Increased component prices are inevitable when demand outstrips supply. But the electronics supply chain is being hammered on all sides – from materials to logistics -- with rising costs. As one freight expert put it: “In 2020 and 2021, global logistics just can’t seem to catch a break.”
For months, the Institute for Supply Management has reported dozens of commodities in short supply and/or up in price. In June, prices of aluminum, copper, electronic components/assemblies, epoxy, packaging materials, plastics, resins, PVC, semiconductors and steel were higher than in May. Copper and aluminum have been on the increased-price list for 13 weeks, and semiconductors are expected to be scarce through 2023.
Chip prices have increased between 10 percent and 40 percent, according to industry sources. “Availability is king,” said Josh Pucci, vice president of sales for distributor Sourceability, “and some suppliers that are holding inventory are using that leverage to drive up cost.”
Market intelligence platform Supplyframe, in its Q3 Commodity Intelligence Quarterly, reported component price hikes as high as 40 percent compared with the prior quarter. Chip supplies were caught short in January when demand unexpectedly bounced back following the Covid-19 pandemic. More recently, semiconductor production and testing have been hampered by a water shortage and Covid-19 outbreaks in Taiwan where half of the world’s semiconductors are manufactured, Supplyframe reported.
Price hikes are not limited to semiconductors. “Component costs have increased on average 10 percent to 15 percent this past year, with certain products costing as much as 40 percent more than a year ago,” said Peggy Carrieres, Avnet Inc. vice president of global sales enablement and supplier development.
“Component ASP changes are being driven by increases in manufacturer input costs, labor costs, and logistics costs to move products around the world. While we will continue partnering with our global customers to mitigate impact where possible, the real costs to produce components have increased and consumer demand continues to outpace global supply,” she said.
It starts with materials
Overall, materials and services prices paid by U.S. manufacturers in June reached a record high with an index of 92.1 from May’s level of 88.0, according to the Institute for Supply Management. Any number above 50 indicates growth.
“Record-long raw-material lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy,” said Tim Fiore, chair of the ISM’s manufacturing survey committee. “Worker absenteeism, short-term shutdowns due to parts shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.”
Materials, like many segments, is suffering from a Covid-related labor shortage combined with disruptive events such as factory fires, weather and shipment delays. The semiconductor supply chain has been feeling the materials pinch since a substrate factory fire in late 2020. This has only exacerbated the chip shortage.
These increases are likely temporary, experts said, as factories repair damages. Wages are a different story, said Fiore. Manufacturing is struggling with a labor shortage and once salaries increase they are not easily reversed. Covid-19 continues to impact the labor market as employees remain absent or don’t return to work.
Malaysia’s Covid-related lockdown is expected to impact interconnect, passive and electromechanical component prices. The high-end MLCC segment is expected to suffer the most severe shortage, according to research firm TrendForce. Products that feature high-end MLCCs, such as smartphones, notebooks, networking products, servers and 5G base station components will likely experience a corresponding impact as well.
Buyers have no problem paying top dollar for the products they need, according to Fiore. Hoarding has become evident in a number of commodities and has been common in electronic components. Authorized channels for electronics parts track their customers’ order history and flag any unusual upside. Non-authorized channels, which include hybrid and independent distributors, fulfill many spot orders in addition to serving regular customers. Unless orders can be cross-checked among component suppliers (that sell direct) and the channels, customers can place the same order with multiple vendors.
Authorized and non-authorized distributors report they are shipping products as soon as they can get them. The authorized channel in Q1 reported no signs of over-ordering or unusual cancellations.
No break for logistics
The most dramatic increases, and the biggest problems, are coming from logistics services. As of July 21, Asia-U.S. West Coast ocean freight rates were up 10 percent to $10k/FEU – 138 percent higher than the same period last year, according to cargo marketplace Freightos. Asia-U.S. East Coast rates increased 2 percent to $10,567/FEU and are 215 percent higher than last year’s rates.
The industry is recovering from a closure at the port of Yantian, but fire and floods are disrupting inland logistics in Canada and Europe; civil unrest is affecting terminals in South Africa; and Covid outbreaks in Southeast Asia are impacting manufacturing and freight in Vietnam and elsewhere, according to Freightos. In the U.S., existing backlogs caused by year-long peak volumes continue to be a challenge: the Union Pacific Railroad announced a one-week suspension of service from West Coast ports to its inland rail hub in Chicago to allow time to address congestion.
Ocean cargo services have been adding surcharges as they re-route shipments to lesser-used ports. To expedite deliveries, many electronics companies are using air freight.
“The cost of ocean freight is up significantly, and all of those organizations are backlogged, as well, so from both a cost and timing perspective it’s a difficult proposition right now,” said Sourceability’s Pucci. “Air freight is essentially the only current option, but with reduced commercial flights that pricing has also increased while speed has decreased. Logistics are just really challenging across the board right now.”
“Globally there have been decreases in capacity in both air and ocean freight which drives increased cost,” said Doug Adams, Avnet senior vice president of global logistics. “There are also challenges around the increasing trend associated with the Paper Pulp index, which drives up the price of corrugated boxes. We continue to work with our packaging providers worldwide to identify inventive ways to neutralize the impact.”
Passing cost increases on to customers is tricky in the electronics supply chain. Supplier-based price hikes are visible to customers and usually well-tolerated. “Avnet has tried to mitigate customer impact where possible,” said Carrieres, “but has notified customers that we have had to pass some costs along.” The distributor has worked with logistics partners to increase visibility within its overall network, Adams added, which has helped decrease the impact to Avnet and its customer base.
Sourceability is not passing increases in freight costs on to customers, said Pucci. “We are also not passing along overtime costs – which have increased due to the larger than normal volume of orders –along to our customers. As a distributor our resale prices are in direct relation to our costs, so those have increased for both us and our customers, but we do not pass along logistics costs.”
Supply chain partners negotiate favorable pricing based on the volume of business they conduct. Therefore, there is some flexibility in regard to overall costs. But there appears to be little relief in sight for the electronics supply chain. Intel Corp., one of the world’s largest chip makers, blamed supply shortages for limiting its growth opportunities. CEO Pat Gelsinger, during Intel’s Q2 earning call, said shortages will bottom out in the second half of the year but "it will take another one to two years before the industry is able to completely catch up with demand."
Across the board, semiconductor manufacturers, major outsourced fab providers and component suppliers are generally raising prices for downstream manufacturing customers in different industries, including automotive, medical devices, industrial equipment, consumer electronics and others, said Richard Barnett, CMO for Supplyframe. "We have seen price increases in key subcommodities move from 10 percent up to 40 percent in some cases, year over year. "
"Downstream manufacturers are now faced with decisions on how much price increases their target markets will absorb, competitive dynamics, as well as target margin pressures," he added. "We believe that these challenges will generally continue through early 2023.”