Editor's note: The most ubiquitous components in any electronics design – interconnects, passives and electromechanical (IP&E) devices – are in the midst of an unprecedented supply shortage. What distinguishes this scarcity from others is the broad base of markets that are desperate for IP&E.
OEMs are facing idle production lines while they wait for devices that cost less than a nickel. Engineers are trying to find work-arounds for components that are facing 40-week lead times. AspenCore Media’s Special Projects team is taking a deep dive into everything IP&E: What end markets are gobbling up components? Why isn’t capacity being added? Where are prices going? And how did we get here?
Finally, we’ve interviewed IP&E market leaders to find out how they’re meeting customers’ needs, and what the supply chain can expect from interconnect, passive and EM technologies in the future.
The ghosts of shortages past – specifically, the inventory glut of 2001—are haunting manufacturers of interconnect, passive and electromechanical (IP&E) components. Even with a severe global shortage of these parts, manufacturers are adding only minimal production capacity. The electronics supply chain has learned a lot since 2001, but somehow it ended up with another supply imbalance.
“The multi-layer ceramic capacitor (MLCC) shortage is the most severe,” according to Stifel’s July 16, 2018 Industry Update, “with many parts on allocation, which is causing headaches for the rest of the supply chain. We heard that some suppliers of parts with normal lead times are seeing order-rescheduling requests from customers waiting on MLCCs or other parts.”
Components that in some cases cost less than a penny threaten to halt global manufacturing lines. So why are these “jellybean” components causing agita across the globe?
The simplest explanation is more of these components are going into end-products than ever before. Items such as cell phones use twice as many IP&E products than they did a few years ago. Products such as the iPhone, which used to have about 120 components, now use more than 1,000.
“We see high demand pulling more units into the marketplace; we also have a backdrop of products becoming more technical,” said Andy King, president of Arrow Electronics Inc.’s global components business. “It would be a struggle to find a vertical market that isn’t growing. There’s automotive, data, industrial, IoT, medical and anything ‘smart’.”
High-end automobiles will contain as much as $6,000 worth of electronics by 2020, according to IHS Markit. Demand for automotive semiconductors will rise more than sevenpercent through 2022 and outpace the 4.5% growth of automotive electronic systems in general.
Despite this surge in demand, manufacturers of IP&E products are conservative about adding manufacturing capacity. During the dotcom boom of the late 1990s, demand surged for electronics components and suppliers ramped up manufacturing. The market hit the brakes in 2000-2001, leaving suppliers, distributors and customers with billions of dollars’ worth of unused inventory. This caused prices to crash; had OEMs and EMS providers pushing excess off on one another; glutted the authorized distribution channel; and greatly augmented the gray market.
AVX Corp., a leading manufacturer of capacitors, began capacity expansion in mid-2017. “We were doing that strictly to increase capability in several of our product groups, one in the MLCC and also in our tantalum/polymer area,” said John Sarvis, AVX CEO, on its FY 2019 Q1 analyst conference call. “And then we had planned roughly around 20% increase going forward into 2020.” However, he explained, manufacturing equipment suppliers are quoting long lead times to customers, limiting their ability to expand.
As capacity begins to come online at the end of this calendar year and into 2019, the industry may see a softening of demand, but not to the degree of easing the constraint, Sarvis added. “These capacity increase are lagging 18 months behind the demand. For example, from 2010 to 2015 the piece count in MLCC’s grew 5% to 7% annually. In 2016 and 2017, the piece count grew 12% to 17% depending upon the case size. If demand continues to grow and it has over the last few years, we’re looking at supply constraints for some time to come.”
Ring in the new technologies
At the same time, said Michael Knight, president of TTI Inc.’s Semiconductor Group, much of this capacity is dedicated to new technologies.
“[IP&E component makers] are adding capacity for the business of the future — not for legacy products,” he said. Some legacy devices have been around for 20 to 30 years, and IP&E products don’t make the technological leaps common to semiconductors. IP&E manufacturers typically don't set aside capital for new manufacturing capacity.
“If you have limited capital to invest in expansion, do you invest that in a product whose days are numbered, or do you put it in next-generation products?” Knight added.
“I’m not sure adding capacity now will make much of a difference,” said Arrow’s King. “[IP&E suppliers] haven’t brought a new MLCC fab up in years. There is limited capital to invest, and from what I have read [MLCC manufacturers] weren’t making a lot of money anyway. We have demand acceleration; we have twice as many MLCCs in a product than in the previous version; and some suppliers have realigned what products they will be in and not be in. “
Market analysts have called out Murata for declaring multiple product lines as end of life, essentially forcing customers to buy their new products. “As Japanese MLCC makers including Murata have begun to convert their capacity for general-type MLCCs to automotive MLCCs since 2017, the MLCC shortage (especially general-type MLCCs) is intensifying and the price is spiking as a result,” reported SeekingAlpha.