ecsn Chairman’s viewpoint: Darkest before the dawn…

Author : Adam Fletcher | ecsn Chairman

01 January 2022

ecsn_Forecast Billings Q3 21
ecsn_Forecast Billings Q3 21

In his last report for EPDT’s Distribution supplement, back in July 2021, ecsn Chairman, Adam Fletcher predicted that 2021 would end up being an extremely challenging one for the global electronic components supply network – as well as for the many technology OEMs that depend on it. And so it turned out!

This viewpoint was originally featured in EPDT's H1 2022 Electronics Distribution supplement, included in the January 2022 issue of EPDT magazine [read the digital issue]. And sign up to receive your own copy each month.

Although it seems like the extended lead times that semiconductor manufacturers have recently been quoting have now peaked, concerns about ongoing shortages of passives, some speciality semiconductors and some e-mech components remain. Here, Fletcher reviews some key aspects of electronic components supply in 2021 – and provides his insight into how 2022 is likely to unfold...

ecsn/afdec UK 2021 electronic components outcome vs forecast

Based on the consolidated view of its manufacturer authorised distributor (afdec) members, ecsn (Electronic Components Supply Network) publishes its performance forecast for the year ahead in December of each year. Limited forecasting information received from customers in 2020 compelled the association to restrict its 2021 predictions to the first six months of the year, and it only provided its best ‘guidance’ for the second half of the year.

The graphic, “afdec Members Book : Bill Ratios by Month” shows actual book-to-bill (B2B) ratio figures for the 69 months that separate January 2017 and September 2021. The heavy black line shows the total components ratio over this period. Note that a B2B ratio slightly above unity is indicative of modest growth in prospect, but between June 2018 and July 2020, the ratio entered negative territory, strongly indicating that customers were deliberately eroding their backlogs and allowing their in-house inventory levels to decline too far. My suggestion at the time that customers should consider increasing their inventory by approximately 10% was largely ignored, despite the threat posed by a looming Brexit.

In June 2020, ecsn advised the market that semiconductor manufacturer lead times were unexpectedly increasing and recommended that customers take action to protect their order cover. Little customer activity happened until November 2020, by which time, many manufacturers of semiconductor and passive components were quoting step changes in lead times. As the blue circle on the graphic highlights, customers have very significantly increased their order cover throughout 2021 in line with (and beyond) the extending components manufacturers’ lead times.

The graphic, “Forecast Billings – Actual & F/C 2021” shows the actual billings (sales revenue) performance for the UK & Ireland electronic components market to the end of Q3 2021. The green line shows the upper range, the purple line the midpoint and the blue line the lower range of ecsn’s 2021 forecast. It’s apparent that the billings performance to Q3 2021 significantly exceeded our members’ original forecast as customers sought to dramatically increase their in-house inventory in a pattern that’s being repeated across all global electronic components markets.

Supply & demand imbalance...

Customer demand continues to outstrip supply throughout the global electronic components supply network, an imbalance that has been exacerbated by generally poor industry forecasting, and a much stronger than anticipated economic recovery. These factors, together with the recent rapid increase in demand, alongside historic year-on-year underinvestment in components manufacturing capacity, have caused exponential growth in demand that is outstripping manufacturers’ capacity to fulfil.

ecsn B2B Ratio Q321
ecsn B2B Ratio Q321

Sadly, extended manufacturing lead times for both semiconductor and passive components is now beginning to be reflected in the lead times being quoted by manufacturers of interconnect products. In response, customers have updated their ERP systems in a bid to secure the components they need, and have loaded more orders, in the process triggering a step change in essential safety stock order cover and pushing lead times out even further – and so the cycle repeats! No surprise then that many components manufacturers (and thereby manufacturer authorised distributors) are today only accepting new orders on NCNR (non-cancellable, non-returnable) terms.

Many of the current ‘challenges’ are nothing new, and are well understood by global electronic components markets, primarily coming down to the availability and pricing of components. That said, international logistics of raw material, work in progress and finished goods is now playing an increasingly critical role. Component manufacturers, their suppliers, sub-contractors and authorised distributors remain almost totally reliant on third-party logistic organisations, but have little direct influence over their activities. In addition, the pandemic severely disrupted the sector and it’s likely that many more months will have to elapse before things begin to approach anything like normality.

Double ordering & the grey market…

Frustration abounds when customers are told that they cannot get the components that they require on time, or without the imposition of swinging conditions. ‘Double ordering’ – the deliberate (and cynical?) placing of duplicate orders on multiple suppliers to beat an ‘allocation’ is perhaps understandable, but it distorts the market terribly when customers blithely cancel the outstanding duplicated orders, as the required components begin to arrive in satisfactory quantities. The way that some customers abuse their own ERP systems and their supply network partners in order to perform this trick is likewise deplorable.

Bad practices such as these lead to internal confusion in the electronic components market, and throw wide the door of opportunity to grey market dealers, who will ruthlessly exploit buyers struggling to obtain the components they need to maintain production. Before resorting to the grey market channel, procurement professionals should ask themselves: “If my existing, trusted supplier cannot meet my requirements, is it likely that some internet-based, often remotely-located organisation that I’ve never heard of has just the components I’m looking for?” Existing suppliers are invariably best placed to understand and meet the needs of their customers, and buyers are well-advised to break their existing supplier relationship only after open, frank and cordial discussion. I recognise the pressure and temptation, but experience has taught me that ‘double ordering’ and particularly ordering from grey market dealers is daft, and a high-risk action that should be avoided by buyers and the organisations that employ them at all costs.

Challenges into Q4 2021…

In Q4 2021, ecsn members reported the beginning of a slowdown in the huge growth in customer ‘bookings’ (orders entered), which had been running in the +50% range. Their relief was somewhat tempered by the fact that many of these orders were scheduled for delivery as far out as mid-2023. In contrast, ‘billings’ (net sales invoiced less credits) are forecast to be modest in the quarter, suggesting that the real underlying market and customer ‘billings’ growth in 2021 should be in the range 12-15%.

Currently most management effort in ecsn member companies is being focused on ensuring that components arrive where they are needed, and that the accurate and timely information necessary to plan effectively – be it good or bad – is communicated both up and down the supply network. On the plus side, overall semiconductor manufacturer lead times have recently eased slightly, but a lead time decline from 26 weeks to 20 weeks probably doesn’t offer much comfort to an organisation a long way back in the queue. It is, however, a welcome indicator of the direction of travel.

shutterstock_53517442
shutterstock_53517442

And into 2022...

The global electronic components market continues to be extremely competitive – and it’s this competitive pressure that’s driving change and bringing about the market corrections needed to bring demand and supply into balance. Unfortunately, as customer order cover is realigned with declining manufacture lead times, the electronic components industry, and particularly the semiconductor market, risks swinging into a period of short-term overcapacity.

Much depends on the successful roll out of 5G infrastructure and handsets, continuing strong growth in HPC (high performance computing) and local edge computing architectures, as well as developments in the rapidly evolving automotive market. Much of this demand, however, has already been ‘booked’ or built into the capacity planning process, which is why I suggested earlier that components lead times may have already peaked.

Assuming that no further destabilising events emerge, I forecast that the generic lead time for many proprietary semiconductors will normalise at 12-16 weeks in 1H 2022, with commodity semiconductors falling into line in the second half of the year. That doesn’t mean that there won’t still be supply problems. Some classes of semiconductors will remain on a longer lead time as part of a structural adjustment in demand for new applications, such as EVs (electric vehicles). It’s the availability of passive components – especially the legacy larger-case sized MLCC (multi-layer ceramic capacitors) and TFCR (thick film chip resistors) extensively used in in industrial and automotive applications in the US and Europe – that continues to worry me. There needs to be radical investment in the manufacture of these components, which has so far remained lacklustre at best. Rising prices may yet however rectify this situation.

The need for increased geographic diversity in the supply chains mandates increased government involvement and financial incentives for technology manufacturers, but also renewed investment in an appropriately skilled workforce and the necessary infrastructure, including reliable access to power and water. A wider geopolitical dispute, particularly in Taiwan or China, would be highly disruptive for the global electronic components supply network – and catastrophic not only for the citizens of the countries involved, but also for the global economy. The COP26 summit was an opportunity for the leaders of China and the US to get their heads together, so good sense may yet prevail…

As we hurtle towards the end of 2021, which by any measure was a brutal year for all in the electronic components supply network, I’m hopeful that we are now set to emerge from “a period of dark before the dawn”. But the new year will almost certainly deliver a different mix of challenges for the global electronic components supply network to manage. Our industry must improve its collaboration levels up and down the supply networks and communicate their real demand with all their partners. Frankly stated, improving communication activity is much more affordable that the alternative, as I fear many organisations in the global electronic components supply network may have already found out. Please ensure your organisation is doing “its bit” to honestly and effectively boost collaboration and ensure all partners in the electronic components supply network win...

About the author:

Adam Fletcher is Chairman of the Electronic Components Supply Network (ecsn), a business association established in 1970 that today offers support to all organisations with an interest in electronic components, throughout their entire lifecycle. He is also Chairman of the International Distribution of Electronics Association (IDEA), an association of individual country electronic components associations, whose objective is to share globally the best industry practices.


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