Don’t Expect Normalization Any Time Soon
The electronics supply chain has been anything but smooth in the past year, so predictions of a return to normal (if anyone can remember what that looks like) are appealing. After a period of extreme component shortages, followed swiftly by inventory overhang, everyone is asking when component supply will normalize? But with demand still fluctuating, interest rates rising and the specter of recession on the horizon, it seems, even if things are improving, the answer is not right now.
Inventory correction is underway
Despite the uncertainty, some supply and demand rebalancing is indeed underway. The ECIA reports an improving sales sentiment for June and July after a significant drop in May, with semiconductors primarily driving this shift. Semiconductors demonstrated the most significant improvement in lead times, likely due to more fabs coming online to increase supply, but there are also some increasing lead times to watch out for in this space.
New product launches and the rapid deployment of AI chips are the foremost growth factor for many IC houses, with companies like Nvidia and Qualcomm reporting a notable up tick. TSMC also claims to see recovery on the horizon with capacity utilization for advanced processes below 7nm rebounding in June.
Some chip makers are, however, still dealing with inventory adjustments and although the worst months of the chip glut are now behind us, all eyes are on the second half of 2023 for a return to increased demand as those excess inventories continue to burn off in Q3.
Which sectors will fuel recovery?
According to ECIA data, sentiment around avionics/military/aerospace shows the greatest optimism with a score above 100, and medical also improving. The industrial sector offers a negative outlook, but the automotive market remained on track with automotive chips still in demand.
Chip shortages hit the automotive sector hard, so it’s interesting now to see initiatives such as the joint venture between Stellantis and Foxconn, designed to provide an ‘auto-industry centric’ source of semiconductors for the ever increasing number of computer controlled features, particularly in the EV sector.
Clearly, the recent semiconductor shortages have left everyone wondering if they could do things differently. In this case, hopefully the joint venture will not only drive auto innovation but also ensure a robust supply of essential components.
And although signs look promising for automotive, there are still some constraints with sensors, in particular, in high demand. All of which means some projects may still be impossible to complete thanks to just a few hard to source components, despite a gradually improving picture on availability.
Consumer electronics tells a different story, however, with sluggish demand across the board. Unsurprisingly in the current climate, personal electronics appear to be the last to recover with the smartphone market seeing the worst demand slump. Cue another round of production and price cuts that could further impact supply.
Recession fears add to hesitancy
Across the world, interest rates have been increasing and although fears of a near-term recession have diminished, economic conditions are anything but stable.
Bearing in mind that every interest hike impacts the cost of holding inventory, this is a worry for many businesses sitting on surplus components, particularly if those purchases were financed through loans. Costs to maintain these components may now outstrip their value, prompting tough decisions on whether to re-sell, or hang on to them until the market picks up.
Which of course, it might just do. Figures from the US Census Bureau indicate a rise in durable goods orders, which jumped 1.7% month-over-month in May, making this the third straight month of rising orders. Does this suggest that the US economy could prove resilient to a recession, or even avoid a down turn altogether?
What this means for you
For buyers, this news might be a mixed blessing since a rebound could easily lead to a return of parts shortages. Should the balance tip in favor of growth, purchasing conditions may once again become constrained with reduced availability on some electronic components as manufacturers ramp up production and demand increases.
As these factors play out, one thing seems certain – supply chain worries are likely to impact operations for a while longer. Planning ahead will continue to be crucial throughout the rest of 2023, with forecasting and advanced procurement just as essential as it was at the height of the chip shortage, despite the excess inventory lingering in the supply chain.
So, whether you’re drowning in surplus inventory or searching for one of those components still plagued by shortages, AERI can help. We can even purchase buffer stocks of those products that are most difficult to find at any given time.
Good to know we’re here really, given that normalization is not just around the corner.
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