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A Moat Upgrade for TE Connectivity

Significant switching costs contribute to a narrow moat rating for the component company.


Seth Sherwood: TE Connectivity is a leading supplier of interconnect and sensor products for the broad industrial sector, with significant market share in the automotive, commercial transportation, industrial equipment, and aerospace markets. We believe that TE's competitive position is stable and that customers face significant switching costs in attempting to go for competitors' products. Thus, we are raising TE Connectivity's moat rating to narrow.

Similar to other component companies, TE Connectivity works closely with customers to design components into "mission critical" systems. This necessitates close collaboration between the local engineering team and the OEM, and both make significant investments in selecting and integrating as part of their product development. Since switching requires potentially retraining, retooling, and even relocating manufacturing, the cost of switching to marginally cheaper products that meet a similar reliability standard is extremely high for these customers. Thus, once a company's product has been designed in, it is likely to remain in for the duration of the design life cycle. For some products, this is five to seven years, but for others, like those in commercial aviation, it is much longer. This results in high switching costs for the majority of TE Connectivity's diversified customer base.

Seth Sherwood does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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