Electronic components — capacitors, resistors, connectors, inductors, circuit boards and modules — are the building blocks of virtually all electronic products. Demand follows technology manufacturing cycles closely, with the smartphone upgrade cycle, PC replacement cycle and industrial automation investment all driving volume at different points. The sector is highly cyclical because of inventory dynamics: electronics manufacturers order significantly more components than they immediately need when demand is strong to secure supply, then dramatically reduce orders when inventories are high, amplifying the underlying demand swing. Automotive and industrial applications have become increasingly important revenue diversifiers as vehicles and industrial equipment incorporate more electronics. Asian manufacturers, particularly Japanese and South Korean component specialists, dominate many sub-categories with decades of process refinement. For investors, component companies with diversified end-market exposure — automotive, industrial and consumer electronics — are better positioned through cycles than those concentrated in a single vertical, and those with proprietary technology in their components are able to sustain margins that commodity component manufacturers cannot.
