Some electronics purchasers think the movement to 5G networks and handsets and a lack of extra capacity could result in another round of tight supply and higher prices next year – By James Carbone
Many electronics purchasers were relieved this year when component lead times, which shot past 50 weeks for some parts last year, retreated to more normal levels and prices declined because of oversupply and weakened demand compared to last year.
Supply conditions for buyers improved because chipmakers and other component manufacturers added capacity while end equipment and component demand dampened because of tariffs and the trade war with China and the overall slowdown in global economic growth.
“Almost across the board, product lead times are returning to traditional levels and many suppliers are also eyeing market-share gains becoming more competitive as it relates to pricing,” said Graham Scott, vice president of global procurement at electronics manufacturing services provider Jabil Circuit, based in St. Petersburg, Fla. “In addition, many of the pockets of inventory held at OEMs and manufacturers that typically build during a market transition have also been reduced, helping the supplier community improve their visibility into actual demand,” he said.
However, some component buyers in the EMS industry are concerned that longer lead times, component shortages, allocations and higher prices may return in 2020. They point out that while capacity was added over the last couple years, there is not a lot of excess capacity in place and they fear that sales declines that chipmakers and other component manufacturers suffered in 2019 will result in less capacity expansion in 2020.
In fact, integrated circuit (IC) sales will end 2019 declining a hefty 16 per cent from $421 billion in 2018 to $356.2 billion this year, according to researcher IC Insights. As a result, most semiconductor companies expect to reduce their capital spending next year, the researcher said. The good news for buyers is that the reduction in capex (capital expenditures) will not be across the board. Some semiconductor companies such as SK Hynix and Micron will reduce capex. Others such as Samsung, Intel and foundry TSMC will continue to make significant capital expenditures to boost capacity, according to IC Insights.
Some buyers say consolidation in the electronics industry, especially among semiconductor companies, contributed to the shortages in 2017 and 2018. Consolidation is still occurring, although not at the same rate as 2015-2017 and will result in a reduction of component industry investment in production.
With additional new capacity limited, a spike in demand for power ICs, memory chips, multilayer ceramic capacitors (MLCCs), chip resistors and other components, could result in short supply again of some components, especially in the second half of the year. Some buyers say an increase in demand could come as early as the second quarter of 2020.
Buyers note that the auto industry continues to build more vehicles with more sophisticated electronics that require a wide range of semiconductors, passives and connectors. In addition, 5G infrastructure is being built out worldwide and will result in strong demand for chips and passives. Once infrastructure is built, many consumers will upgrade from 4G LTE to 5G handsets, resulting in another round of higher component demand.
Possible shortages seen
EMS buyers point out while the supply scenario has improved since last year and most lead times have shrunk to near “normal” levels, there are still shortages of some components. If demand picks up in 2020, shortages will be exacerbated.
“Most of the parts have been coming down to near normal lead times, but we still seeing some spotty shortages,” said Stephanie Martin, senior vice president global supply for EMS provider Vexos, which has manufacturing in Canada, the U.S., China and Vietnam. “I would say right now your average lead time is about 14 weeks. Overall, it’s still a little high, but reasonable.”
Lead times for resistors and capacitors are in the 10- to 12-week range, she said. Last year, passives lead times averaged about 30 weeks for older larger case sizes. MLCCs had lead times of 52 weeks and there are still lead time issues with MLCCs in large case sizes. Those lead times are about 30 weeks, she said. There are also some long lead times for metal oxide semiconductor field effect transistors (MOSFETS) depending on the manufacturer, she said.
Martin said near normal lead times for parts may soon change because there are “signals out of China that the component market is tightening up again. We are seeing some manufacturers easing up prices and tightening inventory.” The tightening is occurring with several components including MLCCs. “It is not happening excessively, but enough that were flagging our team and telling them to look ahead on bigger case sizes and start getting those on order,” said Martin.
She said whether supply tightens “hinges on 5G technology.” She said her “gut feeling” was that 5G will impact supply early next year as more 5G infrastructure is put in place. Demand for components will rise significantly as carriers build out their 5G networks globally. “It’s going to put a strain on the components market again, ” said Martin. After 5G infrastructure is put in place, there will be a second wave of demand for components as consumers upgrade to 5G smart phones.
MLCCs could be a problem
If there is an increase in smart phone shipments, it will lead to tight supply of certain components such as MLCCs, said Scott. He noted that a smartphone produced today uses almost 1,200 multilayer ceramic capacitors (MLCCs), up from 500 in 2011.
“The current forecast calls for slightly less than 1.4 billion smartphones to ship worldwide in 2019. If shipments exceed expectations just slightly, rising to 1.5 billion units for example, this would represent a demand upside for MLCCs amounting to 120 billion units,” said Scott. Such an event could swiftly bring a return to the severely supply constrained conditions seen in recent years, he said.
Martin said 5G rollout will begin in earnest in the U.S in late 2020 and 2021, but China will ramp up 5G in the first quarter of 2020 and then Europe will roll out right after that. “Anything that needs a large number of components pieces is going to put a strain on the market because there just isn’t a lot of excess capacity out there,” she said.
“I would not be surprised if we saw tightening of supply around the end of Q1 and the beginning of Q2,” said Martin. “The question is how bad will it get? I don’t think it will be bad as the one we went through last year but I think we will have another round of spikes and shortages next year.” said Martin.
Besides 5G, there are other trends that could impact component supply. While the electronics industry would like to see an end to the trade war between the U.S. and China, a resolution would likely result in greater demand for equipment and components just as uncertainty caused by the trade dispute contributed to weakened market conditions.
“A quick resolution of the trade issues could lead to a quick acceleration in economic activity, less uncertainty among buyers and increased electronics purchasing activity,” said Scott. “This could help usher in a return to the high-demand, low-availability conditions seen in recent years.” Scott added that semiconductor industry consolidation contributed to tight supply in 2017 and 2018. Merger and acquisitions resulted in a high degree of concentration of market share among leading companies. The top 20 semiconductor suppliers now account for 74 per cent of the global chip market up from 64 per cent in 2015, he said.
Not over yet
Consolidation has reduced the number of suppliers participating in the electronic components market, cutting into the availability of parts and M&A activity is not over. For instance, this year Infineon acquired Cypress Semiconductor, NXP bought Marvell’s WiFi connectivity business, ON Semiconductor bought Quantenna and Nvidia’s acquired Mellanox. Consolidation will continue to reduce the industry’s investments into new production, leading to further supply constraints, said Scott.
Brian Matas, vice president of research for IC Insights, agrees that there will be supply constraints for certain semiconductors in 2020 because of heightened demand for chips by new generation smart phones, datacenter server applications and 5G equipment across all platforms but primarily computing, communication and the auto industry, he said
“NAND flash and DRAM manufacturers seem aware that another round of demand is looming for their devices,” he said. He noted memory IC makers have added capacity in recent years and they are expecting increased demand and “some tightness of supplies, certainly enough for prices to increase next year.” DRAM average selling prices will increase 12 percent and NAND flash average prices will rise 19 per cent in 2020, according to IC Insights.
Supply of NAND and DRAM could tighten as OEMs further transition to 5G-based systems” although the biggest ramp up of high-performing 5G will take place in 2021 and beyond, he said. “ We think 2020 will provide many 5G-capable systems that still will operate on 4G networks.”
There could also be some shortages of leading-edge logic and application processors that are built using processes based on 7nm or smaller technology although TSMC and Samsung are both expanding rapidly to have capacity available at these small nodes, according to Matas. “Qualcomm, Broadcom, Apple, and Huawei are a few of the chip designers who are using this process technology for their devices and I think it may have caught TSMC a little bit off guard with how great the early demand has been.
Managing tight supply
With increased demand and tighter supply, it’s necessary for buyers to have strategies in place to deal with changing market conditions. Jamey Mann, director of global purchasing for EMS provider Kimball Electronics, based in Jasper, Ind., said during the last shortage, Kimball took a “conservative approach to position its supply chain to weather the supply chain demand imbalance.”
He said working with customers and strategic supply partners are key to identifying market conditions, supply threats, inventory levels in the market and gaining “forward input on possible market impactors to ensure we position ourselves to service our customers,” he said. As a result, “we took a position of extending out our lead times to 52 weeks in order to drive purchase orders that covered our demand. As the market started to correct, this action allowed us to reposition our order horizons to a more modest position,” Mann said.
As the market corrects again and demand tightens, Kimball will continue to work with its “partners to ensure we have the appropriate level of inventory needed to support our customers, said Mann.
Scott said with “supplier capacity investments becoming more selective, buyers should be prepared for longer lead times, and higher prices and be aware of a supplier’s particular focus on supporting certain customer types.”
To help manage this issue, OEMs need to provide demand visibility to help suppliers plan, build and fulfill their needs. OEMs should communicate and align their technology roadmaps with their key suppliers, he said.
With the increasing consolidation of supply, OEMs need to mitigate the risk related to having limited or single sources. “To accomplish this, OEMs need to manage their approved vendors lists to optimize commodity coverage and supplier qualification,” said Scott.