In addition to many other factors relevant to business, Kitron constantly monitors the situation in the electronics manufacturing industry, which has been very turbulent. In order to remain competitive, we must stay updated on the latest trends and developments. However, we are pleased to be able to share a more comprehensive executive picture of the overall situation.
A brief recap of what happened in the component market last year
"The perfect storm" continued during the year. Before the global drop in consumer demand in Asia, we saw an increase in geopolitical tensions around the world, an energy and raw material crisis in Europe, many complications, and a decrease in manufacturing capacity in China.
Eventually, the global economy slowed down and the fears of recession caused demand for consumer products from Asia to fall. During the last part of the year, we saw signs of a recovery in the market - this, along with a huge amount of accumulated capital, started freeing up material.
While the consumer- and computer market is slowing down (affecting mainly manufacturing in Asia), we still see increasing demand, led by megatrends such as Electrification and Connectivity, in the Automotive market and an even higher increase among Industrial products.
The book-to-bill ratio is decreasing in the European component market, and more parts are becoming available earlier than expected.
Several semiconductor companies have announced massive investments due to the constraints in the supply chain and the recent economic downturn. Following the passing of the US Chips Act, the scope of investments increased even further. The chip industry has invested more than 500 billion US dollars in capacity expansion in the last few years. Once it is up and running and fully operational, this will certainly impact the component market.
The capacity increase that comes from the investments the foundries have made will mostly be seen in the most modern technologies and in components using 300mm wafers. Recovery will be staggered depending on technology and when investment turning into production.
Where are we now, and what should we expect going forward?
The semiconductor market is entering a major correction cycle, but it will take time, and it will be unbalanced. Almost all lead times on components jumped up together when "the perfect storm" sparked the component crisis - but they will not come down together! This is very clear, and we see obvious differences between different commodities, components, and manufacturers. The recovery will most likely be staggered, depending on demand development and when capacity investments coming into play.
The majority of new capacity investments have been made in smaller commercial-grade components, and this capacity is already available for Automotive components. Meanwhile, where suppliers are purchasing capacity, and OEMs face massive penalties, capacity could potentially be freed up early to mid of 2023.
Components aimed at the Industrial markets will face more capacity coming into play in mid-to-late 2023. For the oldest and biggest components above 90 mm - it might take until early 2024 to see improvements coming from increased capacity.
It can be helpful to understand these differences when reading articles stating that the “Component crisis is over”. It is recovering in many areas, but it’s far from over. The availability of some components has definitely improved, and we see some improvements in both hard- and soft- allocations.
We can see that manufacturers and suppliers are a bit reluctant to share reduced lead-time information at the moment, but we can see signs that lead times in practice are getting shorter than before for some components. Our focus is to look for ways to return to a more normal forecast-based ordering system as soon as possible.
It’s important to understand that the situation is far from over. However, we are glad to share that we actually see more components coming in that help us deliver much more products to our customers. Therefore, not only the chip industry but also Kitron is investing in capacity. As a result of the increasing demand, we are planning to increase our global capacity by 15% this year and to double it by 2027.
As you may already know, the bigger or older the component is, the higher the risk is for allocation or that the component will reach end-of-life. One of our strongest recommendations was to “design or re-design for availability”. That is a recommendation that today is still very valid depending on the design of different products.
Price development
In general, we have seen many price increases over the past few years. Unfortunately, we have not seen the end of it just yet. Especially not in semiconductors. Wafer prices are still very high. Inflation and raw materials, combined with strong industrial demand, continue to drive up the prices of semiconductors.
The price development for passive components, which started to go down due to the slowdown in the Asian market, is expected to flatten out during the year.
Transport shows a more mixed picture where land transportation will most likely get more expensive while air and sea transportation gets less expensive.
As far as mechanical components are concerned, the metal prices that were trending down at the beginning of the year bounced back up at the end of the year and are expected to rise further during the first few months of this year, but a lot depends on how the demand develops.
Outlook
Last but not least - there are plenty of remaining risks and uncertainties that we all need to be aware of and proactively try to mitigate risk for. The component market remains very challenging. However, we believe that during 2023 it will start to recover, and we will be able to offer our customers many more products than before. It will be a bumpy ride and an unbalanced recovery. Hopefully, somewhere in 2024, we will start to have a more normalized market again with Balance and Surplus stocks.
