Component shortages are not just about increased demand. Any number of factors – production capacity, supply chain disruptions, obsolescence and technology migration – can contribute to product scarcity. For 2017 and 2018, supplier merger and acquisition (M&A) activity can be added to the causation list.
Semiconductor and tech mergers reached an all-time high in 2016 and formed some massive companies. These deals were viewed favorably by the market, but they’ve had a detrimental effect on the supply chain. Overlapping products are consolidated after a merger and low-margin lines are likely to be axed. Combined with a widespread uptick in demand, the electronics supply chain’s been caught with a dearth of inventory.
The current component shortage is now expected to last through 2018. Passives lead-times are stretching to 30-plus weeks, according to one research firm, with some orders quoted for delivery into mid‐2019. That’s a long time for buyers to live hand-to-mouth. A few IP&E suppliers are adding to their production capacity-- Kemet, among others -- by about 15 percent, the research firm said. In the meantime, everyone’s keeping an eye out for double-ordering.
“In general, we’re seeing the same behaviors that we’ve experienced during other constraint cycles,” said Chuck Delph, president of Electronics Marketing for Avnet Inc. “The one difference is that although there have been some price increases by the suppliers, they haven’t been as pervasive as in previous cycles. We haven’t experienced any supplier push back on our demand, and we continue to work closely with our supplier partners to support our customers’ needs during this constrained period.”
Component demand is up thanks to the IoT explosion and growth in the automotive, mobile and industrial markets. But the impact of M&A can’t be understated. When two suppliers with common product portfolios merge, the vendor base for those devices is reduced by one. Mature lines are phased out in favor of newer and more profitable products. End-of-life notices from suppliers have accelerated within the past year, according to distribution sources. This leads to a “bunker mentality” within procurement departments that double and even triple orders to shore up supply.
“What’s tended to happen is cycle times are shorter and suppliers try to recoup their investment more quickly," said Paul Romano, COO for independent distributor Fusion Worldwide. "They try to get away from the parts that are not making money. The shortages we are seeing are parts that have been around 15 or 20 years as suppliers push toward higher margin products. In the end original component makers (OCMs) want to satisfy all demand but they don’t want to get into a situation where they expand and the market contracts. At some point, we all know this cycle is going to end. The question is how do we manage a cycle that seems open-ended.”
In the chip industry, mergers have created mega-suppliers with considerable clout. The market is beginning to see price increases for the first time in years. Buyers are anxious to book their business before prices go up. "Our research suggests broad based semi suppliers will continue to win share and will likely have pricing/margin power over the industry over the long‐term," according to one market research firm. "In our research the semi industry consolidation and changes in the distribution sales model have left end customers fewer supplier options and fewer qualified design resources. We believe these industry changes combined with shorter product cycles and increased design complexity (more content/capabilities) heavily favors the suppliers that can provide a full solution. We see these suppliers as positioned well to continue to boost prices/margins through channel sales and gain share of analog content through their superior scale."
Tech migration and capacity
Technology migration, particularly within the already-volatile memory market, has a domino effect on availability, said Romano. “There’s a shift in flash from 2D to 3D technology and flash is the key component in SSDs. That shift is driving shortages in both SSDs and flash memory and is continuing. That, in turn, has put pressure on mature technologies such as DRAM. DIMM modules for servers are in short supply and the cloud has driven demand for server production.”
Moreover, major players have been disciplined with their capital investments, according to Forbes. Estimated DRAM capital expenditures for 2017 will grow by 24 percent year-over-year, well below their 2015 peak, despite the fact that prices have been trending up significantly. Companies are focusing their investments on technology transitions rather than outright capacity expansions. This could keep DRAM supply in check in the near term, potentially boding well for pricing. For instance, Micron expects DRAM supply growth to remain around 15 percent to 20 percent, with DRAM demand growth ranging from between 20 percent to 25 percent, Forbes reported.
“With lead times still extended across standard semiconductor products, including passives and memory, the commodity space seems to be the most volatile," said Avnet's Delph. "Although we have seen some extended lead times for certain SKUs in the high-technology semiconductor families, with all these factors in play, we continue to see strong backlog that supports increased visibility to the lead times. Cancellation rates have stayed about the same in light of these extended lead times.”
Component makers are now faced with some difficult decisions about capacity. Adding capacity is expensive; but not adding capacity could mean lost sales. It takes awhile for capacity to catch up to demand and expansion requires a significant investment in time and equipment, Romano said. "We're now seeing shortages across a wide range of products -- in passives, MLCCs and tantalum; and some resistors and diodes." The industry's largest DRAM supplier Samsung is considering increasing its DRAM output even as it adds capacity for newer technologies.
"In my experience it takes six to 12 months to bump up fab capacity and get back to balanced supply and demand," said Damon Puoya, COO for hybrid distributor Chip 1 Exchange. "Then there's a six to 12 month cycle where you see supply starting to build because demand starts slowing, and it takes time to react to that."
Buyers also face tough choices. Suppliers and distributors are allocating products, using customers’ buying history as a baseline. "I am aware that customers want more inventory than they have – call it just-in-time versus just-in-case," said Arrow Electronics Inc. CEO Mike Long on a conference call. "We are looking for anomalies and we have not seen any hard stops in products. Products are still flowing and this day in age customers are pretty well covered.”
In past allocation cycles buyers have turned to the open market, populated by independent distributors that generally do not carry authorized lines. The authorized supply chain maintains buyers have a high risk of procuring counterfeits in the open market.
Many independents have worked to distinguish themselves from less scrupulous sources. Some, such as Chip 1 Exchange, have added franchised lines to their offerings to demonstrate adherence to quality control and anti-counterfeiting practices. “We think we can better service our customers if we remain independent,” Fusion's Romano said. Both companies are audited by customers; adhere to ISO, IDEA and ERAI standards; and have a full range of test capabilities in-house. “Our customers put a lot of demand on us and that’s good because it helps us develop partnerships with them and so they can take more ownership of the [sourcing] process,” said Romano. Fusion provides tools that allow customers to view and track their orders, among other functions.
Fusion’s growth is coming more from established customers than from new accounts, Romano said. “We’ve built relationships with customers,” he said. “We provide more value than just filling in shortfall. There is cost savings, inventory management -- we have customers that have audited us and worked with us. It makes the transition through these [scarcity] periods that much easier.”