Electronic component suppliers have been complaining for years about eroding prices. With many types components currently in short supply, prices have finally begun to tick up. But are any of these price hikes sustainable?
Typically, the answer is “no.” A continual stream of better-smaller-faster components exerts downward price pressure on older-generation products. However, one research firm suggests that a lack of competition in some component markets could stabilize pricing.
M&A has played a leading role in the chip market with suppliers such as Microchip/Atmel, Micrel, NXP/Freescale, Avago/Broadcom and ON/Fairchild raising prices on acquired lines. A lack of competition in other markets has also helped suppliers pass through some price increases. Commodity and low-end semiconductors are seeing pockets of pricing increases from several suppliers, the firm said, and pricing in higher-performance analog and MCUs continues to track higher. There are also instances of price increases from discrete and passive component makers.
Research firm IC Insights has significantly upgraded its 2017 semiconductor sales forecast to 16 percent from 5 percent in January. IC Insights predicts “exceptional growth” in the DRAM and NAND flash memory markets: DRAM is forecast to grow 55 percent and the NAND flash market is now expected to rise 35 percent this year. In both cases, growth is almost entirely due to fast-rising prices rather than unit shipments, IC Insights said. Excluding these two markets, the overall IC market growth is forecast to grow just 6 percent year-over-year.
"I don't know if prices are actually going up as an industry that dramatically," said Brian Matas, vice president of market research for IC Insights. "ASPs are going up and that is giving a big boost to NAND and DRAM, and there are some automotive-specific, analog and some logic products [seeing that] as well. But sometimes you get a hot end-use application and that tends to drive component prices up. Those products perform well for a couple of years and then begin to peter out. IoT was like that--it was expected that prices would increase but that hasn't materialized to the extent it was expected."
Price increases are extending way beyond the electronics market. The Institute for Supply Management’s raw materials price index increased by 7 percentage points in July, significantly outpacing June’s growth rate. This is the 17th consecutive month of price increases, according to the ISM.
To some extent, suppliers are making up for lost ground, according to Tim Fiore, chair of the ISM’s Manufacturing Business Survey Committee. The July price index, which registered 62 percent, slightly exceeded May’s level of 60.5. (Any number above 50 indicates expansion.)
The ISM’s Business Survey Committee noted price increases in many areas, including metals (steel, aluminum, non-ferrous metals, precious metals); food products, including corn and wheat; electronic components; lumber and wood products; and chemicals, including several types of plastic resins. Electronic components made the ISM’s list of commodities up in price and supply shortages were reported in capacitors, integrated circuits, mechanical components, memory and resistors.
To date there’s been no indication that manufacturers of finished goods are suffering because of price hikes, Fiore said. Companies are reporting record sales and earnings figures for the second calendar quarter of 2017. The worldwide GDP forecast – which was upgraded by 0.1 point to 2.7 percent – also helps. IC Insights believes that through its forecast period, annual IC market growth rates will closely track with the performance of worldwide GDP growth.
Overall, IC Insights’ global economic outlook remains on course with its initial projections. Electronic system production, capital spending as a percent of sales and IC wafer capacity added were unchanged from the original outlook. However, other factors and conditions that contribute to the forecast were upgraded slightly. The worldwide GDP forecast was upgraded by 0.1 point to 2.7 percent for 2017, marginally ahead of what is considered to be the global recession threshold of 2.5 percent growth.
China’s 2017 GDP was raised to 6.8 percent for 2017 from the original forecast of 6.3 percent. Also, IC Insights upgraded its U.S GDP forecast to 2.1 percent from 2.0 percent in January. “While the U.S. economy is far from perfect, it is currently one of the most significant positive driving forces in the worldwide economy,” the firm said in a release. “A falling unemployment rate, PMI figures of 57.0 and 55.8 in the first and second quarters of this year, and relatively low oil prices should help the U.S. economy sustain its modest growth in the second half of this year.”
The chip market’s anticipated 16 percent increase would be the first double-digit gain for the IC market since it expanded by 33 percent in 2010, according to IC Insights, and the fifth double-digit increase for the IC market since 2000. DRAM has had the most notable impact on total IC market growth in recent years. With surges of 32 percent and 34 percent in 2013 and 2014, respectively, the DRAM market alone boosted the worldwide IC market growth rate by three percentage points in 2013 and four percentage points in 2014. At $64.2 billion, IC Insights forecasts DRAM market to be by far the largest single product category in the IC industry in 2017, exceeding the expected second-ranked MPU market for standard PCs and servers ($47.1 billion) by $17.1 billion this year.
And pricing trends remain firmly in suppliers’ favor, researchers conclude. Higher end analog suppliers are likely to continue to win share and have pricing/margin power over the industry over the long‐term. Semiconductor industry consolidation and changes in the distribution sales model have left end customers with fewer supplier options and fewer qualified design resources. At least four suppliers are adding capacity in the second half of 2017 because of the near‐term upside; other suppliers are expected to follow suit.
At some point, though, supply will again catch up to demand. "DRAM and NAND suppliers are certainly enjoying the price hikes for as long as they last," said Matas.