For the first time this year, warning bells are going off regarding semiconductor inventory levels. Nothing has exactly been pointing to a yearend run on stock. However, given the ongoing assurances by the supply chain that communication and visibility efforts continue to improve between suppliers and their channel partners, the industry could expect a more balanced picture than the one IHS is offering.
The research firm, which published a report last week about the industry, said the level of semiconductor inventory is a significant concern.
Adding to widespread worries, the industry has not been able to reduce inventory within the channel or at chip suppliers. Given the excess inventory, end-equipment manufacturers have been delaying the placement of orders for additional components. The result on the whole is that chip suppliers aren’t running their manufacturing operations optimally, and also are manufacturing products solely based on historical demand. In some instances, projected demand also does not materialize, adding to the already slow-moving inventory pile.
Manufacturing to seasonality is a common practice, but we've been hearing all year long about demand trends running counter to cyclicality and to expectations, particularly in the distribution channel. IHS isn't implying that the excess is a surprise to anyone, and, of course, the industry has been hoping for an uptick toward the end of the year. Still, I think the industry could do better than basing its capacity entirely on "historical demand." IHS also says:
The complete reversal -- from positive expectations to negative numbers -- is indicative of how distressing conditions have become for the industry, and the downward pressure on sales has not eased. With final numbers yet to come in, fears abound that industry revenue could decline by as much as 3 to 5 percent when the year finishes, if economic conditions do not improve.
If there is any surprise, I guess it's that manufacturers weren't listening to their own executives or their channel partners for the past few quarters. The industry's largest distributors, Arrow Electronics Inc. (NYSE: ARW) and Avnet Inc. (NYSE: AVT), have voiced uncertain demand during their last two analyst conference calls. Both companies reported softness in all major geographies in the third quarter, and they said their book to bill barely reached parity. According to IHS:
As the year ends, the market finds itself at a difficult juncture, with no significant drivers in sight that will increase demand for silicon suppliers during the near term. All of the initial orders for manufacturing electronics systems that were anticipated for the holiday selling season have already been completed. And while the next opportunity for increased silicon demand will take place at the end of November when companies reorder components, market demand at that time will be small.
Here are a few predictions for 2013. I'd expect an uptick in inventory in the independent channel as companies take advantage of excess inventory and pressure on yearend balance sheets. I'd also expect more inventory showing up within the authorized channel. Chip makers may be able to eke out a less-than-disastrous fourth quarter, but the inventory isn't going to go away until demand ticks up.
IHS ends on a hopeful note: "Prospects brighten next year, with silicon shipments tentatively expected to climb 11 percent by the time the first quarter ends, when companies achieve equilibrium between inventory and demand." In other words, if chip makers do nothing for a few months, inventory will begin to balance out. That's not much of a growth strategy for the most astute manufacturing industry in the world.
What do you think? Could the industry have planned better?
The supply chain has limited ability to cut prices without the supplier's OK. If end-product prices are cut, as IHS suggests, end products will move (I would love an ultrabook!) But it will take awhile before inventory catches up. Another point IHS makes: Windows 8. I've been through a lot of OS upgrades and have yet to see one spur hardware sales. In fact, I know people who are buying last year's products to avoid Windows 8.
Well that is because the attitudes or the belives that we have on certain company behaviours are negative. I think its not done purposely but it happens. So if we can get it right then most of these issues will turn green.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.