How do you view the current situation on the electronics market?
Jan Stoll: It is impossible to answer the question without looking at the bigger picture. That means looking at the entire global economy, on the one hand, and developments over the last 20 or even 50 years on the other. From a macroeconomic perspective, we are currently in a recession, but in some countries it has bottomed out. This is shown by the PMI (Purchasing Managers' Index), which takes many factors into account and is therefore a good indicator of future market behavior. According to this index, the outlook for 2024 is positive, although there are regional or country-specific variances. For example, the situation in China is currently better than in many other countries, although the real estate crisis is hanging over the Chinese market like a sword of Damocles. Germany currently has one of the worst economic climates in the world. On the other hand, however, the positive upward trend in 2021 was also higher here.
What conclusions can you draw from this?
Andreas Mangler: It is the task of a company’s risk management team to keep an eye on these global developments. Regionalization is therefore a key aspect for Rutronik: We will have more and more engineers in the countries to ensure that the country-specific trends even out as a result. For instance, our second largest team outside Germany is in China, allowing Rutronik to participate in the positive developments there. Our international customers also benefit from greater regionalization, as they receive even more local, on-site support. We can implement this easily and quickly, since we have relied on identical processes and IT systems worldwide right from the start. This is also an advantage for our customers with production sites in several countries. They receive everything from a single source, with the same processes and the same quality, wherever they are.
You mentioned the historical perspective earlier. What are the lessons learned from this?
Stoll: If you look back on the long history of the development of the components market, you see that while the current upward and downward trends are very pronounced, the crises of the last 10, 20 years – in other words, the bursting of the dot-com bubble at the turn of the millennium, the major banking crisis in 2009, and the COVID-19 crisis in 2019/2020 – have caused even more extreme trends. This means: Strong market trends are also the norm rather than the exception, at least when viewed over a longer period of time.
But there is a difference: We are currently experiencing relatively excessive trends, but they are not leading us into a massive crisis. The procurement behavior of the manufacturing industry in the components market is, therefore, showing a development which, viewed from a macroeconomic perspective, does not correspond to the real national and international economic cycles. The market was overheated, which was reflected in large customer store inventories. However, in combination with inflation, high energy prices, and other factors clouding the business environment, we are currently in a less precarious situation from a macroeconomic perspective than, for example, during the COVID-19 or banking crisis. But the procurement market in the manufacturing industry demonstrates planning behavior as if we were in a comparably deep crisis. And that is definitely not the case.
What the historical comparison also shows is that the frequency and amplitude of the trends are becoming higher and higher, and that shortages and surplus supplies are alternating more and more frequently.
To what do you attribute this?
Mangler: There are several influencing factors. For example, there is still the missing “golden screw”, without which production cannot take place. But these are often ultra-high-tech products that make up the USP, or the product’s technological competitiveness, and cannot simply be substituted.
And, needless to say, procurement behavior also plays a role. In boom phases, there is massive overbooking and storage facilities fill up quickly. This can lead to cash flow problems and ultimately to overproduction on the part of component suppliers. This trend is also supported by inadequately configured or parameterized ERP or inventory control systems, which sometimes overreact. Thus procurement progresses in leaps and bounds, whereas end markets and production sequences are rising and falling most of the time. This continues throughout the entire supply chain. Supply chain stakeholders manage things using a stop-and-go procurement principle but, in fact, want a continuous flow of goods. This simply cannot work. Modern, AI-based ERP systems can factor in many parameters and use statistical filters to achieve more intelligent results.
Currently, we are observing that store inventories at global EMS providers have fallen below last year’s level, meaning a procurement phase is imminent. Our urgent appeal to customers is not to cancel now to avoid massive double bookings and all that they entail in 2024 and 2025. Maintaining consistency in your own actions is crucial when it comes to navigating the increasingly likely and frequent market trends. It is impossible to avoid them completely, as there are so many other factors involved.
What do you mean by that?
Mangler: The liquidity problem I mentioned early, caused by full storage facilities, is increasingly leading to mergers and acquisitions (M&A). Every merger significantly impacts sales and purchasing channels, often resulting in the consolidation of distribution and storage responsibilities into a single entity, rather than being divided between two. The number of decision-makers is also reduced, wih each manager dealing with larger volumes, which also contributes to greater fluctuations. In addition, production facilities are often relocated, integrated, or centralized, leading to delays in manufacturing and logistics. All this means greater dependency and less flexibility, plus regional concentration: In the high-tech sector, predominantly only US companies are organized regionally – much to the disappointment of European and Asian customers.
There is also a trend for suppliers to withdraw completely from distribution.
Mangler: That is true. I view it as a dangerous development. Since it means losing all the flexibility that distribution creates through its systems and storage opportunities. If the distribution channels become disconnected, the entire system begins to oscillate. And, as we in control engineering are well aware, oscillating systems require damping or buffers – and this can be achieved through distribution and its storage facilities and processes. This is a very important task for distribution.
Moreover, European customers in particular are at a disadvantage if they only have access to the direct channel. This is because we have a multi-segment market with predominantly medium-sized companies from greatly differing industries. Even if they achieve high sales, they often have a relatively low demand for electronic components compared to large international groups. On the global market, this makes them a small fish whose interests are hardly taken into account. This tendency already exists in the distribution sector, as it is also prone to concentration: Over 60 percent of all sales are managed by the ten largest distributors worldwide. This is where we see a key role for Rutronik.
What does that consist of?
Mangler: We want to strengthen medium-sized companies. We achieve this goal, for example, with Rutronik System Solutions. It is where we develop completely new approaches for solutions consisting of hardware and software, which we then make available to our established customers. This enables them to significantly shorten their development time and gain an innovative edge, even if they do not have hundreds of engineers at their disposal like large corporations do.
Speaking of innovations: Which areas do you believe are the strongest drivers of new approaches to solutions?
Stoll: The need to address climate change is a strong driver. The increased energy prices, resulting from the war in Ukraine, have further accelerated the willingness to invest in green technologies. The electronics market is benefiting from this fact, for example through updating heating systems and installing smart home devices and solar systems. Another example is the transformation toward alternative energy sources, such as fuel cell trucks or hydrogen-based processes in large-scale manufacturing industry. This is giving rise to a whole range of new applications, from sensor technology for fuel cells and electrolysis plants to pipelines. In the future, it may also encompass hydrogen tank leakage monitoring and safety systems for hydrogen filling stations.
According to forecasts, the mobility market will be saturated by 2035, but since the proportion of electronics in vehicles is steadily increasing, the electronics industry will continue to grow in the long term. The demand for electronics is also steadily increasing in agriculture. Ever more sensor technology is being used, for example to ensure that pesticides, fertilizers, and water are only used in a very targeted manner – perfected in vertical farming.
How do you assess the hype surrounding AI?
Stoll: We are witnessing a strong trend toward AI or machine learning (ML) at the edge. This has been propagated for quite some time. But now it is becoming clear through the activities of the big market players and the first big winners in this market segment, e.g. Nividia. Decentralized systems are being built – and in all areas, from consumer goods to robotics. This is also because more low-code AI and ML applications are available, making it easier to build intelligent systems. These are often image or camera-based systems, but also optical ones based on radar, lidar, or ultrasound. They need high-performance microcontrollers and FPGAs that enable fast decision-making, as well as VOC or other sensors, which is where the topic of sensor fusion also comes into play.
At the same time, AI tools like ChatGPT can reignite demand for servers, which plummeted after the widespread exit from cryptocurrencies. The corporations behind these AI applications – Microsoft, Amazon, Google, and Co. – ensure the capital to make large investments. However, this in turn can lead to the large foundries focusing on these products and to less manufacturing capacity being available for other markets, such as the mobility industry.
So the situation is complex. In conclusion, when you look at the big picture, are you optimistic or pessimistic?
Mangler: Definitely optimistic. I come back to looking at the long-term picture: Over the past five decades, the component industry has consistently grown at a rate of seven to eight percent annually – and it is expected to continue along this trajectory in the future. Our 50 years of market experience and market observations as a company tell us how things will continue. That is the beauty of it.
The need to address climate change is a strong driver.
If the distribution channels become disconnected, the entire system begins to oscillate.
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