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Could the global chip shortage precipitate a widespread inventory glut?

Could the global chip shortage precipitate a widespread inventory glut?

Two rows of circular microchips sitting on a warehouse shelf. | Sourcengine

Currently, semiconductor industry leaders and market analysts expect the global chip shortage will drag on into 2023 because of robust end-market demand. Consumer interest in new personal electronic devices and cars is expected to outpace existing capacity until then. However, a new Nikkei Asia article examines the possibility that the parts bottleneck is precipitating a widespread inventory glut.

In the immediate future, chipmakers holding excess quantities of integrated circuits (ICs) could lead to a significant price drop. However, electronics manufacturers might encounter major sourcing difficulties if a microelectronics surplus develops.

Emerging Signs of an Upcoming Electronic Components Supply Glut

Although shortages are a regular occurrence in the semiconductor industry, the present crisis is unique in its scope and duration.

The shortfall began in the automotive industry at the end of 2020. Carmakers slashed their component orders last year amid a massive drop-off in consumer interest caused by the coronavirus pandemic. Since vehicle manufacturers relied on a just-in-time (JIT) inventory model, they were caught flatfooted when automobile demand surged suddenly last December. Chipmakers and foundries rushed to fabricate more personal transport parts but lacked the capacity to address their customers’ needs.

AlixPartners estimates the automotive sector will lose $110 billion to the shortage this year, a development that has prompted a reconsideration of long-standing business practices.

Ford and Toyota are looking to stockpile larger quantities of critical semiconductors to prevent shortage-related factory shutdowns in the future. Nissan plans to revamp its inventory management model after grappling with supply chain “fragility” following COVID-19. Plus, Nikkei Asia reports Honda is considering changing its ways after incurring parts stock out losses this year.

However, the vehicle sector’s newfound procurement concerns are disrupting chipmakers’ demand visibility. Infineon Technologies CMO Helmut Gassel said the corporation’s order book reflects two years’ worth of revenue. However, the executive commented that widespread double ordering could be responsible for its recent sales growth.

In March, Bloomberg warned scarcity-averse manufactures could be pushing chip lead times past the 14-week danger zone. By early August, it determined delivery dates for various microelectronics had risen to a historic 20.2 weeks.

In addition, bulk pricing for 4GB DDR memory modules stagnated in June and July, following a dip in smartphones sales last spring. Omdia analyst Akira Minamikawa expects supplies of that component type to exceed demand in the first half of 2022.

What Happens When Manufacturers Create a Semiconductor Glut

When inventory gluts occur in the electronic components industry, they tend to affect OEMs, CMs, and EMS providers in waves.

First, manufacturers fear motivated buying drives up lead times as chipmakers and foundries work to fulfill unexpectedly large orders. During this phase, providers often increase their prices in response to intense end-market interest.

Second, product pricing hits a wall as the previous supply-demand imbalance stabilizes. After firms stockpile enough parts to facilitate their long-term production needs, their procurement decreases. At this point, distributors will contact their customers to determine if double ordering had taken place to avoid bottlenecks.

Third, microelectronics vendors and distributors are forced to cut their prices to clear out their warehouses. As the industry moves out of the boom period, chipmakers and foundries suffer serious financial difficulties, including faltering stock prices. Though difficult, providers have learned to manage the semiconductor industry’s inherent volatility.

However, the global chip shortage prompted a paradigm shift; corporations are moving to diversify and expand their production capacity. Intel is spending $20 billion to build two large fabrication complexes in the United States. Samsung is investing $17 billion to construct a state-of-the-art chip factory in Texas. Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chipmaker, is launching a $12 billion facility in Arizona.

Provided global demand for electronic components remains high, those new plants will bolster the bottom lines of their operators. But if the industry enters an extended cool-down phase, those providers could end up with substantial unused capacity. As modern part factories are only profitable if they run 24/7, that development could cause the sector’s leading manufacturers serious problems.

With the holiday season approaching, an inventory glut will not be apparent right away. Regardless, OEMs, CMs, and EMS providers should consider integrating Sourcengine into their supply chains. The global e-commerce marketplace can help companies acquire the components they need without geographical restrictions. Its technology-driven products and services can provide businesses with the tools necessary to navigate the field’s ever-changing landscape.

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