Breaking unintentional records
Ambient UK temperature isn’t the only record to fall this year: UK £ sterling exchange rates have hit new lows against the currencies of our main trading partners and rapidly rising inflation is driving up the price of almost everything to levels unseen by industry and consumers since the oil price shocks of the mid-1970s.
These and other record negatives are threatening to reverse many of the gains recently made by players in our domestic electronic components supply network. In this article Adam Fletcher, Chairman of the Electronic Components Supply Network (ecsn) provides his insight into what the rest of the year might bring and takes the opportunity to look the latest government investment in semiconductor manufacturing.
The good news is that the supply of semiconductors and associated electronic components has now begun to synchronise with real customer demand. Whilst the latest market data from the leading analysts confirms that the availability of components is easing the underlying situation is still unclear, compelling many technology OEMs to maintain ‘bloated’ inventory holdings – even in the face of the escalating cost of borrowing – amid fears about manufacturer lead-times and the global economic outlook. This uncertainty is compounded by recent announcements from leading semiconductor foundries and integrated device manufacturers about push backs in their planned capital expenditure due to weak forecast demand and possible industry over-capacity. Although announced, it will take at least six months before we’ll see the effects of this realignment due to current work in progress, but it does give the wider electronics industry something more to worry about.
Record semiconductor investment
Informed industry sources predict that the US is likely to adopt the CHIPS Act, albeit with some modification, which will authorise the Biden administration to invest $52bn in advancing semiconductor manufacturing in a bid to improve the county’s competitive position against – principally – Chinese semiconductor manufacturers. Not everyone is happy, however: most of this funding is earmarked for US-based IDMs (Integrated Device Manufacturers (i.e. organisations with their own semiconductor foundry) leaving little for the country’s very successful and highly innovative ‘fabless’ semiconductor organisations that are dependent for manufacture on proven relationships with third party foundry partners.
It seems that the wider industry fears that funding this sector may distort the market and disrupt the established ecosystem, and I can see some merit in their argument. Perhaps the US Government should consider complementing its investment in domestic semiconductor fabrication with investment in the wider semiconductor infrastructure, including research and development. A US government investment of $100bn in the country’s entire semiconductor infrastructure would (by international standards) be a relatively small commitment but would show the world how serious they are about re-establishing world class technology in the US. On the flip side, this investment should be tied to the corporation tax paid by semiconductor organisations in the US and proportionately in the global markets in which they operate.
Closer to home, the European Union has announced plans to commit €43bn of 'policy-driven investment' into the semiconductor sector by 2030, (too little, too late?) but says the investment will be heavily biased towards boosting technology manufacturing in key geographical locations. Europe can already boast of world-class expertise in the key semiconductor manufacturing technologies and investment in R&D and the wider technology ecosystem would mean that the EU technology sector would be able to compete in global markets more effectively.
Russian invasion of Ukraine
The economic sanctions applied by many countries against Russia following its invasion of Ukraine are impacting the country’s economy, but not nearly as severely as is necessary to offset the huge contribution that oil and gas exports make to the country’s GDP. The current hugely inflated prices being paid in Europe for energy imports have increased the country’s revenue despite the severe reduction of exports of other products. In a cynical move designed to increase the pressure on western European economies, Russia is now severely restricting its supply of gas into Europe – particularly into Germany – raising the spectre of some form of energy rationing for German industrial and domestic consumers by the end of the year. Some fear that the German economy could even slide into a full-blown recession if sufficient supplies of gas cannot be secured, which will further destabilise global currency markets.
Impact on exchange rates
Our strong economic links to Europe compounded by our current political turmoil has reduced confidence in £Sterling, which now stands at £1 = $1.19 US. That’s a 16% decline against the US dollar in the last six months or so. All Eurozone economies are scrambling to secure their energy needs from alternative suppliers in response to Russia’s energy restrictions and as a result, the Euro exchange rate against the US dollar has also declined by 15%, and now stands at its lowest level for twenty years. It’s unlikely that European central banks will want to live with falling exchange rates and escalating inflation for very long, so a sharp increase in their interest rates (in-line with the actions of the US Treasury) could be on the cards. This is never an easy option for the banks however, as a too rapid increase in interest rates could trigger national recessions in the wake of a tightening money supply.
Impact on electronic components markets
The majority of raw materials and manufacturing processes used in the electronic components markets are priced in U.S. dollars, as is the pricing of ultimate finished goods. The electronic components market has long been at the mercy of exchange rate fluctuations beyond the control of organisations within it and recent declines against the US$ have inevitably led to an increase in electronic components prices in the UK/Europe, helping to drive inflation up even further. It does however also have the effect of reducing the price of the finished goods that UK manufacturers export, particularly those destined for the US, and should therefore boost revenues from export orders placed on UK and European based manufacturers.
Whist the supply issues in the electronic components supply network are beginning to be resolved, I can’t promise that we won’t have to contend with more unwelcome records. I urge purchasing organisations to exercise great care in the ongoing management of their forward order books and to continue to work closely with their trusted, long-term supply partners. Careful collaboration between customers, component manufacturers and their authorised distributors provides our best chance of achieving a ‘win-win’ result for all parties in the electronic components supply network and the wider economy.