Front End | Electronic Components Supply Network The tide of supply is turning...
Adam Fletcher, chairman of ecsn (the Electronic Components Supply Network) admits to ‘sticking his neck out’ at the end of 2021, when he first predicted that the availability of proprietary semiconductors would ‘normalise’ at 12-to-16 weeks at some point in the second half 2022, with availability of commodity semiconductors normalising by the end of the year: “Despite the current high levels of geopolitical tension I still believe that this is possible”, Fletcher says, “but you’ll have to forgive me if I’m a calendar quarter out...” In this article Fletcher updates CIE readers with the latest electronic components industry information and considers the impact that evolving geopolitical situations might have in store for the global electronic components supply network, and for the many technology OEMs that depend on it
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espite the war in Ukraine, COVID lockdowns in China, escalating prices of raw material & finished goods and continuing logistics chaos etc., the availability of electronic components is steadily improving and ‘Bookings’ (net sales entered) reported by manufacturer authorised distributors have begun to normalise. The data suggests that the current demand and supply cycle has passed its peak but there is still great uncertainty about the velocity of change and the effect a ‘swing’ in either direction could have on the global economy. This uncertainty has resulted in technology OEMs transitioning away from ‘lean manufacturing’ systems that require low inventory holdings towards systems that promise enhanced security of supply but demand higher inventory levels to ensure that customer demands are met. I suspect that this will only be a temporary transition. As the economic situation stabilises and confidence improves, I’m certain that the supply and demand balance will start to return to more typical historical norms and organisations will again seek to re-adopt the JIT (Just In Time) procurement systems that in better times helped maximise their return on capital employed.
Changing inventory holdings According to latest data from US number- crunchers Morgan Stanley Research (
https://www.morganstanley.com), the total semiconductor inventory in the global
10 June 2022
supply chain increased by 21 days to 212 days in Q1’22 and today stands at 46 days beyond the long-term historical median of 166 days. Semiconductor inventories held by Contract Electronic Manufacturers (CEMs) and Original Design Manufacturers (ODMs) also increased in the range 44 per cent-to-52 per cent in Q1’22, however inventories of these devices held by automotive manufacturers only grew by 8 per cent in the quarter, confirming the ongoing manufacturing supply issues that this sector in particular is experiencing. The inventory held by semiconductor manufacturers themselves showed the largest growth in inventory days, growing at around 50 per cent in Q1’22 but big as this statistic is it is misleading as it doesn’t accurately reflect the huge work-in-progress (WIP) inventory that manufacturers have tied-up within their supply network at any point in time. The release of bottlenecks within the WIP bubble can have an enormous effect on semiconductor availability. When the ‘floodgates’ open, manufacturers will inevitably seek to manage their finished goods inventories in line with a likely decline in customer demand. There simply has to be more effective ways for technology OEMs, CEMs and ODMs to utilise their financial investment than by jealously maintaining hugely inflated inventories.
Why is inventory increasing? Technology companies throughout the world are always concerned about the
Components in Electronics
availability and security of supply of the electronic components and assemblies their production lines require. There are many drivers for their current concerns. In addition to those I’ve outlined above concerns about their suppliers’ ability to ship as requested and ensure the availability of a complete manufacturing BOM (bill of material) are very near the top of their list. Even when limited to only a few components or assemblies, a shortfall has the potential to hold up an entire manufacturing process. The shortages against any given BOM is changing weekly, forcing OEMs to inflate their in-house inventory as a hedge against several weeks of disruption pending the arrival of the complete BOMs needed to restart manufacturing. Whilst it’s the shortages of electronic components that are currently making the headlines, the supply of other products including PCBs, metal work, plastic mouldings, sub-assemblies etc., also remain a significant problem for technology OEMs.
Weakening market demand? There are signs of weakness in the key semiconductor market drivers: Global sales of mobile phone handsets declined by 11 per cent in Q1’22. Stocks of personal computers (PCs) are continuing to build in a market that also declined (by approximately 5 per cent) in Q1’22. Average inventory days stood at 62.1 at the end of the quarter but now look set to grow to 70 days, a figure more than
20 per cent higher than the 2016 peak. Telecommunication equipment suppliers inventory days also jumped 19 per cent to 91.6 in Q1’22. In the automotive industry, where sales of new cars are declining year- on-year, semiconductor inventory stood at 52 days in Q1’22 and is now expected to climb to 60 days later in the year, a 50 per cent increase on the pre- 2021 average. These figures strongly suggest that the key markets for semiconductors (and therefore other electronic components) are cooling. It’s unclear whether this is just a temporary ‘blip’ or is the beginning of a trend, but OEMs today are finding themselves with declining demand and rising inventory levels, an unwelcome situation that will be difficult for them to sustain.
An inventory correction? A semiconductor inventory correction is inevitable: Cash remains king and as interest rates increase and money supply is tightened, to head off inflation, the increased level of inventory being held by technology OEMs and the financial loss (and lost opportunities) when it cannot be used elsewhere is potentially huge. Currently, the cost of inventory holding is about 20 per cent of the purchase price each year it’s held in stock, and that’s always assuming that it doesn’t get damaged, doesn’t become obsolete and does eventually get consumed. Supply chain experts will tell you that the critical factor here is not the total value of inventory held but the ‘velocity’ at which it’s ‘turned’ (sold and consumed).
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