State of the nation for the electronic components industry…
Author : Adam Fletcher, Chairman of the Electronic Components Supply network (ecsn)
05 December 2018
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2018 has been a year of continued solid growth across global electronic components markets. The promise of new applications, particularly around 5G infrastructure build-out and ADAS, has been tempered by capacity constraints and extending manufacturer lead-times, further M&A activity – and the looming threat of trade wars. This piece reviews the ‘state of the nation’ for the industry and discusses what might happen going into 2019.
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ecsn members forecast that the UK & Ireland market for electronic components would grow in the range of 7.8% to 12% in the period Q1 to Q3 2018, compared to the same period the previous year.
In the event, the outcome for the first three quarters was actual growth of 9.6% – almost exactly matching the association’s midpoint forecast of 9.7% growth. The forecast also predicted that growth would then slow into Q4 in the range of 2.5% to 6%, which is in-line with historical growth patterns (the green and red bars in Figure 1 [links to ActiveMag] indicate the forecast range).
The latest figures from the Office for National Statistics and the IHS Markit/CIPS (Chartered Institute of Procurement & Supply) UK Manufacturing PMI (purchasing managers’ index) Survey confirm that the UK’s manufacturing sector is slowing into the end of the year, suggesting weakening consumer markets. But the outlook is positive, with both domestic and export orders for intermediate and investment goods increasing.
It's realistic, therefore, to assume that growth in Q4 2018 will also come out around ecsn’s predicted mid-point, indicating that the outcome for the UK & Ireland electronic components market in 2018 will be around 8.5% year-on-year growth – an undeniably super result!
European electronic components markets
Comparing the first three quarters of 2018 to the same period in 2017, the overall European electronic components market grew by 7% in 2018. Individual country markets reported the following growth: Austria 14%; Italy 12%; UK 10%; France 5%; Germany 5%; and Switzerland 1%.
The Nordic region, however, reported a 1% decline. Figure 2 shows the shape of European market growth by quarter. Stronger growth in the first three quarters, followed by a slowing Q4, is in line with historical trends.
Just as ecsn authorised distributor members predicted last year, the UK electronic components market is currently experiencing sustained year-over-year quarterly growth. In fact, the last ten quarters have seen the longest period of sustained growth since 2000 (see Figure 1).
International electronic components markets
International statistical data for Q3 2018 is not yet available, but preliminary information suggests that sales in electronic components markets (excluding commodity memory) continue to be strong – with estimated growth of 12% in the US, 5% in Japan, 12% in China, and 7% in Asia-Pacific. Growth in the US was particularly strong in Q3 2018, as authorised distributors, OEMs and EMS providers increased their electronic components inventory in advance of possible increases in import duty.
Components shortages
Developments in electronic applications and continued, strong growth in international electronic components markets continues to depress availability of many electronic components. Exacerbated by limited production capacity, these factors have led to a ‘new-normal’ 8 to 12 week lead-time for the majority of electronic components. Of the over 1,000,000 high-volume electronic components on the market today, only a comparatively small number (under 2,500) are on lead-times of 26+ weeks; and of these, only a few hundred are effectively on allocation (delivery lead-time of 40 weeks or more).
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The problem is that these few hundred electronic components primarily comprise larger case-sized multi-layer ceramic capacitors (MLCC) and chip resistors: components used in almost every application.
MLCCs are the epitome of ‘commodity products’: they are manufactured in their trillions each year, but by only a small number of vendors – none of whom can claim any ‘ownership’ of the market. These companies have to be content with merely selling their MLCC production output into the market at the best price available at the time, and hope for a profitable outcome.
And because customer loyalty is low to non-existent, manufacturers of these parts have no incentive to support legacy products. Current economics of MLCC manufacture are that a single large ‘1206’ case-size product has the same substrate requirement as 128 off ‘0402’ small case-size products.
The exponential increase in demand for smaller-cased products by mobile phone manufacturers makes it fairly obvious that passive components manufactures will continue to focus their capacity towards this end of the market – at least until the price of a ‘1206’ device significantly exceeds 128 off ‘0402’s.
It’s no surprise, then, that of the small number of companies still manufacturing ‘1206’ large case-size MLCC devices, most are now quoting lead-times in excess of 40 weeks – while others are declining to quote at all. The restricted availability of larger case-sized MLCC and chip resistors is not going to be resolved quickly. It is very unlikely that the availability of these components will return to ‘normal’ market lead-times (8 to 10 weeks) until at least 2020 – if at all.
A short-term fix for customers may be to ask their engineering team to explore the use of tantalum and electrolytic capacitors; but peace of mind might only come from designing-in smaller case-size ‘0201’s in place of the difficult-to-source ‘1206’ case-size MLCCs. Good practice would suggest having a discussion with an application engineer at your authorised distributor of choice, who will be best placed to provide knowledgeable advice.
This is, however, not an easy solution, as most electronic equipment designed and manufactured in Europe and the USA is primarily destined for industrial, automotive, telecom or medical applications – and often has a manufacturing lifetime of 5 to 7 years (sometimes longer). Any changes made to components within the equipment design may require extensive industry-standard testing or market-specific re-qualification prior to sale, which is a time-consuming and expensive process.
Smaller scale acquisition activity
M&A activity among the most notable semiconductor manufacturers continues to dominate the headlines, but it’s smaller-scale acquisition activity that perhaps should demand our interest. For instance, Renesas recently spent $6.7 billion acquiring IDT, in order to increase its access to the fast-growing data centre and communications infrastructure market.
Wingtech (a Chinese EMS provider) has bid $3.6Bn to acquire the remaining 76% of Nexperia, a Dutch-based semiconductor manufacturer of discrete components, logic and MOSFETs. The bid is subject to US regulatory approval (which I suspect may not be forthcoming, as it appears to be rather strangely financed).
US-China: an escalating trade dispute
On 17th September 2018, the US Trade Representative (USTR) finalised a second round of tariffs to be imposed on some $200Bn of Chinese goods imported into the US. The full list details some 5,745 harmonised tariff codes, ranging from consumables like fish and fruit that will directly impact US consumers, to industrial necessities (such as chemicals and semiconductor manufacturing equipment), the impact of which will be felt across numerous US industries.
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The initial import levy of 10% imposed on 24th September is due to rise to 25% on 1st January 2019. In retaliation, China announced new tariffs on $60Bn worth of US imports. The tension between the two countries has been further exacerbated by President Trump’s tweet that he’s considering imposing tariffs on an additional $267Bn of Chinese imports in a yet-to-be-announced third phase of this spat. Uncertainty abounds, and if no resolution is found in the November G20 summit trade discussion, it can only escalate.
More recently, the US Department of Commerce added Fujian Jinhua Integrated Circuit Company to the Entity List of the Export Administration Regulations, claiming “activities contrary to the national security interests of the US”. Jinhua has invested $5.3Bn in a wafer fab, with the intention of producing 60,000 DRAM wafers per month, but the company stands accused of violating patents and IP owned by Micron Technology.
Without access to key US technology, it’s unlikely that any DRAM wafers will come out of Jinhua’s new plant any time soon.
Growth drivers into 2019
Global demand is being driven by a number of applications, the most important of which will be the rollout of 5G mobile infrastructure and products. Demand for 5G handsets will top the wide range of new applications that this faster, low-latency communications protocol will enable, including smart factories, sensors in smart cities, and systems for the backhauling of all this new aggregated data.
The move towards electric or hydrogen-powered vehicles, and particularly increased vehicle automation, will ripple out over the next decade – but not until international standards are agreed and legislation is finalised, which may yet prove to be significant hurdles.
ecsn members’ expectations for 2019 will be announced on 6th December 2018, but I have no doubt that they will reflect confidence that the UK, European, Japanese and US electronic components markets will continue to grow strongly. But sadly, even the predicted high single digit growth will unfortunately not match the double-digit growth predicted for the ASEAN and Chinese markets.
Issues for the electronic components supply network
The growth in the global electronic components market is well-established, and will probably peak in 2021. However, this trend is unlikely to be linear and we must expect the odd bump and hollow along the way. The impact of the current slowdown in global car sales is an excellent example.
A further escalation of a US/China trade war could be problematic, but I suspect that a resolution will be found, as the potential damage to the global economy of failure is simply too horrendous to contemplate. Similarly, I’m confident that good sense will eventually prevail in the current UK/EU ‘B’ word situation; and in any case, the electronic components supply network is remarkably robust.
I’m much more concerned about the ongoing shortage of legacy passive components, a situation that may be very difficult and slow to resolve. I’m seeing little willingness from customers to redesign, or from manufacturers to invest in new legacy component capacity (although one is now doing so).
From a return on investment perspective, I understand their reticence, but an ongoing worsening shortage of inexpensive passive components has the potential to create a major supply problem that will disrupt production, restrict output and growth across Europe and the US, and cause financial loss for a great many organisations in the electronic components supply network.
I encourage all organisations to actively engage with their partners throughout the electronic components supply network. Only by ensuring good communication, both up and down the network, and by reacting diligently to the signals sent and received, will supply equilibrium be maintained across our industry.
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