There’s no short-term relief ahead for electronics manufacturers that are scrambling for components. Tight supplies of capacitors and resistors are expected to last into mid-2018—longer than industry experts expected. The dreaded words “allocation” and “double-ordering” are coming up more frequently, meaning OEMs and EMS providers are facing long-term sourcing challenges.
Thick- and thin-film chip resistor lead times are out as far as 52 weeks, according to an industry update from Stifel; in general, passives suppliers are quoting 20-week lead times. There is a particular shortage of automotive-grade parts, the analyst said, which is sending Tier-1 auto subcontractors scrambling for supply. “Lead times [for passives] are not getting better; in fact, we expect them to get worse, even going into next Spring,” said Michael Knight, senior vice president, Americas, for IP&E specialty distributor TTI Inc.
Lead time data published by one global distributor shows that roughly 50 percent of the passive-component products it sells (capacitors, resistors, inductors) saw lead times increase in Q3; it saw lead times extend on 63 percent of its discrete-semiconductor product offerings, and on 70 percent of the memory products it sells. And according to TTI, 22 percent of capacitors are "highly constrained," meaning lead times of greater than 26 weeks, primarily on multi-layer ceramic capacitors, some aluminum electrolytic and some polymer capacitors. Resistor lead times (thick and thin-film chip resistor) are out as much as 52 weeks-plus for many suppliers. The distributor is also seeing constraints for discrete semis, especially power semis.
It’s been about a decade since the industry faced serious allocation. During the dotcom boom of the late 1990s demand for electronic components went through the roof. When that market bottomed out, the electronics supply chain was left with $13 billion of excess semiconductor inventory in 2001. The supply chain has undergone massive realignment in the years since.
Some things haven’t changed, though: when supplies are tight, big and strategic customers move to the front of the line. Some suppliers are turning new business away and even longtime customers are somewhat constrained: manufacturers are receiving order volumes in line with their historic demand. There is ample evidence of "double ordering," according to Stifel: Large EMS companies and OEMs that typically buy directly from suppliers are now reaching out to distributors and brokers. However, there appears to be little inventory building as supply continues to be tight.
Component suppliers typically ramp up capacity when shortages hit; however, that’s not happening in 2017—at least on a wide scale. Some resistor and capacitor manufacturers were planning to add capacity late this year and into 2018. But that’s unlikely to alleviate pressure on lead times, according to Stifel. Moreover, some suppliers are using this opportunity to discontinue product lines that have not been profitable. “Strategically, in this cycle we are seeing suppliers using the opportunity to back out of products where the margins have not been acceptable,” according to an industry executive. “Suppliers have been under constant pressure to take costs out of manufacturing, but eventually those efforts hit a wall,” the executive said. Component makers are using existing capacity to turn out newer, more profitable products.
Component prices have largely remained stable, according to Stifel, with a few exceptions. Several Japanese capacitor suppliers have raised prices as has U.S.-based Kemet. Other suppliers, such as AVX and Vishay, have been more restrained. Industry experts aren’t expecting widespread price hikes -- customers have become accustomed to paying low prices, they said.
That's not the case for DRAM, though: market research firm IC Insights expects a whopping 77 percent increase in the DRAM ASP, which is forecast to propel the DRAM market to 74 percent growth this year. After including a 44 percent expected surge in the NAND flash market in 2017, including a 38 percent increase in NAND flash ASP this year, the total memory market is forecast to jump by 58 percent in 2017.
The upside for component makers and distributors will be in their quarterly results. “We believe underlying demand remains stable to better across most end markets, particularly automotive [on content], broader industrial, and military/aerospace, offset by continued softness in telecom infrastructure and mixed data points in datacom,” Stifel reported. “By region, suppliers point to Asia as strongest, followed by Europe and North America. In most cases, lead times on connectors and analog semiconductors remain within normal ranges, though we did pick up signs of certain analog semiconductor lead times stretching modestly. However, lead times continue to stretch on certain discrete semis, capacitors and resistors, with some parts on allocation."
Due to the better demand/order environment, as well as modest currency tailwinds for companies with exposure to Europe, Stifel is raising its September-quarter estimates to the high-end or above high-end of guidance on AVX, Kemet and Vishay, where lead times are most extended; on component supplier Littelfuse, which derives 50 percent of revenue from electronics, primarily in the distribution channel; and on component distributors Avnet, which had guided core sales toward the low end of seasonality, and Arrow.
Chip manufacturers will benefit as well: IC Insights has raised its IC market growth rate forecast for 2017 to 22 percent, up six percentage points from the 16 percent increase shown in its mid-year update. The IC unit volume shipment growth rate forecast has been increased from 11 percent in mid-year to 14 percent currently. The research firm has also increased its forecast for the optoelectronics, sensor/actuator, and discretes market. In total, the semiconductor industry is now expected to register a 20 percent increase this year, up five percentage points from the 15 percent growth rate forecast in mid-year.
Bullish estimates are likely to continue as long as suppliers and distributors can deliver products to customers. Distributors such as TTI, which maintains relatively high levels of inventory, are well positioned. “We’ve been getting ready for this since the middle of last year,” said Knight. “The supply chain [since 2001] has learned a lot and I’m impressed with how well our suppliers are dealing with [demand.] We are just starting to see some minor double booking, but distributors and suppliers have been looking for that and are dealing with it as it comes up. I don’t think we are as in much danger of false backlog, big cancelations and big plies of inventory on the backside of this as we’ve been in past cycles.”