The procurement strategies of buyers in the $30 billion connector industry have so far not changed, despite continuing poor market conditions and mounting problems at two of the largest suppliers.
Late this month, Paris-based Framatome Connectors International, which ranks third among connector suppliers, according to analysts, said it plans to sell its military/aerospace and industrial (MAI) division to concentrate on core businesses, including telecommunications.
But FCI is not alone. The industry's largest supplier, Tyco Electronics Corp., Harrisburg, Pa., continues to toil in the shadow of its beleaguered parent company, Tyco International Ltd. The latter is trying to restructure to pay down $27 billion in debt and is seeking to repair an image tarnished by questions over its finances and the actions of departed chairman and chief executive L. Dennis Kozlowski.
Industry analysts say they haven't seen ripple effects on the industry from the top suppliers and therefore are sticking to market projections made earlier this year.
"We had forecast the global connector industry to grow in revenue 3% this year, from $32.2 billion to $35.1 billion," said Ken Fleck, an analyst at Fleck Research, Santa Ana, Calif. "We haven't changed our original projections."
According to Fleck Research, Tyco and FCI combined constituted 22.4% of global connector revenue in 2001, with the top 10 suppliers accounting for 44.5% of revenue-up from 38.2% in 2000. Given the increasing consolidation, how are customers responding to their top-tier suppliers' problems?
Luckily for large suppliers like Tyco and FCI, OEMs and EMS providers have not deserted them yet, preferring to take a wait-and-see attitude.
"When the mothership sends out warnings, it could signal changes in the future," said John Boucher, corporate vice president of supply chain at EMS provider Manufacturers' Services Ltd., Concord, Mass., referring to Tyco International. He added that the company buys from both Tyco Electronics and FCI.
"We're going to keep our options open with multiple interconnect partners, but we're not deviating from our [procurement] strategy now," Boucher said.
Distributors, too, see no reason for concern yet.
"Suppliers are going through right-sizing and adjusting their strategies to business levels," said Tom McCartney, president of Avnet/Kent, Phoenix.
Still, part of that restructuring could involve some suppliers trimming their broad product lines, potentially leaving buyers with fewer sources.
One supplier of test equipment for cable and cellular products is not concerned about getting parts-yet.
"Our products have been in place a long time, and the connectors we use are common enough so we can second-source from other suppliers," said a buyer for the company.
The buyer conceded, though, that obsolescence could eventually become an issue on some custom parts.
Part obsolescence is already an issue with Microwave Networks Inc., a Stafford, Texas, manufacturer of microwave radios.
"We've had former AMP line parts from Tyco discontinued, and the suggested part replacements were not exact drop-ins," said Jimmy Gunder, senior buyer.
Suppliers may have to consolidate product offerings to control their costs because market conditions are slow to improve.
A survey of major OEMs by Bishop & Associates Inc., St. Charles, Ill., found that first-quarter sales increased only in the medical and military/aerospace markets, and decreased in telecom and computers-key markets for many connector suppliers.
The research firm noted that orders for the first five months of 2002 declined 9.9% overall from the comparable 2001 period, though improved April and May bookings could foretell a second-half improvement, according to analyst Ron Bishop.
The uncertain market is forcing some suppliers to refocus their resources on core competencies.
Two weeks ago, FCI said it will try to sell its MAI division, which accounts for 9% of revenue and employs 1,300. This leaves the company with four divisions: tele- communications, data, and consumer; automotive; electrical interconnect power; and microconnections.
FCI's sales will likely stay flat in the second half, according to Eric Albrand, executive vice president and chief financial officer.
"Electronics remains depressed because of the telecom market, where it seems that on top of the inventory issue, the investment prospect is weak," Albrand said.
He added that FCI recently refinanced one-third of its debt, declining to reveal the amount.
Reducing debt is also a priority for Tyco, which announced in early June it would hold an initial public offering to spin off CTI Group Inc., a financial services firm it acquired in March 2001 for less than $10 billion. So far, that IPO hasn't happened.
Although Tyco named John Fort as interim chief executive to replace Kozlowski, its management remains in flux as several other officials left the company last month. Tyco declined further comment.
Analyst Bishop said that suppliers can prosper in a difficult market by trying to increase their market share and remaining cost-competitive. He added that once the market improves, many suppliers will see a return to earnings and revenue growth.
"There's no argument, the connector industry is a challenging one to be in," said Gail Miller, director of marketing at Delphi Connection Systems Inc., Irvine, Calif.
Miller said a focus on the automotive business is helping Delphi, which is ranked among the top-tier suppliers, to keep on track with its 2002 revenue and unit sales projections. She added that Delphi is trying to diversify into the military/aerospace and computer markets.