Microchip Technology Inc. has alerted customers to possible component shortages as demand surge in multiple product segments, resulting in extended lead times and rising capacity constraints. Steve Sanghi, chairman, president and CEO of the semiconductor vendor, warned in a memo to customers that continued misalignment in orders at a time of rising demand and plant capacity constraint could hurt companies that fail to prepare ahead for the back-to-school and year-end holiday seasons.
Microchip, a supplier of microcontrollers, mixed-signal, ICS and analog as well as flash products, said sales to customers in the automotive, consumer electronics, housing, industrial and PC segments have been exceptionally strong in recent months, exceeding its expectations and swamping its ability to raise production capacity. The company said it has in response to the stronger demand jacked up fiscal 2015 capital expenditure 40 percent, to $175 million, from $125 million, “the highest in a decade,” according to Sanghi in the memo, a copy of which was obtained by Electronics Purchasing Strategies.
Sanghi had previously indicated to the investment community that Microchip was experiencing solid demand for its products, adding that the company’s product delivery or lead times have stretched out as a result. In the June quarter, for example, Microchip’s inventory days fell to 108, below the company’s target of 115 days. In a statement to investors released with the company’s fiscal 2015 first quarter results, Sanghi warned inventory days were headed lower despite Microchip’s efforts to crank up production. “We are ramping all of our factories, but we are limited by equipment lead times,” he noted in the statement.
The latest memo to customers indicates demand continue to strengthen for the company’s products. Sanghi described the current business environment as “good” with “exceptional strength in some of our new products and technologies, which are growing at double-digit percentages sequentially.” While this is good news for Microchip – and other semiconductor vendors that may be seeing similar strength in product demand – it does have negative implications for an industry reputed for its often wild swings in demand and supply imbalances. The electronics industry has in the past tripped up because OEMs failed to anticipate rising lead times and capacity constraints at their suppliers, a fact noted by Sanghi in his memo.
“Many of our product delivery lead times have stretched out and we are selectively capacity constrained in our wafer fab, wafer sort, assembly and test operations, particularly on these new products and technologies,” the Microchip CEO said. “Many of our product lead times are currently between six weeks and 18 weeks.”
What’s the best recipe for assuring prompt delivery of components? Sanghi advised customers to stop believing they can put in orders and expect delivery in “as little as 2 to 4 weeks,” and instead start ordering products for November and December deliveries now. They need to understand suppliers may not be able to fulfill component orders on short notice, a development that could result in lost sales.
“I would like your help so that we can help you and your business continue to be successful,” Sanghi said. “We have very little capacity left for August and September orders. Therefore, I am requesting that you place orders for your August and September requirements immediately so that we can best match your needs to the small remaining capacity. It is extremely important that we have your November/December requirements on backlog as soon as feasible.”
How will customers respond? The answer depends on whether or not they believe Microchip that it is capacity constrained and may not be able to deliver to their tight schedules. Some OEM purchasing agents may also rely on secondary or backup sources for the components they buy from Microchip and other capacity constrained IC vendors. If the Microchip products cannot be sourced from other semiconductor vendors or at comparably efficient prices, OEM buyers are most likely already racing to call their Microchip sales reps.
It’s not certain that Microchip’s experience is industrywide although the likelihood is quite high that other chip vendors are similarly seeing rising demand and extended lead times. If that’s the case, component distributors and other vendors that have been waiting for signs of a stronger demand environment may feel emboldened to raise prices with the hope of improving their gross profit margins.
Since firmer or higher pricing has always followed extended lead times this is another reason for OEM component buyers to pay closer attention to Sanghi’s observation. The full text of his message follows:
I am writing this letter to advise you of current business conditions and the effect it is having on our lead times. The business environment is good, and we see strength in many of our end markets including industrial, automotive, housing, consumer electronics and personal computing. We are also seeing exceptional strength in some of our new products and technologies, which are growing at double digit percentages sequentially.
As a result, many of our product delivery lead times have stretched out and we are selectively capacity constrained in our wafer fab, wafer sort, assembly, and test operations, particularly on these new products and technologies. Many of our product lead times are currently between 6 weeks and 18 weeks. We are ramping all of our factories as quickly as we can, yet are limited by our suppliers’ lead times. We have increased our capital expenditures for current fiscal year from $125 million to $175 million, the highest in over a decade.
I would like your help so that we can help you and your business continue to be successful. First, we are still receiving orders everyday where delivery is being requested in as little as 2 to 4 weeks. Second, we have very little capacity left for August and September orders. Therefore, I am requesting that you place orders for your August and September requirements immediately so that we can best match your needs to the small remaining capacity. Once we have visibility of your orders, we will make our best effort to deliver to your schedule.
Currently, we are evaluating wafer starts for product deliveries in late November of this year. To maximize our capacity, we are making the majority of wafer starts based on existing backlog. Therefore, it is extremely important that we have your November/December requirements on backlog as soon as feasible. So again, please act as soon as possible in placing your November and December orders.
My intention in writing this letter is that all customers are equally informed about the environment. Again, I want to assure you that we are working diligently to increase capacity and we are making substantial capital expenditures. We have served you for the past 25 years with some of the shortest lead times and best delivery performance in the industry. However, the success of many of our new products and technologies has caught us by surprise, putting us into a capacity constrained environment.
Thank you for your business,
President and CEO.
Microchip Technology Inc.