Connector Market Outlook: Muted Bookings, Weak Demand, and High Inventory Levels

The connector market continues to navigate a landscape characterized by muted bookings and weak demand, with only limited signs of improvement in certain sectors. Key takeaway sheds light on the current market conditions and provides insights into future trends and challenges.

Bookings for connectors and sensors have remained unchanged, exhibiting subdued activity compared to previous months. While orders for artificial intelligence (AI) and advanced driver assistance systems (ADM) remain strong, weakness persists across other end markets.

This mixed performance has led to a delay in the anticipated rebound, with expectations for order recovery now extended to the fourth quarter of 2021 or the first quarter of 2024, pushing it beyond the initial projection of the third quarter.

Regional Outlook

The supply chain foresees a stable second half compared to the first half, but downside risks outweigh upside potential due to prolonged inventory digestion. Notably, inventory buildup at customers and distributors has led to pronounced outlook cuts, particularly in the Europe, Middle East, and Africa region.

In China and Asia-Pacific region, demand for connectors and sensors has shown minor change month-over-month, tracking at a flat quarter-over-quarter level. Bookings in China have stabilized at low levels, but there has been no substantial rebound observed in the supply chain. Increased competition from domestic Chinese suppliers in both the domestic and EMEA markets has created pricing pressures for common connectors.

Meanwhile, demand in the Americas market is viewed as stable yet weak, with sales projected to be in line with targets.

For the second quarter, sales are expected to be flat or slightly down compared to the previous quarter, with a low-to-mid single-digit year-over-year decline. Forecasts for the second half of the year suggest muted expectations, with projections indicating flat to declining shipments compared to the first half.

Connector suppliers, including TE, are facing mounting pressure from customers demanding more favorable pricing terms. This is reflected in increased pushback against price increases, leading to a more restrained adjustment by TE compared to their initial plans.

Moreover, pricing pressure in the connector market is not limited to specific sectors. The transportation sector has experienced intensified pricing negotiations, placing additional strain on connector suppliers. However, despite the growing customer demands for lower prices, connector suppliers have remained firm, pointing to increased labor costs as a significant factor influencing pricing decisions.

A closer examination of the graphs below reveals intriguing insights into the trends of thermoplastics and metal prices on a 6-month leading basis. It is worth noting that suppliers typically experience price changes with a slight delay due to hedges and pre-buying practices. Based on the data presented, it suggests that raw material costs for connector suppliers are expected to trend downward year-over-year throughout 2023.

While the data indicates a potential decrease in underlying raw material costs, feedback from the industry suggests that this decline is being counterbalanced by rising labor and overhead costs. Connector suppliers face various cost pressures, including the expenses associated with sourcing components from Asia, particularly in Malaysia. Notably, the recent 25% increase in minimum wage in Malaysia has contributed to incremental pressures on component costs.

The interplay between raw material costs, labor expenses, and overhead costs poses a challenge for connector suppliers. Although raw material costs may show a downward trend, the overall cost structure remains complex and multifaceted. Connector suppliers must carefully manage and mitigate the impact of rising labor and overhead costs to maintain their profitability.

In the low-end market segment for commodity connectors, connector suppliers such as TE, Amphenol, and others are facing aggressive competition from Asia-based connector suppliers. As a result, TE, Amphenol, and other established suppliers are confronted with the choice of either reducing prices or introducing lower-spec SKUs to compete effectively in the market.

Despite the challenges posed by labor and overhead costs offsetting the potential decline in raw material expenses, the connector industry remains resilient and adaptable. Connector suppliers have shown their ability to navigate complex cost dynamics and find innovative solutions to maintain profitability.