Independent distributors: Expect tight supply especially earlier in 2021

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James Carbone – Contributing Editor

Electronics buyers will face longer lead times and some shortages in the first quarter, but it is unclear how long unfavorable buying conditions will last.

Non-franchised distributors say there will be limited supply for some passives and semiconductors in the first quarter of 2021 but tight supply for some parts could last through much of the year.

Demand has increased as several key customer segments, which had slowed manufacturing of their products during the pandemic, have now increased production of electronics systems and are ordering more components. In addition, distributors and some OEMs have increased inventories because of uncertainty and potential strong demand later in the year.

However, there is disagreement in the outlook for 2021 beyond the first quarter. Some in the supply chain say that supply and demand will “normalize” after the first quarter with no severe shortages for most parts.

But others are forecasting tighter supply later in the year as people worldwide get vaccinated against Covid-19 and the impact of the virus wanes. The thinking is the overall economy will recover and displaced workers will return to their jobs and demand for electronics equipment by consumers and businesses will bounce back, resulting in greater component demand and tighter supply.

Some independent distributors said in December they were already seeing shortages of components due to increased demand from the automotive industry and because of overall uncertainty in the supply chain, which is resulting in distributors and OEMs, increasing inventory levels.

Luke LeSaffre, director of sales – Americas for independent distributor Fusion Worldwide, based in Boston said: “Customers are coming to us with a long laundry list of parts” which are constrained. “Most shortages that we’ve seen have been from automotive customers. We expect that to broaden in the months ahead,” said LaSaffre.

Component demand is rising
He said demand is increasing from automotive customers for MCUs and some aluminum and electrolytic capacitors. Some automotive-grade MLCCs are also constrained, he said.

However, overall “right now we’re not seeing too much in terms of MLCC shortages but customers are calling that out as an area of concern,” said LaSaffre. MLCCs could be a problem for buyers later in 2021.

“We are hearing rumblings that we will start to see major shortages in the latter half of the Q1 and Q2 and have begun to look at lining up supply in anticipation of it,” he said.

LaSaffre said there has been some tightness with chip resistors. “Resistors and MLCCs often move in lockstep. We’ve actually seen more business on resistors than MLCCs. If one is tight than the other is likely to follow suit,” he said.

Some series of STMicroelectronics microcontrollers are highly constrained. “A lot of it is related to STMicro trying to allocate more capacity to some of their 5G oriented products,” said LaSaffre. “We’re expecting to see a pretty big uptick in demand related to 5G rollouts starting in middle of Q1.”

In addition, some NXP transceivers “have been tight in part due to resurgent automotive demand,” said LaSaffre. Some parts from Marvell and Texas Instruments also have long lead times.

Uncertainty in market
Matt Fonstein, vice president of trade at independent distributor NewPower Worldwide, based in Nashua, NH, said the majority of orders that NewPower has seen over the last six months are for parts that are in tight supply, including controllers, graphic RAM chips and MLCCs. Customers are buying the parts for buffer and hubbing programs that NewPower offers because of uncertainty in the market, he said.

“They are not sure where the market is going to be in 2021 so they are putting products in hubs so they know they have continuity of supply,” said Fonstein. Supply will remain tight for a number of components in the first quarter and perhaps beyond. Some of the shortages are not Covid-19 related.

“There are some big headaches for buyers not related to the pandemic, he said. For instance, a “huge” fire destroyed the Kasei Microdevices (AKM) factory in Nobeoka City, Japan in October, said Fonstein. The factory makes audio digital-analog and analog to digital chips used in audio and consumer electronics equipment and appliances. With production shut down, there are shortages for many AKM parts. Shortages could continue well into 2021. The company said the factory will not be rebuilt for at least six months, but some industry analysts think it will be longer than that.

The destruction of the AKM plant is causing other supply issues because AKM supplies raw materials for crystal oscillators. There are now shortages of those parts. AKM customers are working to redesign boards, and are looking for alternative parts, he said.

There are also some shortages of low-end Intel and AMD processors because of strong demand for notebooks and Chromebooks. A shortage of substrates used in manufacturing of processors and other high-end integrated circuits could have an impact on processors made by AMD and Nvidia.

“There’s a handful of substrate manufacturers. We are heading into a situation where that material is going into a shortage,” said Fonstein. “Intel, AMD, Nvidia are fighting over supply. Intel consumes about 80 per cent of substrates and are willing to pay premiums to get their hands on the substrates,” said Fonstein.

LeSaffre said one reason buyers can expect tight supply of some semiconductors in 2021 is a shortage of 200mm wafer capacity. While many chipmakers have shifted from 200mm wafers to 300mm, there are still a lot of chips produced on the smaller 8-inch wafers. However, as of December 2020, there were “major constraints on supply of 8-inch wafers,” he said. Strong demand for power management chips, display drivers, sensors and analog chips and some controllers built on 200mm wafers has resulted in tight 200mm foundry capacity.

Fewer wafer starts
Another cause for tight supply was there were fewer wafer starts in early 2020. “It was very much Covid-19 related,” said LeSaffre. “There were shutdowns and reductions in workforce and things like that,” he said. “So, there was a limit on output and that affected the current supply situation.”

There are also “geopolitical factors contributing to a run on fab capacity,” said LaSaffre. As part of the U.S. trade war with China, Huawei Technologies faces restrictions on use of U.S. technology. As of 15 September of last year, the semiconductor companies were not allowed to sell semiconductors to Huawei if the chips were developed or produced with U.S. software or technology. Before the deadline, Huawei placed large orders to lock in future supply.

In addition, there is a lot of uncertainty right now going on with SMIC, the Chinese foundry, said LeSaffre. They may also face restrictions on U.S. technology. “If that happens that’s going to remove overall capacity at the foundry level,” he said.

Dave Valletta, executive vice president worldwide sales for components manufacturer Vishay Intertechnology, headquartered in Malvern, Penn., says buyers should expect tight supply conditions in the first quarter, but more normal buying conditions in the second quarter.

He said in the second half of 2020 component demand began to pick up in some segments such as automotive and industrial started to recover. Automotive in the fourth quarter was “scrambling” to replenish inventories which were depleted. “By inventories I mean finished goods. Cars on the lot. This is driving a sharp increase in component demand, which is putting some commodities into shortage situations,” he said. He said there are shortages right now on some optoelectronic devices and resistor chips.

“Some of the shortages will continue through the first quarter,” said Valletta. But demand will “smooth out” later in the year, he said. “Will the level of demand that we’re seeing from automotive be sustainable all year? I think it will probably smooth out a little after the first quarter,” he said.

One reason demand may lessen is that the number of car shipments will increase in 2021, but not excessively. Valletta noted that vehicle production peaked in 2017, at about 94 million vehicles. In 2020, it was expected 70 to 75 million vehicles would ship and in 2021 about 80 to 85 million, said Valletta. Demand for components by the auto industry will rise, but not enough to cause severe shortages of many parts.

The same may be true with PC shipments. PC sales growth will be much less in 2021 compared to 2020. Last year PC sales increased sharply because more people worked and learned at home. Researcher IDC said PC sales would end 2020 growing 11.2 per cent to 291.3 billion units. However, in 2021 PC shipments will rise only 1.4 per cent although notebook shipments would rise 3.2 per cent, according to the researcher. While component demand from the computer industry may not decline in 2021, it won’t be overwhelming.

Valletta said another reason why component demand was high in the fourth quarter was “there was a lot of stocking going on. Our distributors were building stock,” because they were concerned there could be future shutdowns by component manufacturers because of new Covid restrictions imposed by governments.

The increases in component buying that occurred in the fourth quarter by the automotive and industrial supply chains and distributors will likely ease in the first quarter and supply will catch up with demand. So tight supply of some components will ease as more parts
are produced.

Demand will remain strong
Todd Snow, vice president of purchasing for independent distributor Smith, Houston, Texas, agrees there will be strong demand in the first quarter of 2021 and it will be stronger than the fourth quarter of 2020. However, he expects demand will remain robust through the second quarter of 2021 as well. He said there are several reasons including the buildout of 5G networks and handsets, continued strong demand for notebooks, Chromebooks, and other computers from people working and learning at home and rising electronics content in vehicles, as well as higher vehicle sales.

“There’s a lot of optimism with 5G infrastructure,” he said. 5G networks are being built and sales of 5G handsets will increase sharply, which will help drive component demand.

Even with the beginning of the distribution of vaccines, the work-at-home and learn-at- home trends will not abruptly stop in the first quarter of 2021. “You have a lot of home computing activity going on right now,” said Snow. “PC sales are up as companies buy additional equipment to support their employees working at home,” he said.

With so much uncertainty, some electronics companies are changing their supply chain, and inventory strategies in 2021.

“Before Covid, inventory was managed very much on a just in time basis,” said LeSaffre. Companies operated lean, and “minimizing carrying costs was a common widespread strategy,” said LeSaffre.

But Covid has “injected a great deal of uncertainty into forecasting demand. There’s been more of a push to place orders and lock in supply for components,” he said. A lot of customers have changed their minds concerning inventory. “They no longer see it as a something that needs to be minimized but rather optimized and finding there’s more value in having inventory,” said LaSaffre.