The semiconductor shortage: myth or reality?
2 October 2024
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The electronic components market has undergone one of the most significant changes in recent years. If during the pandemic demand was sky high and stocks almost non-existent, today the situation has changed radically.
Alessandro Nardo, founder and sales manager of Electronic Partner for over 22 years, describes how the current market landscape has been shaped by recent events and procurement strategies that are creating new dynamics and challenges.
1. Overstocking
One of the key factors characterizing the current market is excess inventory. During the pandemic, demand for electronic components increased dramatically and stocks were rapidly depleted. Companies in various industries, concerned about the possibility of a long-term shortage, stockpiled materials to prevent production stoppages. However, as global demand slowed and production resumed, excess inventory built up in the supply chain.
Nardo points out: “Many companies now have warehouses full of components that they cannot move quickly, and this has had a knock-on effect throughout the supply chain. Manufacturers, distributors and retailers are working to reduce excess inventory, which has resulted in availability exceeding current demand.” This scenario has created new challenges for electronic manufacturing services (EMS) companies, who now have to deal with a saturated market characterized by increasingly intense competition.
2. Price reduction and the parallel market
As available stocks have increased, the prices of electronic components on the official market have fallen. This phenomenon has also led to the expansion of the so-called parallel or grey market, where those who have accumulated stock now try to monetize it by selling it at bargain prices. “However,” Nardo points out, “the parallel market can be risky as it often does not guarantee the quality and reliability of the components sold, with potential problems related to counterfeiting or non-compliance.” These dynamics have increased the need for companies to carefully verify their sources of supply in order to avoid operational risks and ensure product integrity.
As analyst Dieter Weiss explained at the Evertiq Expo in Göteborg, the semiconductor crisis in Europe may have been less about a real shortage of materials and more about “artificial demand”. Comparing the trend to the famous toilet paper crisis during the pandemic, Weiss argues that many companies, worried about a potential shortage, overstocked, creating a domino effect that fuelled the crisis itself.
Weiss describes the situation as a logjam in the supply chain, likening it to road traffic: a lightly applied brake on one vehicle can cause a chain reaction that blocks the traffic behind it. Similarly, the backlog of orders in 2021 and 2022 has filled the OEMs’ warehouses, slowing down current production, which is now at a standstill.
This “self-fulfilling prophecy” as Weiss calls it, has led to unprecedented build-up of inventories. In fact, European EMS companies accumulated around €5.2 billion of excess inventory in 2023, with the sector growing by 4.9%but with the prospect of a slowdown by 2024.
This “self-fulfilling prophecy” as Weiss calls it, has led to unprecedented build-up of inventories. In fact, European EMS companies accumulated around €5.2 billion of excess inventory in 2023, with the sector growing by 4.9% but with the prospect of a slowdown by 2024.
Despite the current difficulties, Alessandro Nardo believes that the market can still offer significant opportunities, provided that companies adopt more flexible yet secure sourcing strategies. In the current scenario, planning has therefore become increasingly difficult for almost all companies, which, if successful, will require conditions that are difficult to maintain (especially over time and therefore in the next market upturn).
In this context, official prices can be reduced by 10-20%, but the grey market can offer even greater discounts, with reductions of up to 30-40% (companies with large inventories in need of immediate liquidity). However, in order to take advantage of the grey market, it is essential to conduct a detailed test of the components in question by independent and impartial laboratories, as there are many non-original and/or defective components, and there will be more and more of them (let’s not forget the “Class B” products that can also end up in official distribution and can be identified by a detailed test!)
This scenario means that companies often wait “until the last moment to buy” and when they find these advantageous prices, they buy immediately, making this type of stock extremely volatile, thus recreating the “altered” situation of the post-Covid era.
In summary, the electronic components market is going through a period of adjustment after a period of unprecedented growth. Companies now face an environment of excess inventory and price erosion, but with the right supply management strategies, even the current market uncertainty becomes manageable.
Do you need to understand when and how much of a lot is actually worth buying, even at a very competitive price? Contact us and develop a different strategy for the current market and perhaps even for the future!
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