The global electronics supply chains continue to struggle with question of how much inventory is the right amount. Currently, given the current concerns about tariffs and the prospect of a weaker macro environment, our research suggests the trend continues to be to drive inventories even lower and, in our opinion, too low in some areas. We believe this could lead to an “overshoot” and subsequent shortages later this year.
Over the past 12 months, we have seen a 180-degree shift in demand and subsequent inventory levels on finished goods and work in progress (WiP) that end customers (and their associated supply chains) are willing to carry. This has been driven initially by concerns over increasing prices due to tariffs that has led to an overall concern about the macro economic outlook (recessionary fears, higher interest rates, etc.).
The levels of inventory that supply chains are willing to carry represent more than current demand. It is also a proxy of where the industry sees demand headed over the coming one to two quarters. When we are in a strong up cycle as we saw in the first half of 2018, supply chains typically do not care where inventory levels are and, in some cases, turn a blind eye to inventory. However, in a weakening market, especially after a strong demand cycle, supply chains try and reverse direction sometimes too quickly. This is one of the fundamental reasons the industry seems to go from feast to famine and seems to always get it wrong on both side of the cycle.
Our monthly survey of the industry showed early indication of the current downturn last August and continues to show signs that we are not out of the woods yet. Inventory level perception is still high, bookings remain weak, and cancellation/push out rates are at a two-year high. Click on the image below to start a slideshow of our most current research on inventory.
Most respondents saw a weaker first quarter in 2019 compared to the fourth quarter of 2018. Meanwhile, first quarter demand C1Q demand is roughly comparable to the previous two years. However, the next slide paint an entirely different picture when overlaid against what is considered seasonal.
We will watch with anticipation how this plays out in the second half of this year. Likely, we will quickly find ourselves back in a shortage environment. It’s a perfect storm of low inventory levels entering this period, long-term semiconductor content gains in the automotive and industrial sectors remain intact, and the coming 5G cycle.