Constrained supply, diminishing sources of supply and higher than normal lead times for some components will be some key issues for buyers in 2020 – By James Carbone
Many OEM and electronics manufacturing services (EMS) providers buyers may feel that the purported ancient Chinese curse of “may you live in interesting times” applies to them as the new year begins.
While the semiconductor industry suffered double-digit revenue decline in 2019, the EMS industry grew its sales 10 to 13 per cent in 2019, the third consecutive year of double-digit growth for the industry, according to New Venture Research (NVR). While EMS providers hope that healthy sales growth will continue in 2020, buyers will face a plethora of interesting supply chain challenges and risk management issues, including the trade war with China, continuing supply base consolidation and constrained supply for some parts.
EMS buyers must also deal with rising raw material costs, the continuing problem of counterfeit parts, and plan for the possibility that a natural disaster could stop production of key components as it did with the 2011 earthquake and tsunami in Japan and severe flooding in Thailand.
It is often the responsibility of EMS buyers to work with their OEM customers to mitigate such risks or manage those risks on behalf of OEMs.
“A key part of the service we provide to our customers is to help manage and mitigate risk throughout the supply chain, said Graham Scott, vice president of global procurement for EMS provider Jabil Circuit. “We have a systematic process to address and manage risk from geopolitical uncertainty to natural disasters to ensure continuity of supply.”
One uncertainty involves component lead times. While shortages of multilayer ceramic capacitors and other components have eased compared to 2018, lead times for many capacitors, resistors and discretes “are longer than the historical norms,” according to Scott. There are several reasons including continuing supply base consolidation which has reduced the number of suppliers and could potentially impact pricing in 2020 and beyond, he said.
Rising labour costs and reduced labour-force growth in China and other traditional low-labour cost countries have contributed to supply constraints which will likely persist. For instance, China’s average annual wages rose by nearly 63 percent between 2011 and 2016, according to China’s National Bureau of Statistics. The impact of China’s one-child-per-family policy has been a slowdown in population growth and a decline in the size of the workforce, which has driven up wages and labour costs for the electronics industry and other businesses.
China’s workforce will continue to decline, according to the Chinese government. In 2017, China had an available workforce of 900 million people but the figure will drop by 200 million by 2030, the government predicted.
Over the long term, electronics buyers must develop strategies to minimize the effect of rising labour costs. A partner that has extensive global partnerships and manufacturing footprint will be essential to attain this, according to Scott.
Higher labour costs can impact component prices and so can rising demand for certain components from smart phone and portable equipment manufacturers. Increasing demand could contribute to tight supply in 2020.
Dealing with shortages
Another key challenge for electronics purchasers is component shortages. While electronics purchasers historically have had to deal with component shortages caused by a spike in demand and/or lack of investment by suppliers in new capacity, more shortages are occurring because of technological transitions by component manufacturers.
Increasingly, component manufacturers of critical components are transitioning production from lower margin mature components to higher functioning, higher price components. As a result, memory ICs, discretes and some passive components that are still widely used in electronics equipment that have long product lifecycles are becoming increasingly harder to find.
One example is multilayer ceramic capacitors (MLCCs). MLCC manufacturers have boosted production of capacitors in small case sizes such as 0201 and 01005. Such parts are used in smart phones, notebook computers, handheld video games among other products. At the same time, some capacitor manufacturers have ceased to make capacitors in larger case sizes such as 0603 or 1203. Larger case size parts are used in systems that have long product lifecycles such as industrial, medical and communications equipment.
While capacitor manufacturers may increase capacity overall, the increase tends to be for parts in smaller case sizes. Because capacitor suppliers are being more selective in the capacity investments that they make, buyers should be aware of the type of customer a component manufacturer supports.
Buyers need to work with suppliers on visibility issues to help suppliers plan and fulfill their component needs. In addition, with more mature parts going end of life, buyers need to develop strategies that guarantee continuity of supply if a supplier decides to stop producing a needed part, according to Scott.
Trade war continues
One issue that buyers will continue to have to deal with in 2020 is the trade war and tariffs. “Rising tariffs are putting a painful squeeze on many U.S. electronics manufacturers,” said Shawn DuBravac, chief economist for trade association IPC. “Many are facing supply-chain disruptions and steeper costs from the tariffs that have been imposed to date, and the impacts will grow as the trade war drags on,” he said.
Randall Sherman, president of New Venture Research, added tariffs have become a significant headache and is causing redistribution of sourcing away from China.” The findings of a recent IPC survey of the impact of tariffs on electronics manufacturers concur with that assessment.
Fifty-one percent of electronics companies responding to the IPC survey said they are now sourcing from countries other than China as a result of increased tariffs on Chinese imports. That means EMS buyers must work with OEM customers to find and qualify new sources of components and other production materials.
The survey also found 86 per cent of U.S. electronics compnaies are troubled by the higher tariffs imposed by the United States and China on each other’s imports and some are investing less in the United States and hiring fewer workers as a result. More than a third of companies report they cannot increase their prices to cover the cost of higher import tariffs due to various factors.
About 69 per cent of companies report lower profit margins as a result of increased tariffs, 21 per cent report they are reducing investment in the United States and 13 per cent say they are cutting back on hiring and/or reducing headcount, the IPC survey said.
Besides tariffs, many EMS buyers are challenged by a shrinking supply base caused by mergers and acquisitions. Buyers are feeling the impact of consolidation that has reduced the number of suppliers in the electronic components market, which has decreased parts availability. The bad news for buyers is M&A activity is continuing. In 2019 Infineon acquired Cypress Semiconductor, NXP bought Marvell’s Wi-Fi connectivity portfolio, ON Semiconductor purchased Quantenna and Nvidia acquired Mellanox. More consolidation is likely in 2020.
Consolidation in the supply base will continue to reduce the industry’s investments into new production, leading to further supply constraints as demand starts to return to normal levels, said Scott. Due to this increased risk, it’s critical for buyers to understand the supply base and its strategic/technology direction, he said. With the increasing consolidation of supply, buyers need to make sure they have few, if any single sources for parts, which would mean qualifying new suppliers.
Another supply chain issue buyers must deal with is rising labour costs. OEM buyers involved in outsourcing decisions must review their supply chains and assess emerging geographies where costs are lower. OEMs need to balance the risk and cost of moving production and supply chains to places like Indonesia, India, Mexico and new regions of China, said Scott.
Working with distributors
To manage supply chain risks, EMS providers often work closely with key component manufacturers to identify potential risks and develop strategies to address them. Electronics distributors are often part of material sourcing and risk management strategies of EMS companies.
Distributors often provide inventory flexibility for EMS providers. “Since distributors typically have multiple customers for commodity items, they can shift inventory to meet customer needs,” said Scott. “In addition, they can bond inventory within their warehouses to support our customer’s requirements.” Distributors can help EMS companies manage component obsolescence. Many have humidity-controlled facilities to store last-time buy inventory.
Distributors often support supply chain models such as consignment and vendor managed inventory (VMI) programs and distributors can manage some of the “more focused component lines,” said Scott.
Many distributors have large customer bases and strong relationships with component manufacturers. “In cases where Jabil has limited transactions with a supplier, distribution plays a role in establishing a Jabil relationship with that component manufacturer,” he said.
EMS providers often use distributor value added services such as parts programming, custom marking, and kitting, which are helpful in new product introduction production ramp phases.