The first half of 2017 is shaping up as the perfect storm for electronics suppliers as capacity constraints, merger and acquisition, obsolescence and higher-than-expected demand is creating component shortages across the supply chain. The risk of double booking has been cited in at least two research reports, indicating the 2001 inventory glut may be fading from the supply chain’s memory.
It’s an environment that the world’s largest electronics distributor, Arrow Electronics Inc., hasn’t seen in a decade. “Entering the second quarter, the percentage of customers saying they did not have enough inventory was at the highest level since 2010,” Arrow CEO Mike Long told analysts during a conference call. “The percentage of customers saying they had too much inventory was at the lowest level in over 10 years. We've taken all appropriate steps, including taking on inventory, to assure our customers get the parts they need.”
Leadtimes for some products are stretching to late in the third quarter (Q3) and into Q4, according to research and industry sources. AVX, Murata, Kemet, Fairchild/ON Semi and Diodes Inc. are all quoting lead times/deliveries out into late Q3 or Q4 on some lines. “At Avnet, we are seeing lead times stretch across the board,” said Phil Gallagher, president of Avnet Inc.’s Core Distribution Business. “Using semiconductors as an overall market proxy, we are seeing extended lead times across the following product types: analog, in interface, op amps, V-regs; discretes, in power, IGBT, mosfets, TVS (circuit protection), zeners, thyristors, bipolar; memory, across the board for DRAM, NOR, NAND, EEPROM, EPROM; logic, in standard logic; opto, in high, mid and low power LEDs; MCU/DSP, in 8, 16 and 32 bit MCUs both ARM and proprietary architectures.”
“In commodity passives, we have been watching leadtimes crank out in some cases to the second half of the year,” said Michael Knight, senior vice president, Americas, for TTI Inc. “We are anticipating this summer things will get even tighter, particularly in resistor chips, inductors, and MLCC; it’s also evident in tantalum.”
Panic buying, or underlying demand?
Underlying demand is driving the market, Knight said. “The demand picture has been improving, and we have been commenting on that for a number of years as the electronics content in everything continues to increase.” Demand through May has been better than expected, market research confirms, with upside in the channel and into the industrial, automotive, and wireline communications markets. China, however, is experiencing some weakness in smartphones and some pockets of consumer and auto.
Distributors have been careful not to use the “A”-word—allocation. However, supply in the spot market has been tightening as component makers warn their partners against selling parts to independent distributors. Suppliers want to make sure their largest customers are first in line for in-demand parts. A second, less publicized reason is price: prices rise and fall in the spot market based on supply and demand. Component makers and authorized distributors can't control prices in the open market.
“Since the glut of 2000, nobody is using the word ‘allocation,’” said John McKay, president of sales for independent distributor Freedom. “What I can tell you is that parts that a customer paid $3 for are up to $7.” Customers have become accustomed to shopping in the spot market for lower prices; that has drastically changed. “Customers still aren’t willing to pull the trigger on higher prices even if they can get a quote,” McKay added. “But prices we were citing last week are even higher today.”
McKay noted that Freedom has been reading market signals and shoring up its inventory for awhile. “We are in a position where we can be the calm during the storm. If you are a distributor and not having fun in the market today, then you’re probably not in the right job.”
What about capacity?
Typically, when demand spikes, component manufacturers ramp up capacity. At least two component manufacturers, AVX and TDK, have made capacity-related announcements. AVX told analysts it was adding capacity in August; and in a letter to its customers TDK said it was restructuring its MLCC business. The restructuring includes integrating manufacturing sites, and improving technology processes to ensure production efficiency and quality, TDK said.
Adding to supply constraints are the effects of M&A in the semiconductor market and the obsolescence of certain product lines. When two suppliers merge, overlapping product lines are typically consolidated. Stretched lead times are attributed to the Fairchild/ON Semi consolidation and follow‐on product line rationalization; NXP selling their low‐end product line; International Rectifier/Infineon consolidation; the Diodes factory fire; STMicroelectronics share gains at Apple consuming their available capacity; and better demand, according to one research report. Additionally, Micron and Cypress have announced end-of-life (EOL) for any NOR product under 128 megabytes.
“The real problem/cause of extended lead times is that there’s zero slack in the supply chain,” Avnet’s Gallagher said. “As such, even small positive demand changes have significant impact. This is largely because substantial investments in capacity have not been made over the last decade. This year, as an example, the pundits seem to be settling in on a global semiconductor growth rate of 4 percent to 4.5 percent while capacity investments are forecasted to be in the 4.8 percent range (not including memory).”
Is the electronics supply chain headed toward the inevitable boom/bust cycles experienced in the 1990s? Analysts have expressed concern that extended leadtimes and pulled-in orders reflect customer panic and may be ahead of actual end demand trends. Two market researchers saw evidence of double-booking at OEMs and in the channel. There could be a correction in the second half of the year if actual demand falls below current orders.
Distribution executives currently don’t see the danger of a forthcoming glut. “Capacity is being added, but it’s being added slowly,” said TTI Knight. “It’s also not universal. I don’t think it will be the same as we have seen in previous cycles: historically we’ve had a run up on demand so capacity gets added; then there’s been a crash and the whole thing comes tumbling down. I think as an industry we have learned our lesson about where we add capacity.”
Even if there is a glut, Gallagher said the channel can react quickly. “The conclusion would be that it’s possible, but I don’t think it’s likely because of how fast information moves in the global supply chain. Cycles are definitely shorter, and we react more quickly as an industry. Even double ordering has been somewhat muted in the most current cycles as it becomes very visible, very quickly.” At Avnet, he added, “We manage this very closely with both our EMS and OEMs. We look for double bookings, inflated quantities being bought and the like.”
A cautious approach toward building capacity could benefit the channel. “It’s been a buyers’ market for so long that this could be an opportunity to equalize the playing field and stabilize pricing,” said Knight. “Some suppliers aren’t adding capacity because they have no interest in selling more products at the current prices.”
Price and margin erosion has been intense in the electronics supply chain. Customers, Knight explains, expect price reductions to be built into supply contracts. There’s very little maneuvering room left, Knight said. “It’s not like there is a lot of cost to be taken out of the manufacturing process. Any other reductions come from margins.” The pricing tables are beginning to turn, but it will take a while for customers to get on board. “It’s becoming a good environment [for price increases] but it takes a while,” said Knight. “We’ve had a 5- to 6-year pattern of price erosion and it will take some pain and rough patches to reset the market. That’s just starting to happen.”
As a premier stocking distributor, TTI can assure supply to its customers, Knight added. “With our price, you’ll get parts. A great price without the parts isn’t really a good price.”
Looking toward the second half
So where is the market headed? “There seems to be two camps of thought on the overall market,” Gallagher said. “Camp #1 believes we’ll have six months of ‘up’ in 2017 followed by 6 months of ‘down’. If that turns out to be correct, it could certainly lead to a product glut later in the calendar year with associated cancellations. The Camp #2 belief is that the growth trajectory will sustain for the whole year, in which case cancellations will not occur.” Gallagher said he subscribes to Camp #2 for several reasons:
- There’s an upward growth trajectory in key segments including industrial, automotive and defense.
- IoT acceleration. “The fact that more connections are being made to the Internet is indisputable,” he said. “Supporting that trend, consider the surrounding circuitry (i.e. sensors/actuators, MCU, COMM chips and gateways) that are also needed for all those connections.”
- Global GDP forecasts are bullish
- There are strong industrial confidence indicators
The supply chain has been running lean for years because component supplies have been ample. But distributors that have consistently invested in inventory are pretty comfortable at the moment. “We are in great shape,” said TTI’s Knight. “If, as I expect, this is true underlying demand, we are at a point in the macro economy where we’ll see better-than-normal growth.”