SAN JOSE, Calif. — The semiconductor industry's in a funk, and the success of the supply chain has a lot to do with it.
At least that's what Steve Sanghi, CEO of Microchip, thinks. “The industry has an enormous challenge and I don't think industry knows how to cope with (it),” he said in an interview here at Design West, recently.
Here's his thought process: The semiconductor industry's growth has slowed from 15 to 17 percent per year to 4 to 5 percent. Customers insist on an 8 percent price reduction each year, and employees want raises while materials costs rise each year.
“Most CEOs would still price their parts for the future, believing they'll make it up in volume next year. When you go into the next year, there's more competition and they price it again for the year after,” Sanghi said.
But volume has “dramatically slowed,” he added, and US companies are losing money on under-performing product lines.
Strain in the chain
So you can chalk that up to human nature and corporate competitiveness, but here's where the supply chain plays a role.
A decade ago, IC vendors shipped their parts to a Cisco, for instance, and Cisco placed them on their networking boards and went off to the races. Industry recessions popped up every three to four years, when the OEM forecasting went hinky.
Now, the vendor ships to a distributor, the distributor ships to a contract manufacturer, and the contract manufacturer ships off the product.
“Now nobody knows what the hell's going on,” Sanghi said. “The end guy gives business to three ODMs who think they got 50 percent of the business. Each ODM is buying from a couple of disties, and each of those guys thinks they own 60 percent of the business. They're trying to get that lower price, and they say 'I'll give you 60 percent of the business if you give me this.' The total doesn't add up.”
No one along that chain wants to hold inventory, of course. “You call it a lean supply chain, but all the inventory is sitting with the semiconductor guy,” Sanghi said.
Parts take 12 weeks in the fab, and another four weeks in test and packaging before shipping. “Unless you give me 16 weeks backlog, I'm building on forecast, and the guys I'm talking to are giving me the orders with no inventory. Therefore you have more frequent inventory corrections. Now they come every 9 to 12 months.”
Sanghi pointed to Cirrus Logic's $22 million inventory write-off taken after a consumer order was cancelled.
There's another challenge that the chain causes, according to Sanghi. Partly because of these forecasting challenges, contract manufacturers are now reselling unused parts into the broker market after buying them in huge volumes for (usually) consumer product builds. That large purchase gives them market discounts on the parts.
“If they need 100,000 parts, they'll use what they can, then the rest goes into a resale division to push onto broker market using their very, very low cost to create incremental profit. Those parts that should be going at a market price are going at a lower price. In every company, 10 percent of business is brokered.
“This wonderful supply chain has caused two problems: more frequent cycles for the industry with lack of information. Secondly, it's created this enormous broker market, which is 10 percent of the business.”
But he's not angry or anything.