Demand drivers slowing...

27th June 2022
Sam Holland

According to Adam Fletcher, Chairman of ecsn, the latest data suggests that the current demand and supply cycle has passed its peak, but the market is uncertain about the velocity of the changes currently occurring. This piece reviews the global availability of electronic components and shares Adam’s insight into the evolving supply situation.

Despite the war in Ukraine, COVID lockdowns in China, continuing logistics chaos, escalating prices of raw material and finished goods, and even more, the availability of electronic components is steadily improving, and manufacturer authorised distributors are reporting that their ‘Bookings’ (net sales entered) are steadily returning to normal levels.

Nevertheless, there are disturbing signs that the key semiconductor market drivers (and therefore those of complementary electronic components) are weakening: global sales of mobile phone handsets declined by 11% in Q1’22. The market for PCs also declined by approximately 5% in the same quarter, although OEM stock is continuing to build.

Inventory days reported by manufacturers of telecoms equipment also jumped 19% to 91.6% in Q1’22. In the automotive industry, where sales of new cars only grew by 8% in the quarter and continue to decline, inventories of electronic components stood at 52 days in Q1’22 and are now expected to show a 50% increase on the pre-2021 average, confirming the ongoing pain that this sector in particular is experiencing, much of which is self-inflicted.

Overall semiconductor inventories held by technology OEMs increased in the range 44%-to-52% in Q1’22 and stood at 62.1 days at the end of the quarter – but they now look set to reach 70 days: a figure more than 20% higher than the 2016 peak. This cooling in key markets for electronic components appear to be more than just a temporary ‘blip’ and might well be the beginning of an unwelcome trend, where semiconductor manufacturers find themselves with rising inventory levels at a time of declining customer demand.

Why are inventory levels increasing at technology OEMs?

Whilst it has been the shortages of electronic components, particularly semiconductors, that have been making the headlines, the availability of other products including passive components, PCBs, metal fabrications, plastic mouldings, sub-assemblies, and more, is also disturbing the sleep of OEM buyers and exacerbating their perpetual worries about the availability and security of supply of the electronic components and assemblies that their production lines require.

There are many drivers for their current concerns, but at the top of the list is uncertainty about the ability of their suppliers to ship to the due date requested in order to ensure the availability of a complete manufacturing BOM. This is because, if there is any shortfall on this front – even if it’s limited to only a few components or assemblies – it will have the potential to hold up an entire manufacturing process.

Currently, different BOM shortages could crop up without warning every couple of days when different components and/or sub-assemblies become unavailable. This is a situation that is compelling technology OEMs to inflate their in-house inventory by several weeks in a bid to maintain availability of the complete BOMs that their manufacturing operations depend on. I’m sure, however, that technology OEMs will rush to re-adopt the JIT (Just In Time) procurement systems that formally contributed so much to their ROI (return on capital invested) just as soon as the economic situation stabilises and confidence improves.

Inventory holdings are changing...

According to the latest data from US number-crunchers Morgan Stanley Research, the total semiconductor inventory in the global supply chain reached 212 days in Q1’22 and today stands at 46 days beyond the long-term historical median of 166 days. The inventory levels at semiconductor manufacturers themselves showed the largest growth, increasing by around 50% in Q1’22: a statistic that can itself be misleading as it doesn’t accurately reflect the huge work-in-progress (WIP) inventory that semiconductor manufacturers have tied-up within their supply network at any point in time.

I expect the market to ‘skew’ when the WIP bubble eventually bursts: semiconductor lead-times are bound to fall, and as a result, technology OEMs already faced with declining customer demand will then seek to reduce their in-house inventory and supplier order cover.

An inventory correction?

A semiconductor inventory correction is inevitable: cash remains king and as the money supply is tightened and interest rates increase in a bid to head off inflation, inventory levels held by technology OEMs will inevitably begin to decrease. Currently, the cost of holding inventory in the electronic components industry is about 20% to 40% of the purchase price each year, so the risk of financial loss (and lost opportunities) is huge if it cannot be used elsewhere. And that’s always assuming that it doesn’t get damaged, or become obsolete in the meantime.

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 or consumed). In the UK, 98% of customers are supported by manufacturer-authorised distributors who manage an extensive inventory of electronic components on behalf of many hundreds of customers, and on behalf of the component manufacturers themselves.

Technology OEMs have long found that the most effective method of inventory management is the maintenance of close partnerships with these organisations as the buffer inventories that they maintain on behalf of their customers enable delivery schedules to be modified whenever necessary, at short notice and without penalty.

The very high service levels delivered by manufacturer-authorised distributors maximises their customers’ overall investment in inventory and, critically, keeps their stock ‘turning’...

Concluding thoughts on industry predictions…

At the end of last year I predicted that the availability of proprietary semiconductors would ‘normalise’ at 12 to 16 weeks at some point in the second half of 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 outcome is possible, but I could be a calendar quarter or so out.

But just at a time when issues surrounding semiconductor supply are beginning to be resolved it seems likely that technology OEMs will have to contend with limited availability of passive components and moulded plastics. It is no surprise, then, that I urge purchasing organisations to exercise great care in the management of their forward order books and advise them to continue to work closely with their trusted, long-term supply partners.

Careful collaboration between customers, component manufacturers and their authorised distributors is the most promising route to the mitigation of critical supply and demand issues, and usually results in a ‘win-win’ for all parties across the electronic components supply network.

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