The fortunes of the electronics supply chain can change on a dime. Following two years of severe component shortages, demand is weakening, and inventories are too high, a March study found. One global distributor describes the environment as “normalizing” but cautions there’s still a lot of instability in the 2019 forecast.
Tobey Gonnerman, Fusion Worldwide
“Based on our survey results and conversations with various supply chains; we believe the industry has yet to see a true bottom as demand continues to be weak and inventories continue to be viewed as too high,” according to Technology Partners Consulting. “Additionally, there’s concern over the macro environment especially in China. We would want at least another month of positive improvement along with an initial positive outlook before we would believe we are at a bottom in this cycle.”
TPC in March surveyed more than 12,000 electronics industry professionals worldwide.
“’Normal’ these days certainly includes a level of instability,” said Tobey Gonnerman, executive vice president of global trade for distributor Fusion Worldwide. “The widely documented growth in board-level component consumption, along with explosive demand across growth sectors like IoT and automotive, has further complicated the supply chain. In general, the hyper-shortage issues of 2018 have subsided, and an increase of excess has followed.”
This pattern is typical after a prolonged shortage, he added. “The excess is the result of double-bookings, aggressive pull-ins and over-buying to create safety stock. Many are bullish about the second half of this year so we’re expecting strong demand and the inevitable gaps as well.”
The demand outlook for Q2 ticked up slightly, according to TPC, with 32 percent of respondents expecting demand will weaken (vs. 35 percent in February) and 23 percent expecting better quarter over quarter (QoQ) growth – up from 19 percent.
“In general, it feels like we’re in the eye of the storm,” Gonnerman said. “We don’t feel like the back-end of it will be stronger than the front that already came through, but certainly there’s increased market instability in the forecast.”
Lessons from the millennium
In the late 1990s, a boom-bust cycle in electronics resulted in inventory levels that took years to burn off. A correction this time won’t take nearly as long or be as dramatic. Although TPC cites “abnormally high” cancellation expectations in March, just-in-time, lean and build-to-order practices have left the supply chain in relatively good shape. Additionally, electronics distributors have flagged customer orders that seem historically high.
“The electronics industry seems to be slowly coming out of crisis mode,” an industry executive told the Institute for Supply Management. “Lead times and costs have leveled out in some commodities, and dynamic random-access memory (DRAM) prices are actually coming down.”
If demand weakens as expected, cancellations could quickly drive up inventory levels, according to TPC. Forty-one percent of TPC’s March respondents saw cancellation rates increase over the past 30 days. This indicates customers are trying to drive their inventories lower due to the belief of a weaker Q2.
Fusion, an independent distributor, hasn’t suffered from significant cancellations at all, said Gonnerman.
However, some end-markets are still feeling the squeeze from limited electronic component availability. “Business remains very strong amid rumors of a slowdown, but forecasts do not indicate this,” a transportation equipment executive told the ISM. “Electronics are at tight capacity from manufacturers, with no [change] in the near future.”
This is the electronics industry, after all.
No relief in MLCCs
Normally, higher inventory levels mean component prices come down. However, this supply cycle is already different from others. Some interconnect, passive and electromechanical (IP&E) device manufacturers have used the recent disruption to transition from legacy to leading-edge products. MLCC supplies, according to Fusion, will remain unbalanced for some time.
MLCC manufacturers are focusing on small case sizes and are pushing large case sizes out of production. These changes will lead to new product designs and an eventual increased demand for small case sizes. Until then, industries still using large case sizes will face ongoing supply issues, particularly on 0805, 1206, 1210 cases, Fusion said.
The ease or difficulty in transitioning to a different case size depends on the user, said Gonnerman. “I don’t think there’s a one size fits all answer to this – MLCCs are so widely used. There are so many different end products and applications and technologies – the transition for some could be quite easy. For others, it’s an extensive and arduous process – cost, time, resources, customer contracts, size, performance, workability – are all so variable and comprehensive.
Some MLCC applications must stick with larger case sizes due to value/tolerance/voltage or a combination of factors, Gonnerman added. “I believe the manufacturers will certainly continue to support those products where a smaller case size replacement isn’t possible.”
Murata is reducing its backlog in small cases sizes but not the large case sizes that are in demand, Fusion reported. Murata is still taking orders for MLCCs in large case sizes, but current lead-time forecasts are 20+ weeks. Distributors have been notified that their cost will increase 10 percent for all case sizes of the GCM series, Fusion added.
Samsung has stepped in to fill large case size demand, focusing production on case sizes 0805 and above. Fusion expects price increases on large case sizes beginning in Q3 to take advantage of the decreasing production for larger case size by Murata.
Taiyo Yuden is competing with Samsung in the large-case size MLCC market. “However,” Fusion said, “the company plans to consolidate production to certain voltages because of the increased orders from previous Murata customers. For 1206 and 1210 packages, Taiyo is going to focus more on automotive, artificial intelligence, IoT and 5G markets to support growing demand. At the same time, Taiyo is planning to reduce their production capacity for general-purpose large-case size MLCCs.”
Price movement on memory
Memory prices have decreased by 10 percent to 15 percent, according to two market watchers, and may decline even more. “While many active components have maintained or increased their price points, memory has always taken on commodity characteristics in the market – pricing and demand fluctuations, rapid technology changes and shorter lifespans, tight competition, and an extensive trading market,” Gonnerman said.
“In general, the memory manufacturers run pretty tight build schedules and try to keep average selling prices (ASPs) aggressive; excesses put them into the red so they’re looking to avoid that for sure,” he added.
The prolonged period of growth for memory came to an end in Q4 2018, with combined DRAM and NAND revenue of $35.8 billion, down 19 percent from Q3, according to Yole Developpment. Both markets experienced oversupply in the quarter caused by unseasonably weak demand, including lower-than-expected smartphone sales and a slowdown in data-center demand. As a result, ASPs experienced significant declines in both markets and inventory levels increased at the memory suppliers.
Manufacturers expect that by Q3 supply will not only balance with demand, but also there will be a shortage, Fusion said. “There are indications that some manufacturers are already dropping production for memory modules with 2400-MHz speed and pushing for the shift to 2666-MHz modules. The compatibility of the slots for both types makes things a lot easier for the transition and paves the way for the new speed types, like 2933 MHz and 3200 MHz, slowly being introduced.”
Cypress and SK Hynix have entered into a joint venture to manufacture the next generation series of NAND products for the automotive, industrial and IoT markets. Cypress will provide its full suite of single-level cell (SLC) NAND Flash products (1 Gb to 16 Gb) for this venture, notably the S29GLxxxxxx and S34MLxxxxxx series, whereas SK Hynix System IC will provide its expertise and already-broad customer base. Customers were given advanced notice of the coming change, said Fusion, and many moved to preemptively secure stock for FY19 to negate any supply disruptions.
“U.S. distributors now have a healthy supply of Cypress memory, specifically the S25FL and S29GL lines, and pricing is at similar levels as Q1,” Fusion reported. “OEMs and CMs that are not confident their supply of Cypress memory will last through FY19 should consider securing buffer stock while the market has enough supply and prices are stable. Any delay in production from Cypress/Hynix could result in open market supply quickly drying up.”
ICs, MOSFETs & CPUs
Depending on the manufacturer, there is either too much or too little material to suit their needs for ICs, MOSFETs and CPUs. Renesas is temporarily halting production in six of their Japan-based plants (13 globally) due to significant excess material, according to Fusion. The stoppage is expected to last three months and curtail 10 percent of their production relative to 2018. Reports indicate the excess material is a result of decreased demand from China markets, namely automotive and commercial sectors. Renesas has struggled to accommodate this deterioration in demand, and the shutdown is a preemptive measure to cope with its unpredictable outlook toward the second half of 2019.
Fusion said it is already observing wide-spread inquiries across all regions and industries as customers proactively mitigate any anticipated supply chain issues because of the shutdown. Renesas is urging distributors and tier-1 customers to place orders as soon as possible, which will enable the manufacturer to solidify demand and optimize production for shorter lead times. Current orders are also being revised. As it stands, most lead times are being quoted at 16 to 24 weeks, which is substantially longer than its 2018 average of 10 to 12 weeks.
In MOSFETs, wafer shortages are disrupting production, Fusion reports, along with strong demand for power semiconductors from AI, automotive and consumer markets. This is compounded by the inherently low production value of such chips because manufacturers often choose to cut their production capacity in favor of higher valued lines.
Infineon IGBT lead times remain at 52+ weeks. The shortage is mainly contained to high-frequency and high-voltage IGBT transistors like IHW15xxx, IHW30xxx, IHW40xxx & IKW75xxx, which are widely used in soft-switching applications.
ON Semiconductor has been de-committing on deliveries to end customers, Fusion said, and it hasn’t seen any large quantities of stock being released at the distributor level. Distributor lead times are currently being quoted at 20-30 weeks across all lines with no announced recovery date, with wafer shortages still cited as the main cause.
TPC reports that inventory and availability continue to improve for most electronic components. The exception is CPUs — at least according to Fusion. “The desktop market is still bonkers,” the distributor said. “There’s no other way to put it.”
- Coffee Lake has been the biggest challenge recently for customers with the “usual suspects” in the Core models from i3s through i7s continuing to come up short for direct support.
- It's been a year since mobile CPU started running short, and there’s no relief in sight. Supply is comparatively worse than Q1 2019, and according to recent reports, it is not expected to normalize until Q4.
- Kaby Lake, namely the i5-7200U, and Kaby Lake-R are running painfully short. Skylake, on the other hand, has improved as tapering demand has helped to shore up gaps.
- Whiskey Lake has been an area of calm until this month. New step codes for the i5-8265U and i7-8565U have been launched, but the changes have yet to result in any increased supply pressure. The Whiskey Lake Refresh, expected in Q3, has everyone on edge since very few product launches have gone smoothly of late.
At least one server CPU is running low, said Fusion. Allocation is tight on lower Xeon CPU E3 and E-21xx. Supply for V6 is slightly better than V5 and E-21xx. Intel does have limited production capacity on these because lower-end Xeon CPUs share the same production line with desktop CPU.
Expectations for Q2
Source: Technology Partners Consultants
Booking expectations for the second quarter of 2019 have improved, TPC concludes. Forty-six percent of respondents expect bookings to increase versus 44 percent in February. Only 18 percent expect weaker bookings versus Q1. It’s possible there will be an uptick in demand in Q4, TPC concluded.
Fusion – which begins its fiscal year in October – reports year-over-year growth as positive, but different from prior quarters. “The types of product and spread of customers is more diverse than before,” Gonnerman said. “Last year there were some concentrated areas caused by shortages that represented a larger percent of our business than normal.”
Independents often take advantage of opportunistic buys, especially when inventories begin to build. “We maintain a very lean approach to speculative buying – generally we sell first, buy second – but of course we strategically buy when our assessment of potential future opportunity is positive,” Gonnerman said. “There are many buying opportunities at the moment but we’re approaching them selectively.”