Edgewater Research: Interconnect, Passives & Electromechanical Insights - October 2023

(Important disclosures at the end of this article)

In this brief summary, we're sharing some key changes and new insights in the Interconnect, Passives, and Electromechanical (IP&E) industry as of October 2023. 

Recent Developments:

1. Overall Market Outlook: We're seeing a weaker forecast for Q4 across sectors such as Industrial, Telecommunications, Energy, and Automotive in Europe, with an expected slight to moderate decline quarter over quarter.
2. Automotive Sector: There's a noticeable decrease in projections for Q4 2023 and 2024 in European car production, including electric vehicles (EVs), due to declining demand. In contrast, the North American auto market remains stable so far, despite worries about potential inventory buildup in the first half of next year.
3. Artificial Intelligence (AI): Demand for AI is projected to triple in 2024, while non-AI demand remains steady. Companies like TE and Amphenol could have opportunities to collaborate on new Nvidia board designs in the second half of 2024.
4. Industrial Sector: This sector is experiencing a decline month over month due to softer bookings, a rush to fulfill third-quarter backlogs, and cuts in the Energy sector.

Top Channel Insights:

• European Bookings: These have fallen short of targets significantly, with a notable downturn in demand. Our initial expectation of a flat performance in the first half of 2024 has been revised to anticipate a rebound in the second half of 2024.
• North American Auto Shipments: Shipments have met targets, with no significant impact from strikes yet. However, there's growing uncertainty about future demand, leading to inventory buildup and possible production adjustments.
• European EV Market: Demand has slowed considerably, with significant declines in sales in the UK and Germany. Cuts to the production outlook for Q4 2023 and 2024 are notable.

Other Key Insights:

• Q3 Shipments: These are in line with expectations, balancing weaker distributor Point of Sale (POS) with stable direct demand.
• Global Connector Inventory: While better than semiconductor/passives, it's still above targets, and inventory digestion is expected to continue into the first quarter of 2024.
• Regional Feedback: China/APAC remains weak, Europe sees cuts across several sectors, and the Americas are relatively stable but with potential risks ahead. Military/Aerospace remains strong but faces some challenges.
• Supply Chain: TE AD&M Business Unit is struggling to meet rising demand, hinting at potential efficiency and production issues.

Conclusion: 

IP&E fundamentals are subdued, with shipments expected to remain below seasonal norms at least until the first half of 2024. Although inventory levels are high, they are relatively better positioned compared to the semiconductor industry. Encouraging signs are seen in markets like AI, China's EV sector, and some recovery in smartphones. However, challenges persist, particularly in the European Automotive and Industrial sectors. Given the mixed feedback and continued inventory concerns, we remain cautious about the IP&E industry's prospects in the short term.

For detailed disclosures and the full report, please click here.