ecsn Chairman’s viewpoint: Same problems, different causes...
Author : Adam Fletcher | ecsn Chairman
01 July 2022
In his last report for EPDT’s Distribution supplement, in January 2022, ecsn Chairman, Adam Fletcher predicted that 2022 would throw up ever more challenges for the global electronic components supply network, and for the many technology OEMs that depend on it. Of course, he couldn’t foresee the dramatic swing in geopolitical tensions ahead – and the additional disruption it would create!
A version of this viewpoint was originally featured in EPDT's H2 2022 Electronics Distribution supplement, included in the July 2022 issue of EPDT magazine [read the digital issue]. And sign up to receive your own copy each month.
Despite everything, lead times and ‘bookings’ (net sales entered) have started to normalise. The current cycle has probably reached its peak, but there remains great uncertainty about the velocity of change and the resulting impact on demand and supply. Here, ecsn Chairman, Fletcher reviews the performance of the electronic components market in the first quarter of 2022 – and provides his insight into how the rest of the year is likely to unfold...
Russia’s invasion of Ukraine wasn’t on the radar of ecsn (Electronic Components Supply Network) member companies when discussing and compiling their electronic components markets forecasts for 2022. And we weren’t alone: few political analysts predicted Russia’s belligerence towards Ukraine, and even the odd siren voice didn’t see the conflict escalating so dramatically. The war has had significant macro-economic impact on global trade, food and energy supply, and the availability of raw materials. Prices have been driven up significantly, resulting in a jump in price inflation, a reduction in forecasted international GDP growth and concerns about a possible global economic recession. Viewed on a global scale, the conflict has so far had only limited impact on manufacturing of electronic components, despite shortages and increases in the price of a wide range of ‘input goods’, ranging from metals to plastics and chemicals – but this may yet change...
Q1 22 Sales Revenue by Month
A stronger than forecast start for the UK in 2022...
At the end of last year, ecsn members collectively forecasted that ‘billings’ (sales revenues) in the UK & Ireland electronic components markets would continue to grow strongly into the first half of 2022, in the range 12-16%, but cautioned that growth would probably slow somewhat in the second half of the year. In the event, the outcome figures reveal that the market actually grew by 18% in Q1 22 compared to the previous quarter, and by a staggering 29% compared to the same quarter in the previous year. The established historical trend for the UK & Ireland electronic components markets is for strong growth in the first quarter of the year, generally followed by a good second quarter and a steepish decline in the second half of the year. This is a continuing trend: the blue circle in the graphic ecsn Billings (sales revenue) by Month April '20 to March '22 highlights Q1 21 and the red circle highlights Q1 22, illustrating that most growth each year occurred in March, followed by a slowdown in April.
Europe still in strong positive territory in Q1 22...
IDEA Graphic T1 Q1 22
Graphic T1 is a visual representation of 12 consecutive quarters of consolidated European ‘bookings’ (net sales entered) and ‘billings’ (net sales shipped), together with corresponding book-to-bill (B2B) ratios. A B2B greater than 1 is indicative of growth in electronic components markets, while below 1 is evidence of a decline.
The blue bars reveal that European electronic components markets experienced average ‘billings’ growth of 24% in Q1 22, compared to the previous quarter, a very creditable performance given the current political and economic turmoil, and balanced as it is by a slowdown in the defensive ‘over-booking’ that customers are suspected of making since Q4 20. The B2B ratio continues to reflect these changes: the leap in the B2B that we saw in Q2 21 to 1.73:1 preceded a slight decline to 1.62:1 in Q3 21, with a further slight decline in Q4 21 to 1.67:1. The decline to 1.28:1 in Q1 22 is further evidence that ‘bookings’ growth has now peaked in the current cycle, as manufacturer lead times start to ‘normalise’ and customers begin the process of reducing their backlog order cover with authorised distributors.
The situation in Russia...
Russian President, Vladimir Putin visiting JSC Mikron in 2010. The company is Russia’s largest domestic semiconductor manufacturer.
The Russian TAM (total available market) for electronic components is of similar size to the UK, with a TAM of just US$ 4.204bn, surprisingly small on a global scale, given the size of the country and its economy. While there are components manufacturers in Russia, they are generally small operations, content to serve their domestic market rather than manufacturing for export, so the country is heavily reliant on the import of electronic components from the rest of the world. As in the UK, most customers for electronic components in Russia are served by local authorised distributors, who represent a wide range of international components manufacturers. Many of these local distributors are also CEMs (contract electronic manufacturers). Few international authorised distributors have operations in Russia, and those that do are generally focused on providing customer support via the local authorised distributors. Similarly, there are only a handful of international components manufacturers with offices in Russia, again mainly involved with supporting local sales, marketing and applications functions, although some do have limited product development operations.
And in Ukraine...
Information on the Ukrainian electronic components TAM is hard to come by, but anecdotal data suggests it doesn’t exceed US$1.2bn. Much of the purchasing and invoicing activity of the country’s larger CEMs and OEMs occurs in Germany, even though the goods are destined for delivery to Ukrainian manufacturing sites. Countries that made up the former Soviet Republic, including Kazakhstan, Belarus and, until recently, Russia, remain Ukraine’s principal export markets, representing 60% of all exported goods, while China accounts for a further 13%, and Germany for 10%. It’s fair to say that – in common with several of the larger eastern European countries – Ukraine has benefited significantly from recent reshoring from Chinese- to European-based CEM manufacturing. Today, the country is a major manufacturer of wiring harnesses for automotive applications, which it produces in high volumes against very short lead-times for just-in-time (JIT) delivery to customers’ production lines. These assemblies rank among the country’s top 5 exports, and European car and truck manufacturers are rightly concerned about the many months and expensive logistics effort that would be needed if the conflict with Russia mandates that production of these highly proprietary products has to be transferred to sites outside Ukraine.
Global components manufacturing...
Fortunately, global demand for handsets and cars slowed a little in Q1 22, which caused a corresponding decline in average electronic components lead times – but future demand in these sectors remains strong, so any market adjustments are likely to be short lived. Prices of raw materials (particularly palladium, nickel, titanium, copper) continue to increase, as does the cost of labour, shipping and energy. To maintain their profitability and investment, components manufacturers are seeking ways to mitigate the rapidly rising ‘input pricing’, which ultimately means that unit prices for electronic components, and particularly commodity ‘merchant market’ passive components, will continue to rise sharply throughout 2022, and beyond. The headaches that manufacturers of electronic components are currently suffering are being exacerbated by the need to ‘sweat assets’, the exceptional measures that need to be implemented in order to increase output to meet market and customer demand in the current environment.
Why not build more semiconductor manufacturing facilities?...
In the 2000s, the cost of building a semiconductor foundry increased significantly. Since the financial crisis in 2008, and despite reasonable growth forecasts, semiconductor manufacturing capacity has remained restrained, with investment taking place on a ‘as needs dictate’ basis, often following technical trends or upgrading manufacturing facilities to more advanced process nodes.
This is hardly surprising: building a new state-of-the-art semiconductor foundry with the capacity to process 50,000 wafers a month is projected to cost c.$15billion. Economics dictate that this investment must be depreciated over 3-5 years, which suggests that output sales revenues – internal and/or external – need to be in the range $3-5 billion per annum. To return a profit, a semiconductor foundry needs to continually operate in excess of 70% of its planned capacity – but ideally, would deliver capacity utilisation in the 95%+ range, with a ‘process yield’ (known good product) of 99%+. In addition, the operating costs and capital equipment upgrades need to be funded over the depreciation period, as do the carefully choreographed maintenance operations. In the last 5 years, even dedicated third party ‘foundry partners’, with proven ability to profitably achieve both high-capacity utilisation rates and process yields when producing wafers for multiple customers, have really only been able to invest in new leading edge semiconductor manufacturing capacity thanks to joint investment with their customers, in return for guaranteed output.
More transportation & logistics problems?...
Except for pharmaceuticals, healthcare and humanitarian supplies, shipments into and out of Russia have been halted by most large international transport and logistics organisations. International flights in Russian airspace have been curtailed, and sea freight into Russian ports has been embargoed, all of which must be knocking onto rail freight shipments too. Having been heavily promoted as part of the Chinese ‘Silk Road’ initiative, rail freight into and out of Russia has become a popular method of moving mid-weight goods such as PCBs, power supplies, fans, metalwork and so on. Transiting across Kazakhstan, Russia and into Poland, bypassing Ukraine before arriving in Germany – a journey time of around 28 days – rail shipments from China have been significantly boosted over the last two years, due to the ongoing disruption to sea freight caused by the COVID-19 pandemic, but may yet be subject to some level of international embargo and disruption, which could ‘knock-on’ to affect a wide range of organisations in Europe. Typically, European manufacturers of electronic components and electronic equipment have approximately four weeks of their material requirements in-transit at any point in time, so any further logistical disruption could prove to be a big problem...
ecsn logo
Beware of boom & bust...?
The Chip Acts in the USA and Europe will have some impact on rebalancing geographic semiconductor manufacturing capacity away from Asia. This (to be welcomed) geographical diversification of the semiconductor manufacturing base will increase supply security and provide high skill employment, both directly and indirectly, but will also increase manufacturing costs, which will have to be reflected in selling prices. Financial analysts and semiconductor forecasters are concerned that increased investment by governments and by industry will almost certainly lead to a period of overcapacity, probably over the next 18 months or so, before it’s eventually utilised, and may prove to be an inefficient use of capital.
Final thoughts...
Adam Fletcher, ecsn Chairman
The fiercely competitive nature of the global electronic components supply network should, I believe, ensure that availability of proprietary semiconductors will ‘normalise’ at 12-16 weeks during the next 6 months, with commodity semiconductors normalising by the end of the year. That, of course, is assuming no further destabilising events occasioned by the current high levels of geopolitical tensions – and you’ll have to forgive me if my analysis is out by a calendar quarter. However, spiralling costs, the impact of inflation and likely ongoing tight supply of raw materials unfortunately means that component price increases were, are and will remain an inevitable outcome in the medium-term.
As we progress through 2022 and into 2023, there will inevitably be further challenges for the electronic components supply network, and it’s the ability of the people within our organisations to communicate and collaborate effectively that will best mitigate the risks. In the interim, my best advice is for all organisations to continue to work with their trusted, long-term supply partners. They understand your organisation’s current and future needs, value your custom and, in order to maintain the ongoing supply relationship, are highly motivated to get the electronic components your organisation needs in the correct quantity, quality, at the right time, place and (hopefully) price. I look forward to providing a positive update on activity in the electronic components supply network to EPDT readers later in the year...
About the author:
Adam Fletcher is Chairman of the Electronic Components Supply Network (ecsn), a trade 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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