Front End I Electronic Components Supply Network Electronic Components lead times extending rapidly…
As is usual at this time of the year, members of the Electronic Components Supply Network (ecsn) are collaborating in an attempt to reach a consensus opinion on what the coming year has in prospect for our industry in advance of publication of the association’s 2021 Forecast. According to ecsn chairman Adam Fletcher this is always an ‘interesting’ process and in the middle of a pandemic has proved to be even more of a challenge than in ‘normal’ years: “Not that the term ‘normal’ has much meaning in our industry nowadays, because for many years ‘change’ has been the only constant…!”, Fletcher says. This process has however fl agged up a worrying step function change in the manufacturer lead-time over the last eight weeks and in this article, Fletcher shares his thoughts on why this is occurring and how organisations in the UK should react…
The trade bodies in the European electronic components supply network only informally monitor manufacturer lead-time performance, but this metric does regularly crop up in discussions and we do provide updates to the wider industry as it fl uctuates over time. In the US however, the Electronic Components Industry Association (ecia) formally reports the Average Lead-Time based on three component categories: Interconnect and Electromechanical, Passives and Semiconductor components. The latest ecia data is shown in the graphic. The earliest point of measurement on the graph is May ‘15, but the trend to the latest point (August ’20) clearly shows that the average manufacturer lead-time in the electronic components market continues to extend. The current average delivery delay for passive components is 17 weeks, and interconnect and electromechanical is 12 weeks, while customers for semiconductor products are having to wait an average of 14 weeks. Customers in Europe are suffering broadly similar average lead-times but further consideration is warranted as the electronic components market this side of the ‘pond’ comprises of well over two million stock keeping units (SKU), and blithely quoting average fi gures can easily conceal a modest number of signifi cant outliers on very extended lead-times.
Lead-Times Step Out
Pre-Forecast discussions among manufacturer authorised distributors in mid-November fl agged up that they had been receiving recent notifi cations from a wide range of the manufacturers they represent warning them that their lead-times are expected to signifi cantly extend. The new average lead-time for passive and semiconductor components is expected to be 20 weeks but -on the plus side - interconnect and electro-mechanical products are expected to suffer little change. When the average components manufacturer lead-time extends beyond 12 weeks it suggests that supply is tightening due to either increased demand or limitations on capacity. The current
10 November 2020
concerns for ecsn members is for “outliers” manufacturers whose current lead-times of over 26 weeks suggests a major supply problem.
Diff erent Market Structures The structure of the electronic components supply network in the US market is actually very similar to that in Europe. It comprises a wide and diverse customer base driven primarily by industrial, automotive, aerospace and network computing and communication markets. The Japanese market is broadly similar but has a larger consumer market segment and a smaller aerospace market. These three markets all operate on a broadly similar business cycle, with stronger growth experienced in the fi rst half of the year which typically peaks in Q2 before gradually tailing off into the second half of the year.
In Asia-Pac the electronic components market is dominated by China, which alone is responsible for over half of global consumption of electronic components with the other Asian economies consuming a further 10%. The electronic components markets in Asia-Pac are currently dominated by the manufacture of mobile handset and all forms of computing and consumer goods, although they also have thriving automotive and industrial markets. The business cycle in Asia-Pac technology markets are counter-cyclical with the US, EU and Japan. They always see strong growth in the second half of the year which peaks in November before tailing off into the fi rst half of the following year.
Drivers of Increased Demand The European electronic components market is currently only experiencing a modest recovery in demand, primarily as car production returns to growth following the economic crash in the fi rst half of ’20. Again, this is tracking a similar but stronger response in US and the Japanese markets, but other sectors are also improving, albeit modestly.
In Asia-Pac the response to the question “where is the demand coming from” is “it’s coming from everywhere”, suggesting it’s here that the bulk of the current growth spike that
Components in Electronics
is causing the rapid extensions of manufacturer lead-times is coming from, especially as Q4 tends to be Asia-Pac’s peak quarter. This situation may be further exacerbated by the extension of the New Year holiday granted to the Chinese populace in an attempt to mitigate the potential spread of COVID-19. Offi cially the holiday is only being extended by three days but is in practice expected to extend by an additional week in many Chinese regions. I suspect that many organisations will seek to maximise their output in the run up to the extended shutdown, which can only create additional and possible abnormal demand.
Impact on the UK Electronic Components Supply Network In the short term the rapidly extending lead- times should not prove to be a problem for UK customers because of the increased inventory that ecsn authorised distributor members put in place as a “buffer” against potential Brexit issues. They report that currently their stockholding equates to approximately ten to twelve weeks average customer demand.
It’s my opinion that demand for electronic components in Asia-Pac will slow substantially in Q1 ’21, enabling manufacturer lead-times to re-stabilise close to Q3 ’20 values, but some ecsn members and industry commentators disagree, so in this regard consensus has not yet been reached. The concern is that the demand for 5G handsets and infrastructure is likely to continue to strongly drive demand. Whist I concur with this analysis the 5G roll-out is currently behind
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schedule and whilst the uptick will be large when it comes it will be later than anticipated. Currently, demand for semiconductor fab capacity at the leading foundries, packaging and test equipment suppliers is very strong but much of this is being driven by the US China trade war and its impact on large Chinese handset manufacturers.
Concluding Thoughts There will no doubt be a fl urry of activity in the closing weeks of 2020 and into the New Year as all EU based organisations scramble to ensure their compliance with the defi nitive Brexit outcome. I remain convinced that the undoubted competitive edge enjoyed by UK technology manufacturers will be best maintained during the current turbulence by engaging and collaborating both up and down the supply network. It costs little and will go a long way to ensuring our future prosperity.
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