First, rising Labour costs in China have created opportunities for other countries to compete for Western investment.
Second, China's "zero coronavirus policy" may lead to the closure of some businesses.
The effects of currency and inflation
The dollar strengthened significantly in 2022, reducing real industry growth. The industry achieved sales growth of +7.8% in dollar terms, but only +2.0% in local currency terms. The following table illustrates this.
Given that global inflation is between 8% and 10% in 2022 and the industry is implementing price increases in the same band, the connector industry may not have achieved growth in unit terms.
Full year 2022 financial results are not available at the time of publication, but we believe price increases are able to offset higher raw material and labor costs. Interestingly, we expect connector profitability to go from good to excellent in 2022.
Health backlog into 2023
The initial backlog for 2023 is $2,298.3 million or 14.8 weeks of sales. In 21 years, our average quarterly sales were $02.3222 billion. As a result, we should have enough backlog to achieve flat to low single digit sales for the first quarter.
Note that Amphenol and TE Connectivity forecast first-quarter 2023 sales of -2.8% and -2.7%, respectively. Bishop forecast sales growth of +0.5 percent. We think the industry is likely to do better than these forecasts because:
Amphenol and TE results usually exceed expectations.
The backlog is sufficient to generate growth in the first quarter, assuming no major cancellations.
Amphenol, TE, and industry forecasts for the first quarter of 2023 are shown below.
Connector industry sales increased +2.0 percent in the fourth quarter. That's down from full-year growth of +7.8% in 2022, which suggests demand is slowing. Additionally, confirming this trend, Amphenol achieved +7.0% Q4 growth compared to +16.1% for the full year, and TE achieved +0.6% Q4 growth and +9.1% for the full year. Both strong indicators point to slowing demand.
Amphenol and TE's forecast of negative growth in the first quarter is further evidence of a slowing economy.
The consensus is that there will be no severe recession.