July 1st has come and gone marking the start of 2H 2022, the second half of the year. At the start of 2022, expectations for electronic components were cautiously optimistic and generally positive. Certain lead times had stabilized and while there would be challenges throughout 1H 2022, the outlook from experts saw steps toward recovery.
Has this opinion changed? In short, yes.
In October 2021, Pat Gelsinger the CEO of Intel told CNBC that a supply-demand balance wouldn’t be met until 2023. In March 2022, that prediction was still tentatively held and confirmed by Deloitte that some component woes would ease during the second half of 2022. These predictions have since shifted. Why? Global disruption in the form of war, lockdowns, and the long-lasting semiconductor shortage.
Pat Gelsinger recently told Yahoo Finance at the end of May “we’re about halfway through the chip shortage.” The usually upbeat and optimistic Gelsinger’s comments were a sobering reminder of the lasting and continued challenges of the global chip shortage. “My expectation now,” Gelsinger explained, “is that it persists through 2024.”
This change is reflected in the lead time reports for components across the board. While there is stabilization with some components, a good majority of these predictions are prefaced with a disclaimer. This disclaimer asserts that these future predictions are subject to sudden and significant unexpected change.
Richard Wilding, professor of supply chain strategy at Cranfield University in the UK, told Wired magazine the old way of supply chain management has switched. “Managing a supply chain used to involve 80% predictability and 20% coping with surprises,” Wilding said. “That’s flipped.”
“We used to occasionally have black swan events. The problem now is we have a whole flock of black swans coming at us,” Wilding said referring to the rare and hard-to-predict occurrences that have major impacts. With continued demand for chips rising, a whopping 17% in 2021 from 2019, these events are becoming more likely and long-lasting.
What Changed?
“It’s a crisis,” Commerce Secretary Gina Raimondo said in January. That much hasn’t changed. The global semiconductor shortage exposed a plethora of choke points from too much dependency on one geopolitical region to the lack of transparency in others. The Harvard Business Review in their article The Semiconductor Crisis Should Change Your Long-Term Supply Chain Strategy said pre-pandemic normality is gone.
In fact, it may not have existed at all.
“There have been seven semiconductor shortages in the past 28 years (including the current one),” the article stated. “By our calculation, there are some 50 choke points in the global supply of these crucial pieces of technology. Any one of these could be the cause of the next semiconductor crisis.” While the intensity of this semiconductor shortage blows the past crises out of the water, the future challenges might be even worse.
We know the root cause behind the 2020-2022 global semiconductor shortage. Manufacturers expected a downturn in purchasing due to lockdowns and job loss. Semiconductor orders were placed on hold or reallocated when demand not only jumped back sooner than expected but also grew. Semiconductor fabs shut down around this time due to pandemic lockdowns, which resulted in a significant impact on chip availability.
Something that should have taken a year or two to end. Then black swan after black swan, in Richard Wilding’s words. A series of natural disasters in 2021, Covid-19 lockdowns, and bizarre complications in the face of a transport ship blocking the Suez Canal plagued last year. They put dents in the recovery effort but were managed by the start of 2022.
Pat Gelsinger, along with leaders from AMD and Nvidia expressed opinions on stability in late 2021. While tentative, there was an expectation of shortage easement in late 2022 and into early 2023.
Then two major global events occurred. Russia invaded Ukraine on February 23rd, 2022. China experienced an outbreak of a fast-spreading sub-strain of Covid-19 called Omicron BA.2 that forced its tech-centric cities including Shanghai and Shenzhen into lockdown. Ukraine supplies 45-54% of semiconductor-grade neon used in the lasers that manufacture semiconductors. Russia supplies 25-35% of the global market’s supply of palladium, a rare metal used in semiconductors.
While Russia’s invasion of Ukraine cutting off neon gas supplies wasn’t originally cause for concern on semiconductors, rising transport costs are. Available shipping volume has decreased, and many original equipment manufacturers (OEMs) have been unable to obtain critical components.
Some of these critical components are used in equipment made by ASML Holdings and Applied Materials. The equipment they provide? Chip-making equipment.
“The biggest issue we’ve faced over the last six to nine months,” Gelsinger said in response to why the shortage will persist until 2024. “Is the equipment that goes into the semiconductor fabs. These equipment lead times have pushed out pretty substantially.” Even with all the new semiconductor manufacturing plants in the middle of construction, how do you make chips without, ironically, chips?
What are the Lead Times Now?
It is important to note that while lead time forecasts are done with market changes and global events in mind, this prediction is more tentative than normal. Based on the dire situation in Ukraine and the lasting effects of Covid-19 lockdowns, changes are more probable. In the face of rising transport costs and high demand, the trend for the electronic components industry is upwards. Components seeing stabilization are facing rising prices and those that aren’t increasing in cost have longer lead times.
Some components are seeing stabilization but are facing rising prices from external market conditions.
In the face of rising transport costs and high demand, the trend for the electronic components industry is upwards. Components seeing stabilization are facing rising prices and those that aren’t increasing in cost have longer lead times.
As it stands, the electronics industry is going to have another few months if not the rest of 2022 to weather the storm. Early predictions on the market and the timeline for recovery hadn’t prepared for the two major disruptions that came a few months into 2022. The invasion of Ukraine has sent ripples throughout the entire global market and all industries.
These events, while unexpected, are not rare. The return to “normal” is no longer possible and it should not be something companies seek out when the demand-supply balance returns. The global semiconductor shortage taught dozens of important lessons. These should not be discarded for the safety of familiarity when things eventually settle down.
We need to apply these lessons now if we want to face future challenges more strongly.
How Can You Come Out On Top?
While most companies are facing decreases in revenue, some faired and prepared better than others. This division is most noticeable in Big Tech and the automotive industry. Many tech companies including Apple and Dell, learned painful lessons from the 2017 semiconductor crisis. When the global semiconductor shortage began in 2022, tech companies jumped.
The Harvard Business Review in the same article detailed steps Big Tech took that should be applied to all industries that rely on semiconductors. These steps include; a bill of materials for semiconductors, commitments to suppliers with non-cancelable and non-returnable orders for 18 to 24 months and collaborating with suppliers to earmark specific components for sole use and tracing.
More than that, the article touches on Apple’s commitment to TSMC by investing in the 5-nanometer microchip that in turn allowed Apple to book out most of TSMC’s manufacturing capacity. What does this example show others? Collaboration is key and showing loyalty during the worst disruptions by strengthening relationships is how you beat shortages.
In contrast, at the start of the shortage automakers cut or canceled previous orders of components expecting a drop. Automotive semiconductor component needs are far more custom than white goods consumer products such as Apple phones and devices. The automotive industry also relies on just-in-time deliveries close to production to optimize inventory costs. It was a recipe for disaster.
How can the automotive industry and others succeed? While orders may be more customized, the reliance on chips is only expected to grow. This means collaboration with suppliers, transparency with them early on during a project to forecast component needs, and investing in new technology will help prepare for the next shortage.
No Time? No Worries, Meet the Electronic Component Distributor That Can
It takes a lot of time to build a strong foundation with a supplier. In the middle of this crisis, many manufacturers are too busy trying to keep their heads out of the rising water to proactively plan steps on how to not sink next time. For those that don’t know where to start in this difficult adjustment period, electronic components distributors are the lifesaver you need.
Area51 Electronics is an electronic components distributor that has the added benefit of collaborative advantage in its inventory. What’s collaborative advantage? It’s all about forming an alliance to ensure both companies are working synergistically for the greater good.
Like Big Tech, Area51 Electronics knows the importance of working together and strengthening relationships between suppliers and manufacturers. By collaborating with each other rather than taking what one needs and moving on, not only does everyone win but the global market suffers less of a blow during crises.
Area51 Electronics is a diverse, independent and authorized distributor that has a large portfolio of manufacturers to work with and the added benefit of an independent. That means all your hard-to-find, obsolete components are not so “hard-to-find” anymore. If you’re ready to start building a stronger, better future Area51 Electronics is prepared to get you there.
