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Semis & Supply Chain: Chip CEO Points to Disconnects

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

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?

8 comments on “Semis & Supply Chain: Chip CEO Points to Disconnects

  1. _hm
    April 5, 2014

    This is very much true and put in very most appropriate words.

    Few months back I also commented to your blog that reducing margin for distributors is very much desirable. The logicc- in whole chain their value addition is almost nil. And on the contarary due to very much lack of knowledge, it adds up delay and confusion. Also, for technical designer it creates chaos.

    I really loved those halcyon days. It was so much fun to design and interact with semiconductor manufacturer – even with snail mail, telex and telephone call.

     

  2. SP
    April 9, 2014

    Yes semiconductor market is definitely not an easy one. Its so difficult to know whats the actual demand and there is always risk of over production and obsolescnce. Instead of having many small distributors and manufacturers, its good to have few.

  3. Hailey Lynne McKeefry
    April 9, 2014

    @HM, i sympathize with you, and clearly the distribution channel has expanded to try and capture demand that they see. To play the devil's advocate, wouldn't consulting with an organizatoin that represents a broad variety of products in its portfolio end up with better designs? If you have a hammer, everything is a nail. THe same might be true of semi makers trying to convince an engineer to design in their chips.

  4. Hailey Lynne McKeefry
    April 9, 2014

    @SP, what do you see as the main benefit for the OEM of a more consolidated market? I could argue that having choices and competition could be a really good thing.

  5. _hm
    April 10, 2014

    @Hailey: Consulting with them with broad product portfolio is utterly futile excercise. Just imagine the contemparary pace of technology. It is almost impossible to keep up with this with few technical guy with little or moderate desing experience.

    Given the opportunity, designer like to be in touch with semiconductor vendor and with guys who design these products.

     

  6. sbsny
    April 11, 2014

    Great discussion! Having worked at small and large OEMs in positions from design engineering to regional management levels in engineering and manufacturing as well as various positions in distribution I have experienced many angles of this discussion. Unless you are a top tier OEM there are generally not enough technical resources to support every design engineer looking for solutions. Suppliers are clearly great for detailed support at large OEMs. For the remaining tier I have seen valuable examples of working with a distributor partner for design suport from concept through production and then the extra help to support EOL issues. For distribution to support services they need to be compensated in accordance with the value. I have also seen tier 1 OEMs rely on distribution as their supply and design chain partners and be very profitable along the way. In the end it's finding the right value model to fit the needs.

  7. SunitaT
    April 25, 2014

    I think the reason that the semiconductor guys are talking to a guy who is two levels away from the customer because the semiconductor industry doesn't have visibility for the customer, and obviously if it doesn't have visibility, the customer would be talking about Unit Price because having no visibility means the customer is not supplied any portfolio of the commodities in the semiconductor industry, the same portfolio that outlines the price of the commodity to the customer and explains the price. Reduced visibility means reduced confidence among customers in approaching the industry directly, and therefore to play it safe they are channelling using the middle men.

  8. Hailey Lynne McKeefry
    April 30, 2014

    @sbsny, welcome to the conversation! Clearly distribution has always had a place with smaller manufacturers… How do you see the demands on the channel evolving?

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