Editor's note: The most ubiquitous components in any electronics design – interconnects, passives and electromechanical (IP&E) devices – are in the midst of an unprecedented supply shortage. What distinguishes this scarcity from others is the broad base of markets that are desperate for IP&E.
OEMs are facing idle production lines while they wait for devices that cost less than a nickel. AspenCore Media’s Special Projects team is taking a deep dive into IP&E: What end markets are gobbling up components? Why isn’t capacity being added? What can designers do to work around the shortage?
Finally, we’ve interviewed IP&E market leaders to find out how they’re meeting customers’ needs, and what the supply chain can expect from interconnect, passive and EM technologies in the future.
This year, the interconnect, passives and electromechanical (IP&E) industry hit an inflection point. New and growing markets, including automotive, smart phones, telecommunications equipment and industrial applications, are pushing demand for many types of resistors and capacitors well beyond what vendors can comfortably supply. Looking ahead, this seems like a long-term trend rather than a blip on the radar.
“One of the most significant factors we were confronted with is the current global supply chain constraints associated with the procurement of certain electronic components,” said Audra Gavelis, director, marketing and investor relations for contract manufacturer IEC Electronics in a recent earnings conference call. “While this challenge is not specific to IEC, it’s impacting our overall industry, with certain components becoming difficult to procure, having excessive lead times or on allocation due to limited global supplies.”
Multilayer ceramic capacitors (MLCCs), especially larger case sizes and higher values, are among the hardest hit by shortages. “The number that continues to go around for lead times on MLCCs is 40+ weeks because no one wants to say that it’s really a year,” said Todd Snow, vice president of Global Project Development at independent distributor Smith & Associates. “We are hearing it’s going to likely last into 2019 with lead times reaching 40 weeks or more in most cases.” Tantalum capacitors and thick-film resistors are also in particularly short supply.
Lead times are plaguing suppliers and distributors alike. “There is some stretching of lead times across the portfolio and extended lead times have not shortened for discrete, standard logic, embedded and passives,” said Michael Long, chairman, president, and chief executive officer of global distributor Arrow Electronics Inc. Orders continue to be strong: Arrow’s book-to-bill was 1.08 for the second quarter, still above parity, but down from the 1.14 in the second quarter of 2017.
Global competitor Avnet Inc., meanwhile, reports current book to bill at similar levels in its August earnings announcement. “Book to bill is excellent across all regions,” said William Amelio, CEO of Avnet. “We're above 1.1 in every region and it continues [to show] good strength.”
Component makers expect demand trends to continue. John Sarvis, president and CEO at capacitor manufacturer AVX said about its 4th quarter results:
[Q4 reflects] continued strong bookings and since the bookings have been strong during the past few quarters, our core product delivery lead times remain extended. Although additional manufacturing capacity continues to come online, delivery lead times will remain at extended levels for the next several quarters. Orders will eventually slow, while shipments should continue to increase in line with the end market activity and the backlog will gradually reduce to levels that are more normal.
Order activity is being driven in part by the newest designs created by some of the world’s largest OEMs. “These companies, and especially smart phone manufacturers, are driving demand,” said David Valletta, executive vice president of worldwide sales for Vishay Intertechnology. “Newer modules use an ever-larger number of passive components.”
There’s also a technology transition occurring in the IP&E market. Some Japanese component makers have decided to stop making some ceramic capacitor products, said Per Loof, CEO of Kemet. Meanwhile, raw materials costs for passive components are on the rise, making manufacturing more difficult and more expensive, added Smith’s Snow.
How Technology Can Help
Information technology and services have the potential to help those searching for scarce products act a little more proactively. “Fundamentally, every one of our customers in the market who are being affected by the current situation are of the opinion that they could have done things much earlier to get supply and lock in pricing if they had had the right technology,” said Rajesh Kalidindi, CEO of LevaData, a predictive supply chain application provider.
Organizations largely want predictive information and actionable insights. For example, Resilinc recently launched a proactive capacity assessment tool in its service, said Bindiya Vakil, CEO and founder of Resilinc. “It’s important to be able to track current capacity that these suppliers have, alternate capacity that can support your business,” she added. “Using a supplier assessment, you can find out whether they have the ability to add shifts, how long it would take to ramp up in different scenarios, if your demand increases 25 percent or 50 percent, etc. We need to take a stance based on where demand is going and identify suppliers that will be roadblocks to meeting demand.”
Today, supply chain solutions often bring together internal structured data collected by various enterprise systems, as well as unstructured data collected online. “Our platform is already highlighting for customers that they have a discrepancy in pricing driven by availability,” said Bennett Gutmann, vice president of Customer Solutions/Engineering at LevaData. “Most vendors have publicly available plans that forecast markets and growth. The benefits of the predictive side of technology is that it takes, not only pricing and ordering history, but also mines unstructured data from suppliers.”
The advantages of clout
These big buyers are gobbling up inventory, sending smaller players scrambling for parts. “We are totally booked up for the next 12 months from customers who would usually have bought from high-volume commodity component guys,” said Valletta, adding that Vishay has made its name as a high reliability, high performance niche supplier. “Normally, our prices are higher, but price increases from the big commodity players have leveled the playing field.”
Interestingly, geography also plays a role in the current market. “Most of the current demand shortages are predominantly U.S. and U.K. manufacturers,” said Bindiya Vakil, CEO and founder of Resilinc, a supply chain risk management service. “Knowing which parts and raw materials are coming from these countries is the first step.”
Meanwhile, new capacity is ramping up in China. “New factories in China are expected to come on line by end of Q3 2018 with a primary focus on small size, large capacity, low-cost aluminum capacitors,” said Fusion Worldwide in its most recent Greensheet report. “We don’t expect any new manufacturers to enter the MLCC production space, however, due to technological hurdles and a limited supply base of materials and production equipment.”
Component makers are taking a wait and see approach to adding capacity for fear of creating a glut. “The industry is generally trying to be more careful on how we add capacity,” said Valletta. “Demand is increasing in a number of market segments and we expect that to continue, but certainly, we don’t want to put capacity past that. Historically, that has caused problems.”
Vishay is adding limited capacity, focusing on MLCCs. Like many manufacturers, the company is adding production equipment that can be staffed without huge investments, rather than building new factories.
The Dos and Don’ts of Shortage Buying
From a relationship standpoint, going to unknown vendors and sources during the crunch is a bad idea. “From a sourcing standpoint, if it seems too good to be true, it probably is,” said Kemet CEO Per Loof. “Stay away from unknown vendors who are likely to want cash in advance and offer unfavorable credit terms. If you decide to go that route, make sure you have a robust vetting process.”
Established vendors that keep a low profile are a better bet, experts said. “The little chip guys, like Yageo, are investing in higher priced, higher cost commodity products,” said Todd Snow, vice president of Global Project Development at independent distributor Smith & Associates. Also, buyers should take a more aggressive stance to get product.
“OEMs are looking further out than they typically would for supply assurance,” said Tobey Gonnerman, executive vice president for Fusion Worldwide. “With the extended lead times, this is a crucial step. We highly recommend looking beyond the immediate shortage they’re experiencing and taking a larger bite out of their problem. It’s a difficult reality as no one wants to pay a premium for parts they don’t need right away. But getting in front of future issues can significantly reduce the inevitable over-cost that rising prices would present.”
Redesign as last resort
As a last resort, some organizations are redesigning their products to use technologies that are easier to get. “For some, that’s possible, but for others, it’s more complicated and you can’t do it,” said Loof.
“The reluctance of customers to go back to the drawing board on the design side is a factor in the demand,” countered Snow. “They have decided to ride it out.”
Kemet, meanwhile, is taking a slightly more aggressive approach. “In some cases, we need to build or expand a plant and we are,” said Loof. “We are spending $70 million to $80 million this year in adding capacity.” In addition, the component maker is working on yields and machine efficiency rates, Loof said, adding that the company has enjoyed 10 consecutive quarters of growth. “And we expect September to grow over June.” The growth is really demand driven, he said. “The increases aren’t enormous in any segment but it’s in every segment.”
Decisions made by leading IP&E supplier Murata is impacting legacy products. The company is quoting 12 to 36 weeks for standard MLCCs, while some automotive SKUs are running 24 to 52 weeks, according to Fusion Worldwide. “Bigger case sizes, such as 1210/1206/1812 for 105/106/107/226 capacitance value are facing critical shortage,” Fusion Worldwide’s Greensheet. reported. “On top of that, Murata officially announced a number of parts updated with status ‘Not Recommended for New Design’ (NRND), as well as cost increases in line with market demand.”
Distributors, both independent or franchised, are evolving their procurement practices in an effort to get ahead of demand. “In a more balanced market environment, Fusion Worldwide has a ‘sell first, buy second’ approach,” said Tobey Gonnerman, executive vice president for Fusion. “Now that these components have taken on commodity characteristics, we have been quite aggressive in our efforts to capture supply.”
Relationships are everything
In times of allocation and shortages, relationships may be the difference between failure and success.
“The customers that fare the best are the ones who have solid loyal relationships with distributors and suppliers. When things get tight, that means something,” said Valletta.
At the same time, buyers who failed to honor their commitments are struggling now. “Some companies have not had issues with supply because they are open and communicative about what’s going on,” said Loof. “Others have played the game and been opportunistic in their buying strategies. Now, their chickens have come home to roost.”
Customers with solid planning strategies are better positioned to weather the shortages. “Those that lost track of the supply chain when times were good are struggling now,” said Valletta. “As the old saying goes, the time to dig your well is before you are thirsty.”
Big OEMs continue to have an advantage over those sourcing smaller quantities. “Big manufacturers have and always will flex their muscles,” said Snow. “They can purchase capacity and mothball it. They can pay more for products and get away with it. They’ll always have the ability to get products.”
Most of these customers have direct agreements with suppliers. Forecasting is critical, said Loof. “We have agreements with these customers and we have supply that is commensurate with demand. They give us a rolling forecast and we try to come up with that.” Smaller buyers should focus on building and maintaining relationships with their distributors, he added.
Although component vendors deny it, large customers have the potential to shake loose capacity that was earmarked for customers with less clout. “When these customers come calling, the manufacturers listen. In turn, bumping others down the priority list is an inevitable result,” said Gonnerman.
For emerging companies who weren’t around to build relationships or create forecasts, the independent distribution market may be their best recourse. “We put together a managed inventory type program,” said Snow. “We’ll buy and stage the product and submit it to customers. We provide ownership and visibility. They will have to pay a little bit of a premium.”
Looking to the future
Ultimately, though, shortages are likely to continue for the foreseeable future. That, in turn, is likely to impact pricing. “The rising labor costs in China and the stricter environmental control restrictions will cause prices to rise further, while preventing them from reducing to pre-2016 costs even after the shortage has ended,” predicted Fusion Worldwide in its Greensheet report.
“Trade tariffs are real, and that can make it more expensive to do business,” said Vakil. “In one or two earning cycles, we’ll begin to see an impact on profitability. This can cause companies to make different investment decisions and may drive demand as people make different plans. I’m concerned right now.”