The electronic component shortage is likely to get worse before it gets better. As a result, electronics prices are on track to rise this year – and it may not be until late 2023 before prices begin to fall.
Electronics manufacturers can prepare now to manage upcoming electronics price increases, continuing shortages and longer-than-average lead times on important electronic components and raw materials.
On average, electronic component prices rose by 5-40% in the past quarter. Lead times for these components have also increased. For example, microcontroller manufacturer Microchip has begun telling manufacturers to expect up to 50 weeks before order fulfillment. The company is also requiring new orders to be no cancel, no return (NCNR).
STMicroelectronics Asia Pacific has notified its distributors about price increases for all its product lines in the second quarter of 2022. NXP is expected to increase all product prices by 15 percent, effective July 14. Bookings are backlogged to 2023. And Intel is expected to increase its pricing by 7-10 percent across all server CPUs in Q4.
Chip supplier Infineon’s lead times have increased, from an average of 48 weeks to 60 weeks, and IP&E vendor Vishay Intertechnology’s lead times now extend beyond one year. These Q1 2022 price and lead time increases came after similar increases in Q4 2021.
Because semiconductor commitments from large manufacturers now extend beyond 52 weeks — and they’re paying top dollar — there is little incentive for chip suppliers to get lead times under control this year.
Additional price hikes on the horizon
During the summer, higher price tags may cause electronics prices to increase even more later this year. According to CNBC, the world’s biggest chip foundries, including TSMC, Samsung, and Intel, are considering price hikes due to inflation and the rising cost of chemicals and other raw materials. The price increases will help offset these costs, drive ongoing initiatives like reshoring, and help the foundries keep on target for growth this year.
Foundries have already increased their prices by 10-20 percent in the past year. However, due to the ongoing shortage of semiconductors, chip foundries have a great deal of freedom when it comes to pricing. When supply is limited, electronics manufacturers and other businesses that depend on semiconductors (like automakers) will take what they can get.
Many experts are unwilling to suggest when prices could return to normal or when the component shortages that have caused the price increases will end.
With a few exceptions, it’s likely that electronics and components prices will rise so long as manufacturers face uncertainty around labor, supply and logistics. It may not be until well into 2023 that electronic price increases begin to slow down.
How to prepare
Manufacturers should prepare now for future price increases, long lead times and ongoing supply chain challenges.
Over the next few years, if price and lead time increases become the norm, JIT (just-in-time) manufacturing may become less and less viable. Instead, manufacturers may need to adopt a “just-in-case” business model, holding onto excess stocks and finished products in anticipation of long lead times and supply chain disruptions.
An optimized warehouse or storage space layout can help manufacturers adapt to this change by maximizing storage utilization and reducing warehousing costs as other operational costs increase. Storage space optimization can also yield efficiency improvements that may help manufacturers cope with rising raw material and component prices.
Manufacturers may also adopt efficiency-boosting technologies they can use to increase revenue or decrease operating costs as a way to offset rising component prices.
Increasing automation via the adoption of robotics, robotic process automation, and artificial intelligence (AI), for example, can help manufacturers improve productivity without necessarily hiring new employees.
Communication with both suppliers and customers will also be essential as shortages and supply chain disruptions continue.
Regular communication with suppliers will help manufacturers prepare for rising lead times and stay aware of changing market conditions. Strong supplier-manufacturer relationships, which can encourage suppliers to invest in the success of their clients, can also help manufacturers secure more reliable sources of raw materials and components, helping offset some of the current market uncertainty.
Regular communication with customers will help manufacturers manage expectations – keeping customers informed about potential delays, price increases, and lead time growth can soften the impact of this news or at least ensure customers are not caught off-guard by changes to the manufacturer’s pricing due to price increases in the supply chain.
Adopting new technology, new communication strategies, and new pricing structures may be necessary for manufacturers to adapt to the changing components market.