Connectors in a changing industrial world

The pandemic, supply chain restructuring, new energy sources and industrial automation are among the factors that are influencing the outlook for the industrial connector market.

65
Bishop connectors

by Ron Bishop |

During the 2020s, making accurate predictions about the impact of the Covid-19 pandemic on the global economy and connector market proved to be a difficult exercise. Even today, there are less visible consequences of Covid that deserve to be considered: how will it affect our global supply chains ?How will it affect our industries? And, as a result of all this, how will the industrial connector market be affected?

To find out, we need to take a closer look at the manufacturing and energy sectors. If we go back to the third quarter of 2020, we immediately have a surprise: industrial production, after the slump that occurred in the first part of the year, has recovered very strongly, returning to 2019 levels by the close of the year. Instead of a long, drawn-out recovery, there was, at least for now, a V-shaped recovery, which saw global connector sales break all records in Q4 2020. Bishop & Associates believes that the growth in connector sales seen in 2020 is largely due to a shift in demand, as companies around the world have shifted their focus from services (eating out, travel, etc.) to consumer goods (laptops, tablets and appliances). Students and workers required new equipment as their schools and offices closed and hospitals required additional equipment to deal with the influx of patients.

Further changes resulted from an increased demand for bandwidth capacity as more devices came online, requiring the creation of new server infrastructures. All these conditions have led to a skyrocketing demand for electronic components, as is clearly confirmed by the growth experienced by the connector industry since the second half of the 2020s.

Not just connectors: megatrends accelerated by the pandemic

The trends mentioned above mainly benefit the computer, telecommunications and datacom sectors, but do not necessarily stimulate all industrial markets. It is also important, however, to recognise that there were already some megatrends influencing the manufacturing and energy sectors even before the pandemic:
-digital transformation of manufacturing, particularly the implementation of IIoT and Industry 4.0;
-focus on energy consumption and shift to cleaner and renewable energy sources;
- repositioning of production (some companies are already restructuring their supply chains to get closer to customers).

If the pandemic has done anything for the manufacturing industry other than interrupt it in the immediate short term, it has probably accelerated the implementation of these megatrends. Indeed, digital transformation enables companies to improve their productivity and become more competitive, which will also allow them to shorten supply chains and create 'regional' production centres to better serve local customers. Of course, with the added benefit that shorter supply chains are usually less prone to disruption.

While some companies were already beginning to move their supply chains from global to regional structures, effectively optimising them on a global scale to bring production facilities closer to the end user, the need for such reorganisation became more evident during the pandemic.
The international competition we witnessed during the pandemic for medical equipment, vaccines and other resources only reinforced the need and belief that supply chains should be different, preferably domestic and more easily managed.

Offshoring and re-shoring

When re-shoring - or in the opposite direction, offshoring - several important elements are usually taken into account:

  • Cost | Industries with low labour costs and high logistics costs may choose to bring production back home if the labour advantage in distant production areas is significantly reduced.
  • Level of automation | Sectors that can increase productivity through the use of advanced automation technologies are likely to be more inclined to bring production back home.
  • Innovation and intellectual property | Sectors with relatively high R&D expenditure, particularly valuable intellectual property embedded in the production process, or important patent applications may choose to produce at home to protect their IP.
  • Product quality and safety | It is unlikely that even sectors with stricter quality and safety regulations (e.g. food and pharmaceuticals) would consider an off-shore strategy.
  • Essential business designation | Companies, sectors or products officially designated as critical or essential by government authorities may not be allowed to offshore. Military equipment would be a good example.
  • Environmental regulations | Criteria and costs to meet or exceed local environmental regulations on emissions or pollution may influence the choice of production site.
  • Political andgeopolitical issues | As we have seen, in many trade disputes and also during the pandemic, political tensions, trade disputes and national interests can play an important role in the decision-making process to boost business. This would include (fiscal) incentives by (local) governments to attract new investments and companies.

Clean and renewable energy sources

Finally, the trend to curb energy consumption and increase the use of cleaner, renewable energy sources is accelerating. Although most of our primary energy still comes from natural gas, oil and coal, this trend is set to continue. The pandemic may have had a short-term positive impact on our energy consumption, but it may also have had a short-term reverse effect on our transition to clean energy sources, as fossil fuel prices came under severe pressure during the 2020s due to falling demand.

In the meantime, these prices have returned to pre-pandemic levels (crude oil in early 2021 was back to around $60 per barrel), so the effect may be short-lived. If, however, supply chains shorten and the volume of products sold travelling back and forth across the world (by sea, air, rail, road) decreases, the demand for fossil energy sources used for this activity could fall, or at least slow down.

The crisis in the manufacturing industry and prospects for connectors

While many are optimistic about the post-pandemic performance of the manufacturing industry, especially in light of the exceptional recovery already occurring in some sectors, others are less optimistic about the medium-term effects.

A recent report by CreditSafe stated, "The manufacturing industry in the United States is on the brink of severe negative impacts from Covid-19 and many manufacturers could see a significant decrease in their revenues." Specific industries most likely to be severely affected (in the US) include: Printing and Publishing, Industrial Machinery and Equipment, Fabricated Metal Products, Clothing and Other Textile Pro- ducts. Renovating and modifying supply chains to adapt to a new situation is costly and will take time, and the above results are not likely to be limited to the US. This could potentially harm existing manufacturing industry, but, as always, it will also provide new opportunities for those companies that can offer products and solutions that fit with emerging manufacturing strategies and supply chain solutions.

In the first months of 2021, China's industrial production increased by 35% compared to the first two months of 2020 and by +17% compared to the same period in 2019.

In the US, the situation is slightly different: after a 1.5% increase in December, industrial production contracted again by -1.6% in January 2021. The recovery in manufacturing is more fragile, but a successful vaccination strategy, combined with increased consumer spending, will boost industry in the US as well. Europe is likely to lag behind China and the US, as the pandemic is still being fought in many countries. Some industries, such as the German automotive industry, have, however, reported quite positive results in the fourth quarter of 2020. As long as demand continues to be strong, European manufacturing should also recover. This is good news for the connector industry and is already reflected in the very strong order and turnover figures that Bishop & Associates is monitoring.

It also means two other things: connector manufacturers must, like everyone else, rethink their supply chains and production locations and, once again, think about what it will mean for the connector industry when the digital transformation accelerates. As new energy sources are integrated into the grid and smart cities and buildings become the norm, the demand for connectivity solutions will only increase. This is where connectors will find new opportunities and plenty of room for innovation and new product development.

This means that the performance of the industrial connector market will be determined by many factors; not only by how the pandemic develops in the coming months, but also by the economic packages that will be put in place as a stimulus to economic recovery, the digital transformation that will occur in manufacturing sectors, the reorganisation of supply chains and, last but not least, how consumption patterns will develop in the aftermath of the pandemic.

For 2021, we therefore expect the industrial connector market to grow by +6.9% compared to 2020, while for the period from 2020 to 2026, we expect the industrial connector market to grow at an annual rate of +5.7%, just below the +5.9% growth rate estimated for the overall connector market.

Previous articleMedical, electronics and growth opportunities in 2021
Next articleMedical as seen by Semi: the healthcare revolution is upon us

LEAVE A COMMENT

Please enter your comment!
Please enter your name here