Component cost and demand in the 2020s

TTI SVP business development, president Exponential Technology Group, Michael Knight states that how things have worked in the past are not how things will work going forward.

Q: How have component prices moved over the last ten years and are you seeing price increases driven by extending lead-times and shortages?

A: Generally, prices have deflated over the past decade. The notion of sales prices in electronics declining over time has become baked into consumer expectations then institutionalized in the purchase price variance metric prevalent through the component specifying and procurement communities.

The level of year-on-year decline is not uniform across all component types. Commodity passives particularly have been squeezed more than non-commodity semiconductors. During the past decade we’ve seen years the average selling price of chip capacitors and resistors declined more than 10 per cent. This led to manufacturer hesitancy to add capacity, especially for legacy parts. This contributed to the shortages we saw in 2018 and the shortages crippling many supply chains right now.

During 2018 we saw a temporary halt to price decreases, and even increases in challenged components. This was essential to encouraging suppliers to commit to capacity expansion. However, it’s now obvious that new capacity that came online then was only enough to relieve the immediate pressure, not enough to support the explosive growth in demand created by the ramping of 5G, IoT, electric vehicles etc in the current decade.

Q: It is predicted that component sales over the next five years will double compared to current sales. Does this mean authorized distribution can expect twice the sales and profits?

A: Even in down years for the industry, the number of components manufactured and shipped each year is always greater than the year before. This speaks to how significant price decreases can be. In down years component prices fall faster than shipping quantities rise, and historically the industry has had enough down years to create a bit of a bunker mentality going into the 2020s.

With this in mind, I don’t think the idea that the growth in demand for electronic components is going to greatly accelerate through this decade (and probably beyond) has settled into the collective mind of the industry. Rather, we are conditioned to expect a sharp drop after a sharp climb and even now many in the industry are bracing for a drop. This is especially rough on distributors who contend with multiple levels of competition, which drives a bit of a ‘race-to-the-bottom’ instinct, especially when quoting pricing.

Of course, any increase in demand is good for the toplines of all in the supply chain, but what good news there is on the bottom line is unevenly distributed. The go-forward source of profit improvement in distribution isn’t a slam-dunk and what there is probably won’t be the result of increasing the gap between component purchase prices and resales. It is more likely to come as the result of essential supply chain and design services that distributors are adding to the components they spec in and sell, and through the increasing digitization of their transactions with OEMs and component suppliers.

Q: Have shipping, raw material and other costs impacted component prices in recent times?

A: They have. All cost inputs have risen sharply: labor, chemicals, plastics, energy, transportation, packaging materials. This has triggered price increases unlike any we’ve seen in a long time—maybe ever. Not only have the prices for new orders gone up; open supplier backlog is being repriced, sometimes multiple times, before the product ships. This on top of the expediting going on now has increased the workload and stress on the entire supply chain. An unintended consequence is that new product development has slowed as resources are diverted to dealing with supply chain issues, which may end up being a safety valve that bleeds off a bit of the pressure that is building.

Q: Can you share your predictions and advice for the North American component supply chain?

A: Supply chain configurations and metrics have largely been unchanged for fifty years. Outsourcing, offshoring and just-in-time have optimized for cost, not resilience. The pandemic, trade wars and climate related disruptions have exposed the brittleness of the electronics supply chain, and the growing demand (despite all the environmental and economic head winds) threatens to break some of those links. I think the obvious first step for all participants is to acknowledge that how things have always worked are not how things will work going forward—waiting this out is not an option.

In the short-term OEMs should open up bills-of-material that are riddled with single sourced parts and invest in alternative sourcing. In some cases, products may need to be redesigned to use components available. OEMs should also expect to make more forward looking and binding commitments than ‘normal’. These actions will reduce some of the immediate pressure and incentivize suppliers to add capacity.

In the near term, time, energy and investment should be committed to evolving and modernizing every link in your supply chain. Much easier said than done, but critical to survive and thrive in the accelerating-demand environment for electronics that will be the hallmark of the 2020s.