Where Is the Electronics Market Headed in 2012?

As the old year wound down, everyone was looking at predictions made at the start of 2011 to see how well the prognosticators did. It is interesting to go back to what the "experts" said and try to figure out how they arrived at sometimes dramatically different conclusions.

Who could have predicted two natural disasters, a worldwide debt issue, Chinese currency inflation, and a crippling recession? Individually, any of these could create havoc in our industry and result in a very difficult year. Collectively, they have created one of the most challenging years ever for the industry as a whole.

So, I've decided to float some end-of-the year questions and give everyone a chance to be the expert on events over the next months:

• What market conditions do you see that have the potential to slow growth over the next six months?
• What big moves will occur in the industry? Is our industry in "survival of the fittest" mode?
• What changes can we expect as the result of the focus on stemming the flow of counterfeit parts into the supply chain? How will suppliers and distributors react?
• What will the market look like in five years? Are we on the verge of another big technological boom or a period of prolonged stagnation?

My thoughts on these issues follow, but I'm really more interested in your opinions, thoughts, and stories. Together, perhaps we can reach an industry-wide consensus.

On the issue of market conditions over the next six months, it looks as if the opportunity for growth is there. We are already seeing indicators that the market may be improving. The major issue that I see getting in the way of significant recovery and growth is an overall lack of confidence. Be it the fear of another recession, currency implosions, volatile stock markets, natural disasters, or any combination thereof, until the citizens of the world have confidence that we are on a forward-thinking, forward-moving path, people will continue to hold tight to their purse strings.

This is true of corporations, and it is true of individuals. It's worth noting that companies that survive this economy and come out stronger are likely to be those that have exercised caution in their expenditures and shown wisdom in their big decisions.

What big shifts will occur in the industry? We have seen the consolidation of distribution, with large distributors growing by acquiring smaller distributors. One example: In 2011, Arrow Electronics Inc. (NYSE: ARW) acquired electronic components distributors in China, Japan, North America, Asia/Pacific, Europe, and Latin America. And there are others. This raises another issue: Are small distributors actually positioning themselves to be acquired? Whether they are or not, my prediction is that we will continue to see more mergers and acquisitions in the coming year. Who do you think will be next?

Attention to the issue of counterfeiting is escalating. For years the industry has battled this issue, and we are now seeing action by the US Congress to mandate purchasing discipline in an effort to prevent counterfeit parts from entering the military supply chain. I was in Washington to witness the Senate Armed Forces Services Committee receiving testimony regarding counterfeit parts entering the military chain. On the same day as the hearing, my colleagues and I submitted language for an amendment to the military appropriations bill that is still awaiting ratification.

When and if the bill is ratified, the US Department of Defense will be charged with developing systems to thwart introduction of counterfeits into the military supply chain. But at what cost? Will suppliers shoulder the burden or will it be shared by the DoD? Once these systems are in place, suppliers that want to do business with the DoD will have to follow them, regardless of the impact. Will there be the opportunity for the suppliers to be part of the process? How can we make sure that happens?

In the EMS world, we are seeing some projects coming back onshore while others continue to move offshore. Are there new criteria being established to determine which projects will be manufactured in Asia, Mexico, and Latin America and which will be built in Europe and the United States? Are any of you involved in such planning? If so, please share your thoughts on this issue.

Looking forward five years, as I said earlier, I think that some of the large contract manufacturers will be gone either through merger or attrition. I think that several of the large OEMs will become much larger through expansion into other industries. This will directly benefit a few key contract manufacturers and industries. Others will be left on the outside looking in.

The supply chain will continue to grow more advanced. Vendors will have to become more sophisticated in how they determine stocking levels, the types of product they stock, and the services they offer. The best growth path forward will be for those that are helping their customers solve their challenging business issues. This means doing more than simply taking orders and delivering product. Understanding the nature of customers' challenges and working in partnership with them to address them will be an essential component of success and growth. If you want to grow, you have to stay relevant.

So, there you have it: my thoughts on these issues. Now it's your turn. Tell me your experiences and what they lead you to believe will happen in the next six months, what big moves are just waiting to be made, and how will our industry look five years from now. I look forward to hearing from you.