ECIA president and CEO, David Loftus, reminds buyers that the current shortage problems, which will subside, are less damaging than the pandemic’s original dire predictions
Supply chain professionals’ searing memory of 2021 will be their efforts dealing with shortages. The frantic exercise to secure components and overcome shipping bottlenecks has been the everyday, often 18-hours per day, headache for millions worldwide.
These shortages are actually a good problem to have. Think back to the pandemic’s early days. Those dark clouds, dire predictions of recession and potential collapse, now seem a distant bad dream.
Through Q2 2020, most production lines were shuttered, workers idled and fear of a hidden assassin gripped the world. However, as essential businesses ramped output and other companies resumed production, we realized the world was not imploding. Governments injected trillions into shaky economies and by Q3 2020, most businesses were catching up for lost time.
Recovery efforts are causing the biggest headaches. The components market ran like clockwork for 50-years, with boom-bust cycles every four to five-years. Late 2019, the market was climbing out of the last down cycle. Most businesses had drawn down inventories. Just as demand ramped, Covid slammed on the brakes.
A rush of new orders has driven extended lead-times and escalating raw materials prices. Semiconductors will grow 24 per cent year-over-year to a record $550B. Dozens of new fabs are being constructed or planned, with hundreds of billions of dollars in new capex.
However, the new variable is nationalism. China, the EU and US are each dangling tens of billions of dollars in incentives for companies to build fabs within their specific borders. With 5G, IoT and EVs driving opportunities, it is hoped these investments will catch up and keep pace with demand without overbuilding.
Excess capacity can present equal challenges. Fabs are extremely expensive to build, from $2B to $20B. While many wish for extra capacity, ‘be careful what you ask for’. If supply overshoots, prices will rise to cover excess, under-utilized machinery.
Lastly, most buyers are reviewing their supply chains and improving their forecasting. Direct customers are reengaging with the channel to cushion supply disruptions. Most companies are reevaluating their forecasting methodologies and inventory policies to avoid future lines-down situations due to a few missing components.
While the current crises are painful and disruptive, it could have been worse. The market will stabilize (personal prediction is mid 2022), we’ll gladly resume some normalcy and hopefully learn some important lessons to protect our businesses going forward.