Most buyers are rejoicing over the fact that shortages of multilayer ceramic capacitors (MLCCs), chip resistors and power transistors, which plagued the industry last year are over.
Many parts had lead times of 40 weeks or more and some were on allocation. Buyers had to search far and wide to find shortage parts on the open market and pay high, if not exorbitant, prices for them. “Last year was one of the biggest shortage years in history,” said Paul Romano, chief operating officer for independent distributor Fusion Worldwide, based in Boston. “Now a lot of that is abated and supply conditions are not the same as they were last year.”
For instance, standard-grade, small-size MLCC lead times are less than 30 weeks. Metal oxide semiconductor field emitting transistor (MOSFET) lead times are in the 22- to 26- week range after being 40+ weeks last year. Resistor lead times from several manufacturers have shrunk to about 20 weeks after being on allocation last year, according to electronics manufacturing services provider Vexos. Lead times for discretes are normal, about 12 to 16 weeks.
The good news for buyers is that lead times will stay the same or shrink because of oversupply in the supply chain, which as of September, had not been worked off. The bad news is though despite greatly improved supply conditions, there are still short-term spot shortages of some parts. In addition, buyers this year are dealing with other supply chain issues including tariffs, trade wars and excess inventories.
Spot shortages seen
While it appears to be a buyer’s market for many parts, independent distributors say there are still spot shortages of some components. “We always see spot shortages and it drives a fair amount of activity,” said Romano. Such shortages can occur if a company had an unexpected spike in demand for its products and did not order enough parts from component manufacturers or distributors or didn’t have inventory on hand to meet demand.
“We still see some minor issues with MLCCs in larger case sizes.” Larger case size MLCCs are very low-margin parts and “there was never a significant amount of investment in expansion” in them. Some suppliers are producing fewer of them in favor of higher margin capacitors in small sizes, which are in high demand. Lead times have also stretched for some relays and CMOS image sensors, said Romano. Those are generally used in surveillance cameras and other devices. “There’s been a huge growth in that market because of smart phones,” he said.
Memory IC buyers may face some longer lead times for NAND. A fab jointly run by Toshiba Memory and Western Digital suffered a power outage in June, which reduced production of NAND flash wafers. Western Digital said the outage would likely reduce the company’s life production by about half for the third quarter.
Some Intel microprocessors are also in short supply as Intel has tried to transition customers to its newer MPUs. However, demand has remained strong for its older Skylake processors resulting in shortages.
“The transition from Skylake to Cascade Lake Xeon processors has played a part in the current shortage, which, from our view, is not entirely uncommon when generational migrations occur,” said Todd Burke, vice president of business development for independent distributor Smith, based in Houston.
“We’re still seeing significant open-market demand for many processors.” He said there has been high demand across the board for Intel CPUs used in desktops, mobile computers, and servers.
Tight supply will return
While shortages of components have eased many in the supply chain say it’s only a matter time until tight supply returns. “There are a number of things that will have an impact on the electronics market, including artificial intelligence, the continued digitization of transportation, and 5G,” said Romano. Such trends will result in robust demand for electronic components.
Fifth generation cell phone technology will “necessitate the replacement of a lot of gear,” which will result in higher demand for semiconductors, passives and other components.
Burke noted the rollout of 5G is starting across Europe, Asia and North America. As a result, “we expect to see an overall increase in demand for the active and passive components needed not only in handsets, but also in the cellular infrastructure equipment including core network equipment, base stations, and antenna arrays,” he said.
He said that initially supply will be impacted by the buildout of 5G networks, then there will be an increase in demand for smart phone components as people upgrade their phones to take advantage of 5G capabilities.
“We’re not seeing tight supply for specific 5G components yet.” said Burke. “The industry is still scaling, and manufacturers at the OEM and CM levels still have a lot of inventory on their shelves,” he said. However, there should be an increase in overall demand beginning in late 2019 and early 2020 for components used in 5G applications, according to Burke.
Automotive will also continue to have an impact on electronics supply. In fact, some buyers blame automotive for causing some of the shortages of MLCCs, chip resistors and MOSFETs last year and in 2017. More sophisticated electronics systems are being designed into more vehicle models, resulting in higher demand for many components. Vehicle sales have been flat to down in recent years but if they should increase by a few percentage points, it could likely result in tighter supply, and shortages.
Automotive demand grows
While the auto industry often buys directly from component manufacturers or their authorized distributors, independent distributors say they recently have seen an increase in demand from the automotive segment.
“We saw a lot more opportunity in automotive reaching out to us,” said Carleton Dufoe, CEO and founder of independent distributor NewPower Worldwide, based in Nashua, NH.” We did not know a lot of them in the past. But we had people from the auto industry coming to us,” he said. “It’s one of the higher performing segments for us. So, we’re seeing more and more activity in that space.”
Automotive customers “know what they want, they know what they need. It’s no nonsense. They need authentic product and it needs to be automotive grade and traceable to the manufacturer,” said Dufoe.
While buyers may have to plan for increased demand caused by 5G networks, new handsets and rising demand from automotive, they also have other concerns, including tariffs, and the trade war between the U.S. and China and its potential impact on supply. So far there has not been a big impact on the component business because of the trade kerfuffle, according to Burke.
“The semiconductor industry is coming off a record-breaking revenue year. The U.S.-China trade issue hasn’t impacted the component business as much as market cycles have,” he said.
However, the tariff dispute is causing a lot of ambiguity, uncertainty and cautiousness in the electronic components industry. “Lots of changes have occurred with parts being added to the tariff list and then some taken off,” said Burke.
“We’re also seeing some OEMs and CMs, to avoid the tariffs, move U.S.- bound projects out of China to manufacturing clusters in other countries, such as Taiwan, Vietnam, and Mexico,” he said.
Dufoe said that tariffs are a challenge, but don’t seem to be dampening business to any great degree except for very large global companies that may be moving “hundreds of millions of dollars of product globally.”
Dealing with tariffs
Ron Bishop, president of connector industry research firm Bishop & Associates, said the tariffs are also causing some connector manufacturers and other electronics manufacturers to move manufacturing to other regions. “I think the tariffs are hitting China big-time. There are a lot of people pulling production out of China. Some of it is moving back here (to the U.S.) or to Singapore, Hong Kong” or other countries, he said.
The tariffs may impact future investment in China from companies in the U.S. and Europe, according to Bishop. “I don’t think you’ll see a huge investment in China from American or European companies that once existed,” he said.
He also noted that China used to be the fastest growing region for connectors. However, in the first seven months of 2019, connector sales were down 8.3 per cent in China, while the North American market was up 2.8 percent. “China is the worst region of the world in connectors. It is something we have not seen in probably 15 to 20 years,” he said.
While it is unknown how long the tariffs and trade dispute will continue, there are “ways around tariffs,” said Burke. “We have warehouses strategically located in Amsterdam and Hong Kong from which that product can be shipped. Our global team of procurement specialists can also help qualify other manufacturers to stay in line with pricing objectives.” In fact, some buyers are also qualifying component manufacturers in other regions for parts to avoid the tariffs.
Buyers have other concerns this year besides tariffs. Last year and in 2017, many buyers double and triple ordered parts because of the shortages to make sure their companies had enough components to keeping production lines humming. As it turned out, all those parts were not needed and some electronics companies have large stockpiles of components.
One example is MLCCs. “With MLCCs everyone was going crazy,” said Dufoe. “A lot of people bought a lot more than they needed, but now customers have oversupply. Some are trying to burn through those inventories, while others are trying to resell the parts. Customers are asking us can we sell parts to someone? Can we scrap them? What’s the solution?” said Dufoe.
Large companies with more than $1 billion sales often aren’t overly concerned about the excess parts and will write them off or scrap them, said Dufoe. Smaller companies feel they need to consume the parts or sell them to recoup some revenue.
Recouping revenue from parts can be difficult in a buyer’s market especially with low-cost components. “A lot of these parts cost below a penny a piece, said Dufoe. However, buyers may have purchased them on the open market for three, four, five cents or 10 cents.
“How much can you recoup if the component manufacturer is now selling that part by the millions for $.007 a piece? How much savings are you going to make?” he said. The company may be better off holding the parts and consuming them or scrapping it.
“We are seeing a lot of those discussions,’ said Dufoe. “We’re trying to help customers with MLCCs and see what’s possible for them to get for the parts. However, if a company has $5 million of parts on their books, the components may be worth only $900,000 with today’s pricing,” he said.