Semiconductor M&A Squeezes Supply Chain in 2017

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For procurement organizations, supply base consolidation is a glass-half-full/glass-half-empty scenario. Optimists see an opportunity to buy more products from fewer suppliers; pessimists see favored vendors or product lines going the way of the dinosaur.

Both points of view are valid. If you are a big customer of Company A and Company B is your second source, you’re suddenly a VIP at Company AB. At the same time if A and B have some product overlap, certain part numbers are going to go away.

The unprecedented pace of semiconductor M&A in 2016 is setting the stage for disruption. Some of the problems buyers face are largely clerical, such as replacing B’s part number with AB’s designation on a BOM. But some of the problems are long-term, as Greg Wood, Director, Parts Content, for IHS Markit pointed out in a recent webinar. One challenge is just knowing what parts are already in your supply chain. M&A also increases the risk of counterfeits. There will be branding and inspection challenges as incoming inspection systems deal with new logos possibly rejects components, Wood said.

Defense contractors may have trouble securing second- or domestic-component sources for military-related equipment, Wood added, and QMS/QML challenges in finding qualified components.

These problems have been faced before, but not on such a large scale. In 2014, according to IHS Markit, there was $37 billion worth of M&A activity in the semiconductor market. In 2016 that number rose to more than $80 billion. IC Insights, which also tracks fabless semiconductor companies, came up with an even higher number -- $98.5 billion. (See related story.)

There also have been multiple mergers within the semiconductor industry in a relatively short time. In 2015 NXP and Freescale merged; in 2016 Qualcomm acquired NXP. In 2015 Avago Technologies acquired Broadcom; in 2016 Broadcom Ltd. acquired Brocade.

Companies that procure these lines through distribution may have more trouble than companies that buy direct. Distributors that carry both merged brands – such as NXP and Qualcomm – usually retain both product lines after a merger. In cases where a distributor has one line and not the other, the distributor stands to lose one line or must lobby the acquirer to add them to their channel. Either way procurement may have to scramble for parts or change distributors.

A long-term challenge of M&A is product lifecycles, IHS said. Chip companies generally acquire one another to gain technology. Technology is being implemented and then replaced more quickly than ever before. In 1970, the lifecycle of a semiconductor was expected to be about 30 years. By 2014 semiconductor lifecycles were reduced to 10 years -- a 60 percent reduction since 1970.

These reduced lifecycles mean that chips will become obsolete (or end-of-life (EOL) more rapidly than before. For the cellphone/smartphone industry this isn’t a problem: new products are released every six months or so. But for longer-lived equipment – including automobiles, industrial and medical equipment, airplanes and defense equipment – maintaining or even finding EOL devices is a significant problem.

These dynamics seem poised to create problems in 2017. OEMs and EMS companies have enjoyed a long span of short leadtimes and declining prices in the component market. Several independent distributors – companies that buy and sell excess and obsolete component inventory – are reporting an uptick in demand for components made by acquired companies. Prices for these products, which are determined by global supply and demand, are beginning to increase. Leadtimes on many components are stretching out. The “A-word” – allocation – has been mentioned since the beginning of the year.

Allocation is another one of those glass-half-full dynamics. If you are a chip manufacturer, an uptick in demand means you can increase prices. If you are in the spot market, you can charge a premium for hard-to-find devices. For OEMs and EMS, though, allocation means scrambling to find parts; paying more for the part they find, or finding second sources for components pretty quick. As IHS points out, second sourcing has become a challenge as companies merge and acquire.

At the very least, IHS recommends keeping on top of supplier activity in 2017 and beyond. IHS offers a variety of parts management solutions. Distributors are also a resource for component information. Supply chain platforms track part changes as do various subscription services and aggregators. BOM management tools, which are widely available, flag part change notifications (PCNs) and related data. Although buying more products from fewer suppliers should simplify the supply chain, in many cases it doesn’t.