A perfect storm of events have converged to create the semiconductor shortage of 2021. High-level collaboration across the electronics supply chain could make the deficit less painful, experts say.
Shortages often prompt less-than-optimum purchasing behaviors. Competitive bidding for inventory drives prices up. Exceptions to approved vendor lists become common. And double-ordering – where purchase orders are placed with two or more vendors – becomes a real concern.
When initial signals of shortages occur, said Ryan Crouch, SupplyFrame’s senior director, business development – e-commerce, “buyers also tend to increase weeks of buffer inventory to ensure they can keep production lines up, which tends to drive an overall lift within the electronic components space.”
These all exacerbate shortages. This one is expected to last until calendar Q3.
Chip makers and their distributors both guard against double ordering. If historic order patterns begin to inflate, vendors will reach out to customers. The challenge lies with the disparate customer bases served by suppliers and distributors. Chip makers cater to direct high-volume or strategic accounts. Distributors manage orders from thousands of smaller companies.
In the industrial market, for example, NXP told analysts in Q3 “we do not have the visibility into all of the thousands of end customers behind distribution. So, it's less easy to say what [distributors] possibly are restocking or not restocking.”
Limited visibility can worsen a shortage.
“You can’t just have visibility into your own demand,” said Syed Alam, semiconductor global lead and managing director for business consultancy Accenture. “You have to have an understanding of the entire landscape.”
So far, so good
So far, the industry’s largest global distributors, Arrow Electronics Inc. and Avnet Inc., have not seen evidence of double ordering. Distributors typically hold or manage most of the inventory in the electronics supply chain.
“I don't believe there's any buildup or exaggeration there,” Avnet CEO Phil Gallagher told analysts in January.
“Our percentage of backlog within the quarter sales has not increased. So, it would suggest that [there is] really not double ordering,” said Mike Long, CEO of Arrow, earlier this month.
Customers are placing their orders further out, said Long, giving distributors visibility beyond 90 days. In turn, suppliers are asking for that data so they can plan manufacturing.
“I believe the market is reacting well to that,” Long added. “And that can minimize a lot of the problems that are being talked about out there.”
However, there’s also a lot of buying and selling behind the scenes. Independent distributors, which fill gaps in OEM/EMS bills of material; buy and sell parts on the open market; and specialize in hard-to-find devices keep a close eye on shortages. Many provide regular market updates.
SupplyFrame, a market intelligence firm, reports a lot of movement in recent weeks.
“We are currently seeing the highest buyer intent activity in over 12 months,” said Crouch. “As an example, [early February] was the highest demand we've seen in over 12 months. While there are product specific areas that are 'hot spots' such as microcontrollers, microprocessors, ASICs and audio ICs, we are seeing activity increasing every week overall.”
What’s different this time
A unique factor in 2021 is the level of semiconductor demand from the automotive industry. Cars are using more electronics and EVs are beginning to materialize.
“For the past several decades, the automotive manufacturing industry has driven one of the leanest and most demanding supply chains in the world, especially for electronics,” explained David Loftus, ECIA CEO, in a statement. “Just-in-time manufacturing works great in a steady state environment. Unfortunately, with long lead-time items like semiconductors, when demand is volatile, as it has been in the past 12 months, the accompanying supply chain cannot react instantaneously.”
A spike in automotive demand, beginning in Q4, caught chip makers by surprise. Going forward, said Dale Ford, chief analyst for ECIA, all vertical markets should prepare for widespread competition for parts.
“Higher-volume consumer electronics products such as smartphones receive preference,” he explained. “The annual smartphone market has grown to over one billion devices compared with approximately 100 million cars. Automaking is also a lower-margin business. As a result, automakers are constrained in supporting higher chip prices as this impacts already low profit margins. Even though newer model cars increase the value of their semiconductor content, so do the latest advanced consumer products.”
Recognizing the potential impact of reduced allocation chip supplies to other markets, companies downstream should engage now with their suppliers to understand risks and develop contingency plans, Ford said.
Given the possibility of an ongoing supply challenge, electronics manufacturers need to identify possible design modifications and alternative supplier engagements that can provide solutions if supplies become unduly constrained, he added.
Automotive companies – relative newcomers to the electronics supply chian-- should consider hiring product experts in their procurement divisions, said Accenture’s Alam.
“They are procuring more electronics – starting with sensors and now semiconductors – and they should beef up their procurement departments by hiring experts,” he said. Auto companies should start to look more like high-tech organizations that assign commodity managers to categories of components.
Alam concurred with Ford--- all companies should source with an eye toward non-traditional competition. “Automotive companies aren’t used to competing with Apple or Samsung which consume high volumes of components,” Alam said.
However, some automotive-grade parts can’t be swapped for commercial devices and have dedicated production lines calibrated to specific quality and tolerance standards. Within foundries, “it takes time to qualify production lines,” said Alam. “Production can’t be switched from one line to another. This stretches lead times even more.”
To enhance supply chain visibility, partners should consider tier 2 or even tier 3 suppliers in their planning cycles. Chip makers are currently suffering from a substrate shortage tied to a factory fire toward the end of last year, Alam pointed out. “You may have visibility into your tier 1 suppliers, but it could be a tier 2 or tier 3 supplier that’s struggling. This often catches companies off-guard.”
That information should be shared with supply chain partners which may have alternative sources of products.
Where it all starts
Chip companies should reconsider their long-term approach to capex and capacity, market watchers say.
“Generally speaking, chip companies are building to demand and available capacity,” Alam said. “Demand for semiconductors is not going down. More applications are using more chips – for example, the chip industry was driven by PCs, then mobile and consumer products. Now there are automotive, AR/VR and the cloud. All of these applications will use chips. [The industry] should not consider this the shortage of 2021 – this could happen again, or it could last for a longer period of time.”
The U.S. government has expressed interest in onshore chip manufacturing, Ford said. “Watch government actions related to the technology sector and the North American manufacturing technology and infrastructure,” he said. “While there is hope that a new administration could find a new path forward with China, the discussions about a ‘bifurcation’ strategy recommended by top tech executives could create renewed concern in U.S.-China relations.”
The U.S. could take a page from China’s playbook and create a long-term strategic plan for restoring local manufacturing capability, including front- and back-end semiconductor production, he said. The need for government involvement could be promoted as a “national security” requirement.