How the Supply Chain Developed an IP&E Shortage

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. Engineers are trying to find work-arounds for components that are facing 40-week lead times. AspenCore Media’s Special Projects team is taking a deep dive into everything IP&E: What end markets are gobbling up components? Why isn’t capacity being added? Where are prices going? And how did we get here? (The full report is available at the end of this article.)

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.

The ghosts of shortages past – specifically, the inventory glut of 2001—are haunting manufacturers of interconnect, passive and electromechanical (IP&E) components. Even with a severe global shortage of these parts, manufacturers are adding only minimal production capacity. The electronics supply chain has learned a lot since 2001, but somehow it ended up with another supply imbalance.

“The multi-layer ceramic capacitor (MLCC) shortage is the most severe,” according to Stifel’s July 16, 2018 Industry Update, “with many parts on allocation, which is causing headaches for the rest of the supply chain. We heard that some suppliers of parts with normal lead times are seeing order-rescheduling requests from customers waiting on MLCCs or other parts.”

Components that in some cases cost less than a penny threaten to halt global manufacturing lines. So why are these “jellybean” components causing agita across the globe?

The simplest explanation is more of these components are going into end-products than ever before. Items such as cell phones use twice as many IP&E products than they did a few years ago. Products such as the iPhone, which used to have about 120 components, now use more than 1,000.

“We see high demand pulling more units into the marketplace; we also have a backdrop of products becoming more technical,” said Andy King, president of Arrow Electronics Inc.’s global components business. “It would be a struggle to find a vertical market that isn’t growing. There’s automotive, data, industrial, IoT, medical and anything ‘smart’.”

High-end automobiles will contain as much as $6,000 worth of electronics by 2020, according to IHS Markit. Demand for automotive semiconductors will rise more than seven percent through 2022 and outpace the 4.5 percent growth of automotive electronic systems in general.

Ramp-up reluctance

Despite this surge in demand, manufacturers of IP&E products are conservative about adding manufacturing capacity. During the dotcom boom of the late 1990s, demand surged for electronics components and suppliers ramped up manufacturing. The market hit the brakes in 2000-2001, leaving suppliers, distributors and customers with billions of dollars’ worth of unused inventory. This caused prices to crash; had OEMs and EMS providers pushing excess off on one another; glutted the authorized distribution channel; and greatly augmented the gray market.

AVX Corp., a leading manufacturer of capacitors, began capacity expansion in mid-2017. “We were doing that strictly to increase capability in several of our product groups, one in the MLCC and also in our tantalum/polymer area,” said John Sarvis, AVX CEO, on its FY 2019 Q1 analyst conference call. “And then we had planned roughly around 20 percent increase going forward into 2020.” However, he explained, manufacturing equipment suppliers are quoting long lead times to customers, limiting their ability to expand.

As capacity begins to come online at the end of this calendar year and into 2019, the industry may see a softening of demand, but not to the degree of easing the constraint, Sarvis added. “These capacity increase are lagging 18 months behind the demand. For example, from 2010 to 2015 the piece count in MLCC’s grew 5 percent to 7 percent annually. In 2016 and 2017, the piece count grew 12 percent to 17 percent depending upon the case size. If demand continues to grow and it has over the last few years, we’re looking at supply constraints for some time to come.”

Ring in the new technologies

At the same time, said Michael Knight, president of TTI Inc.’s Semiconductor Group, much of this capacity is dedicated to new technologies.

“[IP&E component makers] are adding capacity for the business of the future — not for legacy products,” he said. Some legacy devices have been around for 20 to 30 years, and IP&E products don’t make the technological leaps common to semiconductors. IP&E manufacturers typically don't set aside capital for new manufacturing capacity.

“If you have limited capital to invest in expansion, do you invest that in a product whose days are numbered, or do you put it in next-generation products?” Knight added.

Andy King, president, Arrow global components

“I’m not sure adding capacity now will make much of a difference,” said Arrow’s King. “[IP&E suppliers] haven’t brought a new MLCC fab up in years. There is limited capital to invest, and from what I have read [MLCC manufacturers] weren’t making a lot of money anyway. We have demand acceleration; we have twice as many MLCCs in a product than in the previous version; and some suppliers have realigned what products they will be in and not be in. “

Market analysts have called out Murata for declaring multiple product lines as end of life, essentially forcing customers to buy their new products. “As Japanese MLCC makers including Murata have begun to convert their capacity for general-type MLCCs to automotive MLCCs since 2017, the MLCC shortage (especially general-type MLCCs) is intensifying and the price is spiking as a result,” reported SeekingAlpha.

The 80-20 rule

To some extent, designers and engineers have contributed to the shortfall. IP&E components make up about 80 percent of a circuit board design. Designers have largely left that 80 percent alone as they introduce new versions of their products; focusing on the 20 percent that provides differentiation.

“It makes sense that engineers would reuse a bill of material for their next design,” said TTI’s Knight. “IP&E parts are readily available and used across many products. They’ve consistently reduced cost over time. You’d be crazy not to take advantage of that.”

“What many people haven’t realized are the underlying economics of the supply chain,” Knight continued. “We’ve gotten to the point that all this slack has been taken up by an improving market. We’ve gotten to the point where we’ve run out of capacity and prices are going up.”

MLCC prices increased more than 20 percent in 2017; according to SeekingAlpha, and price strength will continue into 2019.

To buy or not to buy

Inventory continues to be a hot button in the electronics supply chain. Component makers prefer not to manage the bulk of their inventory, leaving most of that work to distributors. Publicly traded distributors tend to keep a tight rein on their component supplies as market analysts frown on inventory build-up.

Distributors have been applying the lessons learned since 2001 for component allocation. Resellers keep track of their customers’ historic consumption to flag any anomalies. During the dotcom bubble, customers double ordered — placing the same order with two distributors, or with a distributor and a component supplier. Double ordering made the inventory glut worse when the bubble burst in 2000.

“We see what our customers are holding and match output to demand,” said Arrow’s King. “We aren’t building inventory where we don’t need it, and we have considerable breadth across geographies, customers and end markets.”

Michael Knight, president of TTI Semiconductor Group

Privately-held distributors have more flexibility when it comes to inventory build-up. TTI and Future Electronics traditionally hold high levels of stock and invested before the uptick, executives said.

“I think it comes down to whether you have the luxury of taking the long-term view,” said TTI’s Knight. “We do, and we like what we see. There is zero doubt that that the electronic content in products is only going to increase. Even in a down cycle, TTI has been able to invest in inventory, warehousing and head count.”

In addition to IP&E devices, the discrete semiconductor supply situation is also of concern with MOSFETs, diodes and transistors in popular package types being increasingly constrained, said Future Electronics in a release.

“Maintaining customers’ continuity of supply remains the top priority of Future Electronics. We are proud to be the leading capacitor distributor in the world,” said Jacques Hing, vice-president, worldwide, capacitors at Future.

In spite of the ongoing challenges, the current market has been very good for component makers and their distributors. Arrow's Q2 2018 sales increased by 15 percent. “Arrow is adding customers at unprecedented rates,” said King. “Products are consuming more technology and manufacturers are, in turn, selling them into untraditional markets.”

The only limit to future growth could be a dearth of components. Communication with customers, executives say, is essential. “I think customers are waking up to this new reality and are looking for partners to help guide them,” concluded King.

Related articles: