Connector Market 2023 - My Outlook!

We have reached the first quarter of 2023. I have held back for a long time with an assessment of the connector market this year. Why? Worldwide, there are and have been pessimistic growth expectations of the economy. The Corona pandemic is now behind us, which took a lot out of us, but was surprisingly accompanied by disproportionate economic growth when we look at the electronics market in particular. The reasons for this are complex and I have mentioned many in my reports before.

 As usual, I will reflect my personal assessment in this article. Let's go back to the pessimistic expectation for 2023 in terms of global economic growth. Pessimistic yes! Recession? No. It can be summarized as simply as that. Certainly, there are differences locally. In Europe, for example, there are some aspects coming up that will demand a lot from all of us. On average, the economy will grow slowly until 2026, but at least we can expect 3.3 to 3.8 percent in the following years (IFO Instiut). For Europe, however, we keep hearing figures below 1 percent. Eastern Europe in particular is worrying the experts. I myself break it down even further and dare to predict that Germany may also fall short of its expectations if policymakers do not soon find adequate means to stimulate the economy again in the medium term. Subjectively, too much is being subordinated to climate policy right now, which can nevertheless also be an opportunity. The question is how fast the transformation of industry can keep up? How quickly will the change in industry, from heavy industry to electronics industry, progress? This is also important for the federal government's other climate projects. The only question that remains is whether the policy is not demanding too much from industry and whether the path being taken is not too fast. Just one example: Let's take the manufacturers of heat pumps alone, who will find it difficult to cope with the expected demand. This leads to other countries, such as the USA or China, also setting their sights on the German market. Supra-regionally, this then provides the expected growth again. Whether the European and especially the German market will grow to the same extent, however, is another matter entirely.

 What does all this mean for the development of the connector market?

1) Demand in general will not decline. But I expect a short-term easing in 2023. The TOP10 suppliers of the connector industry are likely to be most affected by somewhat weaker growth.

• Why do I expect the TOP 10 manufacturers to experience some weaker quarters? This is because the TOP 10 manufacturers alone are responsible for more than half of all sales in the global connector market. The top dog is still TE, followed by Amphenol and Molex. All companies in the TOP 10 have benefited among the most from the growth of the last 2 years. At the same time, they have also faced the most challenges in terms of capacity expansions, raw material shortages and increased raw material and energy prices. Now in the second quarter, when various uncertainties are emerging and some customers are buying somewhat cautiously (keyword: full warehouses), sales here are inevitably declining the most. However, even here it is evident that there is no negative trend. An important market sector for connectors is, among others, the construction industry, i.e. building construction and civil engineering. This is weakening significantly due to rising interest rates. Inevitably, it will take some time to reallocate production capacities and, if necessary, to balance them out with other categories. That this will happen is very certain.

2) Prices will rise in the middle of the year

• I expect some price adjustments in the middle of the year, which will continue to be justified by higher raw material prices and above all higher energy costs. However, many of the TOP 10 connector suppliers are also listed on the stock exchange. Since investors may have different expectations for 2023 based on previous years than reality reflects, however, one or the other company will certainly be inclined to raise prices for this reason alone. In this way, it will be possible to improve earnings even if demand is stagnant or lower. Consolidation also continues to take place in the connector market. In the last 10 years, the top 10 manufacturers have taken over 80 companies. Especially investments made in the last 2 to 3 years now come with integration costs. In short, investors want to see results here as well.

 3) Sales figures will pick up again by the fourth quarter and 2024 at the latest. The drivers are still the automotive industry, industrial networking (keyword Industry 4.0), industry in general with the increasing demand for products for energy generation and clean energy products, the telecommunications industry with the megatrends of data centers and 5G, medicine with the ongoing development of new diagnostic systems, and still also the transportation market in general (trucks and special vehicles).

• Here I would like to return to point 1 and address the decline in connectors for building construction and civil engineering that I already mentioned there. Due to rising interest rates, the construction industry is suffering the most. As already mentioned, it inevitably takes some time to reallocate production capacity and, if necessary, to compensate for it with other categories. That this will happen is very certain. On the other hand, renewable energy technologies are being developed in Europe and the USA. In the USA, 369 billion US dollars are to be invested in the energy turnaround and climate protection measures by 2030. An extensive support program has been launched for this purpose. In Europe, this turns out to be much smaller, but nevertheless, the EU, the laws all in the direction of "more" renewable energies. Germany is leading the way here. All products for this require connectors.
• In Europe, however, we still have war. The Ukraine conflict has made some adjustments necessary here. So just the European military armament also creates a growth potential.
• Furthermore, demand for automobiles will pick up in the next few years. Now that semiconductors are gradually being delivered, old orders are being processed. But at the same time, the global automotive industry is preparing for an unprecedented transformation away from internal combustion engines to all-electric powertrains. This will certainly lead to the elimination of some connectors (engines), but at the same time new ones will be added. Keyword "networking". Here, Ethernet connections will become increasingly necessary, also in the automobile. On the one hand for reasons of comfort, which we consumers are demanding more and more (cameras and augmented reality systems), and on the other hand with regard to autonomous driving. The high-end connectors for high-voltage applications also need to be developed now and made available for the platforms that are already launching in the next few months. Another point where you can see the importance of the automotive market for the producers of connectors: Among the TOP10 global connector manufacturers are Aptiv, Luxshare and Yazaki, proven experts for the automotive market.
• Other drivers continue to be consumer electronics with its overlap into the medical sector (fitness trackers and other gadgets in this area), the medical sector itself, and further the global 5G expansion. Industrial networking, with its special connectors for Ethernet connections, will also pick up in the coming years. Among the TOP 10 connector manufacturers are TE, Amphenol and Rosenberger, some heavyweights that invest in the areas of high-frequency, fiber optics and high-voltage connection solutions.
• We must also not neglect the consumer industry. After the abolition of the Corona restrictions in China, we also see here that, as recently in other parts of the world, demand is once again increasing in the short term. People there are consuming more again. At the same time, however, the consumer industry, especially in Europe, is facing a huge challenge due to increased inflation and the resulting reluctance of private consumers to spend. Therefore, the demand here is rather driven by the Asian area.
• In short, these are just a few reasons why I expect demand for connectors and growth in this area to pick up again towards the end of the year. Also, delivery times will then increase again, after we have recently registered some relaxation in the market. By the way: In the case of relays, which are always attributed to the connector market, there is no such relaxation at all. Here the delivery times are still high!

4) The largest categories of connectors will continue to be connectors for printed circuit boards. So-called PCB connectors. This area is driven by the increase in electrical components in almost all areas of life (IoT and IIoT). Surprisingly, the second largest category is still driven by user-specific developments. Here, you can still see the influence of the automotive industry on the global connector market. Other important connector categories include IC socket connectors, RF connectors, circular, telecom and fiber optic connectors. However, the demand for terminal blocks is also here to stay in the electronics industry. Heavy duty and power high voltage connectors also play an important role.

• There is not so much to say about this point. PCB connectors will continue to represent the largest connector share. In almost every application and for every industry, electrification is increasing. More and more control units are needed here. This is also accompanied by the demand for PCB connectors. Application-specific connectors or customer connectors will also increase in the future. Background: Many new high-voltage connectors are needed for the planned electrification of automotive drives. The automotive companies are pursuing different approaches here. Only the charging connections are standardized.
•  As far as the form factor and other categories are concerned, much depends on how further demand for key technologies develops. For the defense industry, the demand for circular connectors, but also fiber optic connections, will certainly be the focus, in addition to other connectors.
• Fiber optic and telecom connectors will be seen in more and more applications, even where we would not expect them at first. E.g. in agricultural equipment, which is becoming more and more sophisticated and also needs to exchange higher and higher data rates between ECU of agricultural vehicles and attachments due to automated processes. Industry 4.0 also requires special Ethernet connections with data transfers of 1GB and larger. Here it will be exciting to see how the order of the categories of connectors will develop in the coming years.

 These are just a few thoughts I have about the connector market. Of course, I will pay very close attention to how the further development will be. If only to be able to give you, my customers, the best possible advice. Not only in terms of technologies, but above all in terms of availability and costs. Future Electronics, as a distributor, can also offer you very good advice here, independent of manufacturers, and at the same time ensure supply. Contact our experts and our sales team. Feel free to contact me if you need further information or a market update.

 Your Lars Klapproth