Looking back at 2025, the electronics industry was characterized by sharp divergences across geographic and market sectors. Anything connected to AI has seen explosive growth, from chip manufacturing to servers, while more mainstream industrial electronics have been fairly lackluster. From a geographical perspective, the U.S. has remained strong, and while in Asia the picture is a bit more nuanced, China’s export machine is working at full tilt, supported by state subsidies and incentives and arguably a deliberately devalued currency.
Unfortunately, Europe has found itself on the wrong end of nearly all of these global trends: Its automotive industry is being hit by China’s fast-growing car industry (particularly EVs), it has little presence in the high-end AI sector, and the continuing uncertainty caused by U.S. tariffs has hit exports westward. So the broad-based European electronics industry has had another tough year of fighting to gain traction. Outside the AI boom, it isn’t clear whether the picture in the U.S. is much better, with growth concentrated in a very small number of companies.
None of the above global factors look like they are changing dramatically in 2026. Some cautionary voices suggest that there is a dangerous bubble around AI, with circular cash flows built around vendor financing deals. However, the momentum behind AI and the power of the major players make it seem unlikely there will be any let-up in the short term. China is still struggling to shift away from any growth model other than exports, and U.S. tariff changes remain highly unpredictable and show little signs of stabilizing. The broader electronics industry will therefore continue to battle headwinds in 2026.
Some reasons for optimism
Nevertheless, some grounds remain for optimism. The supply chain gyrations that led to violent peaks and troughs through the Covid years have all played out, and the destocking cycle appears complete. There are even signs of scarcity in some components or materials, which should lead, in turn, to customers having to make longer-term commitments to secure supply. Across the industry, it is common to hear manufacturers and distributors say that their book-to-bill has risen above one, indicating growth going forward. The more negative flipside of this is that the starting point of revenue is much lower than most anticipated a couple of years ago. Many companies have abandoned hopes of a quick upturn and reduced headcounts to match these lower revenues.
Technological and legislative trends driving the industry
The electronics industry never stands still, even in difficult times, but 2026 will see some specific trends that can potentially spur growth.
Defense spending
Spending on defense is rising globally, which, from a human perspective, may not be desirable but is positive for the electronics industry, given the high-tech nature of modern weapons. The U.S. defense budget has passed the $1 billion level; meanwhile, China is aiming to rival the U.S. as a global military power. Europe is facing continued Russian pressure and a clearly less supportive attitude from the U.S., forcing it to increase spending and support for Ukraine. So far, defense spending increases have been more announcements than reality, but 2026 should see real money flowing into the defense sector. The Russia-Ukraine conflict has also reshaped ideas about modern warfare and thus will spur development in new sectors such as drone technology.
AI at the edge
The most high-profile strand of AI development is focused on the attempt to create “human-like” general intelligence, driven by large language models. This sector is dominated by a few, mainly U.S.-based, actors. However, this model is based on high-speed connectivity to powerful servers and high resource availability. For many applications, this is either unfeasible or uneconomic. An alternative approach is to deploy AI at the edge, where small AI engines are deployed on end devices targeted at a narrow problem domain, effectively replacing manually coded logic. This is a strand of AI with a more diverse group of industry participants and could be one where productivity gains can be more quickly realized. It also avoids some of the dire environmental issues linked to the ever-increasing power required to run the servers used for AI large language models.
Increasing need for security
Security has become a hot topic in electronics, with almost-weekly stories in the press of data theft and cyberattacks. Connectivity has become ubiquitous in electronic devices, but in the first wave of development, security was often an afterthought, and the components used to build connected systems lacked the features to take a more sophisticated approach.
This approach is no longer acceptable; within the EU, the
Cyber Resilience Act demands that manufacturers put security first and foremost, but even where there is no explicit regulation, manufacturers realize that poor security poses a massive reputational risk. Chip manufacturers have stepped up, offering built-in security features on small devices, but implementing an end-to-end secure solution still requires significant development work. Nevertheless, security features such as encrypted end-to-end communication, authentication via root of trust and secure key storage, and updates to fix known vulnerabilities will become obligatory for even small-scale IoT devices.
Suspicion of Chinese-manufactured devices could also act as a growth spur for Western-based electronics companies, whether justified or not.
Standards
The value of standards is widely recognized across the electronics industry, even if there are often fierce battles about which standards to adopt. End purchasers, whether consumer or business, want the security of being able to choose between suppliers and avoid getting locked into proprietary technologies. Basic communication technologies, such as Bluetooth or Wi-Fi, are based on well-established standards, although both continue to evolve and improve in terms of features and performance. In addition, new standards operating at an application level, such as Matter or Amazon’s sidewalk, have the potential to offer opportunities to a diverse range of product manufacturers. It is notable that the mid-market furniture chain Ikea has started offering Matter-connected products, signaling that smart home technology is firmly entering the mainstream.
Need for new devices
All of the above developments, and others, show that despite difficult times, the electronics industry isn’t standing still. They also demand products be upgraded with more powerful, feature-rich processors and other components. To stay competitive, product manufacturers will have to redevelop their products, whether they like it or not.
Outlook for 2026
The last few years have been a turbulent time for the electronics industry. There’s no doubt that many players hubristically mistook a short-term boom for a long-term growth trend. The last two years have thus been a painful “reset,” where companies have had to acknowledge their core revenue base is significantly lower than they had previously believed and, in many cases, painful cost cuts have had to be made to reflect this new reality.
I am confident, however, that this process is finally coming to an end, and having undertaken the reset, the industry will show modest but hopefully accelerating growth in 2026 from this new baseline. A further complication in 2026 comes from the saturation of semiconductor fabs due to the extremely high demand for AI chips. This is having the effect of increasing delivery lead times for components across the board, further complicating the return to growth.
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