In addition to many other factors relevant to business, Kitron constantly monitors the electronics manufacturing industry situation. To remain competitive, we must stay on top of the latest trends and developments. We use this knowledge to inform our decisions and create strategies that will help us stay ahead of the competition.
Our focus will continue to be on semiconductors, as they are the hottest topic among electronic components, but we also see other subjects as important. Today, there are so many things happening in the world, and most of them are affecting the electronics industry market in some way.
What happened in the component market last year
A part of "The perfect storm" continued throughout the year. Before we saw a global drop in Asia consumer demand, we noticed an increase in geopolitical tensions and raw-material shortages, which resulted in a reduction in China's manufacturing capacity.
Eventually, the global economy and the fear of a recession slowed down the consumer demand in Asia, and we could see signs of recovery in the market – this, together with huge tied-up capital among all players in the supply chain, started to free up some material in the late part of last year. It has continued to improve in many ways, and even though we still have a lot of issues and challenges, we are able to see a clear trend in the recovery. It is also clear that lead times are coming down, but prices in many areas are still going up or are stabilizing at high levels, which is unique.
Overview of the supply chain
Generally, as more supply becomes available, the global supply chain pressure shifts.
Earlier, the main focus was on availability. However, now we also need to manage increasing inventory levels so that we tie up the right inventory.
On the positive side, we have:
- Lead times and availability are clearly improving.
- During the rest of 2023, we expect to see more of our overdue POs delivered and our supply constraints easing further.
- Prices are stabilizing – meaning that we will see fewer price increases in the coming year.
On the negative side, we see that:
- We still face "Golden screw” challenges, and now it’s not only raw material that is a bottleneck at component manufacturers but also capacity and constraints, for example, testing or packing.
- The big amount of NCNR’s are challenging. NCNRs mean “non-cancellable and/or non-returnable,” and before the crisis, NCNRs were 2-3% of all electronic components, but today that share is over 15%, and most of them are for relatively expensive components.
- Manufacturers and suppliers still quote long lead times even though we know and can see that lead times are dropping. This, however, will most likely adapt to reality rather quickly.
- Furthermore, pricing is not decreasing even though lead times are slowing down – which is quite an extraordinary situation.
Overview of pricing
We face a very unusual situation where lead times get down, and prices keep going up or stay at high levels.
Inflation, high labor cost increases, and prices on raw materials keep the prices on components high, but also the fact that CAPEX is going down this year for the semiconductor industry as a way to balance capacity and demand to a situation where the manufacturer can keep the prices at the highest levels so that they can get a return on their heavy investments made in the last few years.
There are, of course, variations in this area, and where we anticipate more price increases are, for example, for power supply components, but decreases, are for timing devices and electromechanical components. Land transportation costs remain high while sea and air freight costs are decreasing but at very high levels. PCBs from Asia are back to pre-covid prices, but PCBs from Europe are stable at high levels mainly due to capacity constraints.
Outlook
A global pandemic showed everyone how vulnerable it is to have the world's semiconductor supply come from one source due to geopolitical dominance. The global nature of the semiconductor industry means that the supply chain is vulnerable to government policies and geopolitical developments. Risks or concerns moving forward include, for example, the reduction of CAPEX in 2023 within the semiconductor industry. We also see a big risk with limited capacity for mature chips and technology. As long as these components are not profitable enough, this is still an important point to consider.
Another risk is the "risk" of rebounding in consumer demand, which will put us in the same position as in 2021 and 2022. The question is not “When will the chip shortage end?” but “When will the next evolution of the semiconductor supply chain begin?” So, in short, the semiconductor market is expected to decline a few percent in 2023 compared with 2022, but long-term growth is unchallenged. The focus is shifting from availability to inventory management.
Component availability is generally improving, but the remaining "golden screws" are more difficult to solve. Prices for raw materials, transportation, energy, and foundry costs are still high.
Lastly, we all know that this is not the last time we will encounter challenges in the component market, and we strongly advise - design and re-design for availability. It means no single source components and avoid unique components, as that requires considerable leverage within manufacturers to get the support you need. Be proactive - approve as many alternative components as possible.
You can rely on Kitron to support your "Design for availability" efforts and, as stated - keep your customer team together to form the best common plans for moving forward.
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