Front End | Electronic Components Supply Network Starvation and headache to indigestion
The market cycle we’re currently experiencing has been seen many times in the past and sadly, many leading industry analysts are predicting more of the same. In this article Adam Fletcher, chairman of the Electronic Components Supply Network (ecsn), sets out why he believes that we’re currently in the middle of an industry cycle that has arguably moved through a period of component “starvation”, improving slightly last year to “headache” and in 1H’24 has entered a phase of “indigestion”.
P
rior to the COVID pandemic the overall capacity in the global electronic components markets was generally able to meet the real customer demand, which geographically speaking, was historically cyclical throughout the year. Demand for specific passive and semiconductor components in some regions did occasionally outstrip manufacturers’ ability to supply that resulted in unwelcome large increases in lead-times but supply difficulties were generally resolved quickly within the free market. Over the past decade the frequency of these demand and supply fluctuations started to escalate and it became obvious to industry analysts that the capacity in the global electronic components market for some passive and semiconductor components was becoming too finely balanced. The primary reason for this is our industry’s collective inability to accurately forecast demand, a situation that has significant influence on manufacturers’ willingness to commit to making large investments in new capacity with the promise of uncertain returns. These problems are compounded by the investment made by leading-edge companies in manufacturing capacity in a few highly focused geographic locations in a bid to increase various ‘economies of scale’, improve efficiency and reduce costs.
Starvation
Accustomed to managing supply based around an annual, fully predictable wave of demand and supply between the West and the East, the electronic components industry was simply unable to meet the immediate massive increase in global demand once the COVID pandemic began to ease. The result was that manufacturer
12 February 2024
lead-times for most semiconductor and many passive components rapidly progressed from 4 to 26 weeks followed by “allocation”, where the manufacturer refuses to accept new orders and prioritise its output to serve outstanding customer orders only. Despite continent-wide population lockdowns, industry closures and severe logistics problems manufacturer authorised distributors, who serve over 98 per cent of all the global customer base, did their best to fairly serve their customers from the considerable inventory levels they routinely maintained. Compare this to the manufacturers’ direct customers with Just-in-Time manufacturing systems who had zero “buffer inventory” to fall back on. Many were forced to stop assembly and, in some cases, even close their factories.
Headache
Customers in the electronic components markets had for over a decade become accustomed to manufacturer lead-times of four to six weeks. The inventory and order cover calculations automatically made by an organisation’s Enterprise Resource Planning (ERP) system is highly influenced by lead-time values and in the face of rapidly escalating delivery times massively increased in-house inventory and supplier order cover in a bid to meet the new targets. Together with an increase in “double ordering” (customers placing orders for the same components on multiple suppliers with the intention of cynically cancelling the other orders as soon as one delivers), this exacerbated rather than eased supply headaches by contributing massively to the fictitious demand. The spectre of some of the largest customers, particularly automotive
Components in Electronics
manufacturers, shutting down production due to a shortage of electronic components - particularly of semiconductors - increased awareness by politicians and the general public to the importance of electronics to global economic activity. It also raised concerns about the geographic concentration of advanced semiconductor manufacturing in Asia and particularly, in Taiwan. A combination of government pressure, generous financial incentives and demand from direct customers has persuaded some of the largest semiconductor manufacturers to invest in new facilities in the US and Japan and Europe. Obviously, this will help expand the geographic semiconductor manufacturing capacity but will also increase costs by negatively impacting economies of scale and, in the medium-term at least, will inevitably lead to significant overcapacity and the distortion of what was for many years a highly stable free market industry.
Indigestion
Its truism that “what goes up, must come down...” and despite the warnings of industry analysts that customer demand was artificially inflated, the oft forecast glut of semiconductor and many other electronic components is becoming a reality. In 1H’24 we are living through a period of “supply indigestion” where the inventory pipeline right across the electronic components supply network has become hugely inflated. Many semiconductor manufacturers currently have in-house inventory that exceeds 200 days output, which combined with the inventory currently held by their authorised distributors will take at least two calendar quarters - possibly three - to run down. The in-house inventory held by our members’
customers (systems integrators) is also well above normal levels and they too will want to “consume” this inventory down to their “new normal” level prior to any replenishment activity.
Worse, it’s a racing certainty that the product mix currently held in inventory across the global electronic components market is entirely wrong for current customer requirements. The components needed to rectify this will have to be produced against the prevailing manufacturer lead-time, which for most semiconductor products is realistically a minimum of 18 weeks. But semiconductor manufacturers have so much cash invested in existing inventory that until it “turns” (is sold and paid for) they are unwilling to build the components currently in most demand. The inventory held by manufacturer authorised distributors is also at grossly inflated levels, and they too cannot justify increasing investment in inventory that doesn’t turn, so more sporadic shortages are to be expected. It’s a sad fact that many semiconductor manufacturers are already seeing their capacity utilisation rates fall to unacceptable levels and are using this as an opportunity to undertake maintenance operations and furlough staff.
Concluding thoughts
I’m confident that stronger underlying ‘real’ growth will return to global electronic components markets in 2025, which leaves ample time for all parties to collaborate on their demand planning initiatives. Supply network collaboration can go a long way towards mitigating future supply and demand imbalances at a time when many geopolitical and economic uncertainties threaten
www.cieonline.co.uk
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62
