In the electronics industry, the semiconductor industry and the supply chain are inexorably linked. And an industry insider says supply chain evolution has hindered the chip industry.
Steve Sanghi, CEO, Microchip
We sat down with Steve Sanghi, president and chief executive officer at Microchip Technology, during the recent EE Live! conference to get his thoughts on the electronics supply chain. He was clear in his statements: "Honestly speaking, I'm not sure that the supply chain has helped the semiconductor industry. Really, it has actually hurt it."
He called the semiconductor industry as it existed 15 years ago as a halcyon time. "In those days, the semiconductor supplier shipped directly to the end customer, and we were talking directly to those customers about inventory and availability." As distributors and contract manufacturers (CMs) evolved, the picture changed. Distributors used to offer small and midsized organizations a way to get smaller numbers of chips. More recently, though, distribution has become the go-to channel for customers of all sizes.
"Enter the supply chain, and the semiconductor makers have to talk to the distributor and contract manufacturer, who is talking to the customer," Sanghi said. "Suddenly, we are talking to the guy who is two or three levels away from the customer."
The biggest downfall of the system as it has emerged is that it has pushed all the inventory risk directly to the semiconductor manufacturer. "Everyone convinces the purchaser that they are keeping inventory, but they don't. Since nobody is keeping inventory, the entire inventory burden has fallen on the semiconductor manufacturer."
Furthermore, some basic financial math has become problematic. "Margin is being shared by three guys, rather than the one semiconductor manufacturer."
The semiconductor market's growth has slowed substantially over the past two decades. "We had at least 10 years of double-digit growth, but in recent years, growth has been in the 5% range," Sanghi said. "Customers want 8% price reductions each year, and employees want a 4-5% cost of living raise. The cost of materials is going up. It just doesn't add up."
Over time, these realities have led to substantial consolidation in the semiconductor industry. In turn, of course, competition is reduced.
What's the industry to do? In part, the answer lies with semiconductor suppliers having strategic discussions with higher levels in the OEM organization. Today the business opportunity lies with proprietary products, rather than more standard fare.
"The supplier always wants to have a conversation about the cost of ownership, and the buyer wants to talk about unit price," Sanghi said. "We have to rise above the buyer and have a conversation at the CTO/CEO level to get to a person who sees the value of what a specific component will do to add value in the overall ecosystem."
Our conversation led me to wonder what our readers think about this topic. How do you see the evolution of procurement and the supply chain impacting component suppliers? Does Sanghi have a point?