corporation).

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