ECIA’s Chief Analyst Dale Ford recently appeared on a member webinar to report on ECIA’s mid-year forecast for the component industry. EMSNOW caught up with him for a follow up interview based on his insightful analysis. We present this material in two parts, with the second half posting on Monday.
EMSNOW: ECIA is forecasting a downturn in the components industry for most of the rest of 2019, but then a healthier growth cycle for 2020. How did we go from components on allocation just a few months ago to a softening in demand?
It is necessary to look below top-level trends and analyze the mix of components and markets when considering the dynamics regarding component allocation and softening demand. Both the supply and demand side of the equation must be studied. There are still certain component families where challenges with allocation persist while other product categories are reaching a more reasonable balance as demand slows and supplies increase.
MLCCs continue to face allocation challenges as the multiplying number of MLCCs required in newer generation smartphones continues to drive demand that outstrip supply. The economics related to MLCC manufacturing has limited investments in added capacity to supply greater volume that would help alleviate this situation. At the same time, other capacitor categories never experienced the strong supply/demand imbalance as MLCCs, and they have maintained a manageable inventory profile over the past 24 months.
On the other hand, the memory market is notorious for the wide swings in pricing and supply as suppliers regularly move through under- and over-supply challenges. Data Flash and DRAM products used in high volume markets such as smartphones and hot-growth markets such as data center servers were unable to meet demand as memory requirements per smartphone increased and data center growth exploded. During the period of high allocation prices were driven up and memory suppliers where motivated to increase manufacturing capacity. Repeating a familiar historical pattern of competition driving the memory market into oversupply, memory suppliers significantly grew supply and now this market finds itself in a situation where prices are plunging and inventories are growing.
In most component categories, manufacturers have increased supply and the market has now moved into an oversupply situation as the market demand has cooled. This ongoing swing between over- and under-supply has characterized the electronics components industry throughout its history and will continue in the future.
EMSNOW: In spite of the softening demand, inventory levels are trending down in certain categories, according to the data you shared from ECIA. Where is that inventory exactly and how and when does that ripple through the rest of the global supply chain?
According to surveys conducted by ECIA in North America, component manufacturers are reporting inventory levels of passive components that skew to the “high” side but not “extremely high.” DRAM and analog IC inventories at manufacturers are approaching a better balance but still tend to the “high” level. The category showing the best inventory balance at manufacturers is Data Flash.
Distributors and Rep firms report inventory levels that are lower overall across all component categories with Data Flash memory reported as “extremely low” in certain areas. A much higher share of memory ICs are shipped directly to systems manufacturers so the distributors and reps typically receive lower priority for supply of memory ICs. It is expected that memory inventory levels downstream at distributors and reps will soon reach a healthy balance.
In the overall view, manufacturers have ramped up production and now hold extra inventory that will be pulled through the supply chain in coming months bringing the inventory picture into balance across the supply chain. If component manufacturers scale back production rates to match weaker demand and manage their output efficiently, they will be able to avoid a significant build-up of inventory that could overhang as the market transitions into the next growth phase in 2020. The good news is that more effective supply chain management processes have resulted in fewer challenges with bloated inventories over the past two decades.
EMSNOW: The nature of the semiconductor cycle seems to have changed. Has the semiconductor cycle become more aligned with the overall economy over the past few decades? Why do you think that is the case?
Analysis of growth in the economy as reflected by GDP and growth in electronics equipment revenues and electronics components revenues shows that the turning points in these areas have aligned over the past 20 years. In the years leading up to 2000, computing and communications products became a significant influence throughout a wide range of industries and homes. At the same time electronics became global in their reach creating strong forces between the economy and the electronics industry that resulted in an alignment in the peaks and valleys of their growth cycles. The management of the electronics supply chain has become increasingly sensitive to changes in the economic environment and has actually become a leading indicator of the general economy as it responds faster to increasing or slowing growth in the overall economy. In a departure from this pattern, the most recent decline in electronics revenue growth was not mirrored in the broader economy. The most recent cycle has been more isolated to the electronics industry. Hopefully, the broader economy will remain healthy moving into 2020 and support the electronics market and technology forces that are aligning to stimulate renewed growth.
EMSNOW: How will the rollout of 5G impact the availability of components. If these technologies are as disruptive as they are predicted to be, will the component suppliers be ahead of the demand curve for the right components to avoid shortages?
PART 2 of this Interview will post on Monday.