Supply Chain Alert Dec. 2022

General market overview and outlook for 2023

In general, there is no clear improvement observable in the material markets. The lead times are not increasing, however, they do remain on record high levels. The lead times ranging over a year are becoming the “new normal”. Price increases communicated by the manufacturers remain ongoing, with no clear signs of the end.

The year 2022 was a continuous struggle on the supply side of the electronics market and in terms of price pressure. We observed that prices in 2022 increased on average between 20%-100%. On average, the prices of active components increased the most – if we add up the increases within the year, the value of these components has doubled. The largest increases apply to diodes and transistors. Connectors and passive elements rose on average by about 20%, and occasionally even up to 40% on selected items. Cartons or labels prices rose on average around 30-40%.

The lead times were being extended within the first half of 2022, with the second half of the year showing stabilization. This does not mean the lead times have decreased, they were simply not being extended further (this excludes unreliable manufacturers such as Microchip, and NXP).

In terms of the 2023 outlook, further price increases have been unofficially announced to happen early in 2023 (we usually tend to receive official information at the beginning of Q1 each year), however, we do not yet know their levels. There are clear signals from authorized sources (large global distributors) that the price increases will be continuous, but we predict their level will be lower in comparison to 2022 (however, this also depends on the global inflationary pressure and raw material prices). Nevertheless, we already observe that the pricing level on the unauthorized market (brokerage sources) has become milder and we see much less economically unreasonable asking prices.

In summary, market signals let us believe that the general availability of components on the market will get better (this may not apply to much shorter lead times, which we do not see decreasing but again second half of 2023 may show visible changes). The price increases in 2023 will continue, but we anticipate that on aggregate these will be on a lower level than in 2022.

It is visible that global inflationary pressures and global interest rate spikes impact economic slowdown and consumer spending, causing lower demand for electronic components used in consumer goods. However, we observe that the demand for chips in automotive and industrial devices remains at high levels and we anticipate this will continue at least into H1 2023.

Market signals 

Gartner, a well-known market research firm, has communicated its forecast for the global IC market in 2023 predicting a 3.6 annual per cent decline (from, which it must be noted that memories are a big driver for this decrease, where Gartner forecasts its decline by 16.2 per cent in revenue in 2023). The IC market historically is known for cyclical behaviour, but Gartner’s predictions do not display major pessimism.

Even though the decline has already been observable in Q3 2022, the reality is that certain components still cannot be found anywhere, while others are fairly available. Recovery is not likely to take place within the following year and shortages will continue for many components used in industrial (or automotive) applications over the next several years, although there are signals that the demand in automotive and white goods is slowing down. The visibility of component availability remains vague. This information is confirmed by our discussions with a number of manufacturers, including Microchip, which is probably the most problematic manufacturer these days.

Based on our information, there is an evident feedback that older technology chips (used predominantly in industrial applications), are not subject to further investments by component manufacturers due to technological constraints. This means that manufacturers will simply stop production of certain components or in the most optimistic scenario – current capacity will remain until the products become end of life. However, if the market demand exceeds the manufacturing capacity – no further investments to increase shall be expected. Leading-edge semiconductors today, eg. 5nm chips used in smartphones, are more profitable due to higher order size and shorter life cycle. Industrial applications do not require such chips, and this is why the majority were depending on chips that were leading edge two decades ago.

Yet, it is also evident that smaller chips utilize fewer raw materials (and there are observable constraints in the supply of raw materials) thus the trend of miniaturization and shorter lifespans will be more visible to everyone.

Redesigning current products to be able to utilize leading technology, newer and tinier chips, is an expensive and time-consuming process for OEM producers (especially taking into account a number of market regulations, product certifications etc.). On the other hand, chip manufacturers have no motivation to increase the capacity of old technology chips, due to outdated tools utilized to create these older chips, which again offer lower profitability for them and utilize a bigger amount of raw materials. Increasing capacity would be an expensive process for the chipmakers, especially that global industrial applications, the automotive market and alike, do not generate the majority of total revenue. That relates to consumer electronics. This approach has been confirmed by our discussions with vast chipmakers in recent weeks.

From this perspective, we believe miniaturization will be inevitable and that component life cycles will become shorter in future. This means components will become obsolete more often and product redesigns project will need to be run more frequently for our Customers.

Overview – Lead times / Pricing

There are no significant signs of improvement at the moment.

We observe further signals from the manufacturers and official distribution side, that the demand may be falling within 2023 and that customers (of whom many are brokers) will have the tendency to cancel or postpone orders. Very recently, such information have been communicated by ON Semi and surprisingly ST, where the manufacturer announced that with immediate effect, ST backlog until 2024 becomes NCNR (non-cancellable non-returnable), meaning that no requests for cancellations or pushouts will be accepted unless there it is not yet a commit date from ST. This has been surprising, as there have been numerous rumours (even unofficially communicated by the manufacturer) that the situation will significantly improve by Q3 2023. Analog Devices is also reporting a visible increase in order book cancellations. Nevertheless, high-end ST Micro, NXP, Microchip, Infineon and OnSemi chips remain on allocation.

The lead times remain stable, however on record high levels. We do not see signs of improvement, but also no signs of extensions. Nevertheless, although the majority of the lead times range in the area of 52-90 weeks, many distributors/manufacturers inform us that many of the Customers place forecasts/orders that range up to 3-4 years or even longer for up to 5-6 years. “Being” in the order queue is becoming an important factor, especially for the older technology chips. This tendency may in fact cause the lead times to extend for a number of allocated, problematic components.

The price levels remain on an increasing trend. There is clear communication from the market that prices from official distribution sources and manufacturers will increase beginning in 2023. There are no observable signs of a downward trend, and we would not expect these to occur in the nearest future, especially taking into account the global inflationary pressures, wage increases, as well as the much decreased worldwide neon gas supply, due to War in Ukraine.

On the other side, there are clear signs of lowering prices and higher visibility on the unauthorized, brokerage market. We observe significantly lower asking prices for most problematic components, for which a few months ago their asking price was on an abnormal, economically irrational level.

Our focus and recommendations

Long-term planning and forecasting remain key. Our recommendations:

• Demand visibility (forecast/purchase orders) for a period of 24 months or above is strongly anticipated to support a more predictable supply of components at normal costs.
• If placing orders or forecasts in such a long horizon is not feasible, material authorization and related individual agreements focusing on securing long-lead time and allocated components are inevitable – taking into account the same time horizon (24 months or above).

Consequences of lack of visibility: This may inevitably result in gaps in meeting potential future demand at the desired dates, and extra costs of buying these components on the open, brokerage market (availability permitting)