Supply Chain’s Unintended Industry Impact

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.

Hot potato
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.

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13 comments on “Supply Chain’s Unintended Industry Impact

  1. SP
    May 16, 2013

    One can easily see the loophole for countereit components finding their way in supply chain.

  2. chipmonk
    May 17, 2013

    What Steve Sanghi of MicroChip complains about is the inevitable consequence of losing competitiveness as the technology ( in his case low – cost micro-controllers ) matures / disperses and there are are more and more Suppliers ( semiconductor companies – IDM or Fabless ), commoditization, having to cater to the low – margin / high – volume Consumer Electronics market, control passes from technologists to dealers / marketers.

    In the first phase of Outsourcing the technical companies raked in the profit but the tables have inevitably turned and power has passed to the providers of Outsourced mfr. service providers and Dealers.  Hey even Apple is being forced to bring out stripped – down models, reduce their margin ( Verizon is pushing iPhone 5 at a discount ).

    Anyone who chases the huge Chinese market / outsources to China should accept that sooner or later they will be pirated and lose their shirt. You cannot do business on the long term with the Chinese. Make your money there with old mature technology, then re-invest in new technology and put up a brick wall with no contact / dependence with China or the Chinese. Can't have it both ways. 

    Having let the genie out of the bottle it is too late to complain about getting eaten alive.

  3. SP
    May 17, 2013

    @chipmonk, well said.

  4. Ashu001
    May 20, 2013


    These are very,very Good Comments!

    But do you think the Chinese will permit A company to bring Old,Mature Technology only to China?

    Especially today when the World-wide Perception is that China and the US are the only real Growth Engines in Town?

    Don't you feel they will put all sorts of licensing,etc requirements in place[Including Technology Transfer or sharing] first?

    Most companies(and I know this is so true on Wall Street),will do anything and everything possible to sell their Products even if it means selling their Souls to the Chinese!!!

    How do we handle this situation then?


  5. Ashu001
    May 20, 2013


    Do Look at the recent Spats between Europe and the Chinese on the Issue of Solar Panels and Steel.


    Looking at this Information its extremely clear all is not Hunky Dory in either Europe or China today[If China was doing well,what was the need to export all that Steel outside the Country???]

    And these arguments are just the first of a long and nasty battle between Two trading Super-powers who are fighting over a declining Piece of the Pie(Global trade) today.

    How does this fit into the Whole Global Supply Chain issue?

    Well one will see massive changes in the Global Supply Chain as it stands currently.

    A lot of things are about to change very soon.

    We need to be prepared.


  6. chipmonk
    May 21, 2013

    There can be little question that China's phenomenal growth since the 1989 Tian an Men massacre has been fueled by the outsourcing of mfg. & free technology xfer from the West. This has been driven mainly by Wall St. in search of China price ( regimented non – union labor cost just 10 to 20 % of the US ). Contrary to popular myth that this has helped the avg. consumer in the US most of the savings have been kept by the Corp.s who have destroyed US manufacturing & tax base in the process. They have used some of their bonanza to hire opinion makers in the media and academia to mislead the public, even scare them of consequences if outsourcing to China was stopped. For the last 20 years China has scored a trade surplus of some $ 300 billion per year with the US (imports just 20 % of what it exports to the US – mostly via US Corps ). The real impact of this deficit to the US is magnified by 3x as it impacts not just expenditure for unemployment benefits, loss of tax base but also the 2 to 3 fold rise in cost of raw materials as the Chinese Communist party, supported by Wall St.,, indulges in break neck  development & consumption so as to hang on to power, and lastly they invest billions they make off the US economy into new weapons to assert themselves and spread illiberal values around the developing world. It is only because trading with China fattens the Wall St. hedge fund operators ( not so much the avg. 401 (k) investors who are actually screwed by China ) and the pols in DC they have bought that the US has been committing slow suicide by trading with China and giving the store away. Financial models show that if the US and western Europe ( incl. Germany, who unlike the US have benefited from China trade ) pulled out of China, their economies would actually revive and China won't be growing quite as fast. The only way to do it is to go COLD TURKEY.

  7. Himanshugupta
    May 21, 2013

    Chipmonk, so you are saying that China has outsmarten USA in its own game. So, all these talks and lectures about free market and Capitalism are bogus and we should rewrite the history book. I think blaming someone else just because they have been working harder does not make sense to me. Also i do not see any relation to such comments with this article.

  8. t.alex
    May 21, 2013

    Suppliers like Microchip are facing very tough competition from companies in China or Taiwan. Instead of buying off-the-shelf microcontroller from Microchip, we can easily get a customized one from Taiwanese vendors at equivalent low prices. 

    This is like butterfly effect: a small drift at the end-consumers can cause a huge swing at the supplier level. 


  9. Ashu001
    May 21, 2013


    Undoubtedly that is most definitely what is happening currently.

    However,the Question arises once again ,How Do you check this trend?

    Or stop it altogether?

    This is where Chipmonk's Suggestions come very much in Handy.

  10. Ashu001
    May 21, 2013


    Who said China is not free-market oriented today?

    On the contrary they are Totally free-market oriented today.

    And that's the Big problem for the US.

    US has built up an over-bloated Welfare System which needs to be slimmed down if we are to compete effectively with the Chinese;its either that or our Energy costs have gotta keep dropping steadily to ensure More and More Manufacturing moves back to the US.

  11. Ashu001
    May 21, 2013


    I am not disputing all that you just said here but most of it is History.

    What is the Way Ahead?

    Is'nt that the most important issue now?

    Do you forsee(as the Media is currently singing constantly) that the Shale Gas Boom will totally-totally change the way Manufacturing happens Globally(with more and more of it being done in the US)?

    Or will America mess up this once in a Generation oppurtunity to use our Natural Resources to the best of our Advantage?

    What do you feel will happen?

  12. t.alex
    May 21, 2013


    The suppliers have to adjust themselves. For example I am wondering who still uses Microchip nowadays?

  13. Ashu001
    May 22, 2013


    Believe me there are STILL a lot of people who use Microchip today.

    The Brand-name counts for quite a bit even today(amongst the Old Buyer crowd).

    We should never forget Basic Human Pschyology here-Humans don't like to Change,especially when they are Happy with the Quality of Existing Service Delivered.

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