Electronic Supply Chain Outlook

December 10, 2021

Two global trends dominate the global electronics industry today.

According to IHS Markit, on the one hand, the sector is rebounding sharply. Analysts see strong demand in all key markets. Remote work and learning have stimulated adoption of innovative digital devices. Consumer products are in strong demand as so many households find themselves staying home for both work and play throughout the COVID-19 pandemic.

On the other hand, the challenge is that this strong demand continues to cause semiconductor shortages globally, especially in the auto sector. On the supply side, we’ve seen disruptions due to natural disasters and ongoing local outbreaks of COVID-19.

There are also troubling pandemic trends in South Korea, Taiwan, Malaysia and Vietnam which could lead to further production shortfalls. While the vast majority of semiconductor producers are operating at close to full capacity, sporadic disruptions cause volatility throughout the supply chain.

Growing Demand and Restricted Supply

Growing demand and restricted supply have caused prices to rise for both inputs and outputs in the electronics manufacturing process. In addition, the pandemic has caused shortages of essential raw materials, further driving up prices. In fact, input price inflation is the highest recorded since 1998.

Overall, the growth in the electronics industry has led to economic recovery throughout the world’s workshop in Asia. This includes China along with South Korea, Japan, Malaysia, Singapore, Philippines, Taiwan, Thailand and Vietnam.

Beyond the growth in individual markets, the electronics supply chain is tightly integrated across East Asian countries. This drives further economic growth through synergy.

China’s exports of integrated circuits were up by 32% year over year in June. Mobile phone exports were up 33.5% over the same period. Japan and Korea are experiencing very similar growth rates. Market watchers are seeing especially strong growth in demand for digital devices in the industrial and computing market segments.

IHS Markit projects that shortages for semiconductors and related products will continue, causing further price inflation for the rest of 2021. The most intense inflation affects printed circuit boards, but semiconductors, resistors, capacitors and connectors will all be subject to rising price pressures. Expect to see double digit inflation over the next while.

The good news is that manufacturers are moving to expand capacity. This will bring supply and demand closer to equilibrium in 2022 and beyond, stabilizing prices. Meanwhile demand for consumer electronic products will remain robust during 2022 to 2024. The implementation of 5G over the next five years will further drive global demand for smartphones.

The Industry 4.0 trend will lead to greater integration of advanced technology including the Internet of Things (IoT), cloud computing and analytics, artificial intelligence and machine learning. This will boost demand for industrial electronics such as high-tech sensors, embedded software and robotics.

KPMG has identified three top issues facing the semiconductor industry over the next three years. These are territorialism, potential supply disruption and talent risk.

Territorialism is by far the main concern. Industry watchers expect to see further tariffs, new trade agreements and national security policies that may adversely affect the semiconductor business. The continuing rivalry between the two largest global economies, the US and China, is likely to complicate supply chains and trigger further inflation.

Trade and Tariff Costs

The concerns with potential supply disruption are only partly due to COVID-19. The pandemic was less disruptive for the industry than expected. Of greater concern to industry watchers is trade and tariff costs. Even so, KPMG found that the semiconductor industry’s own mature, established global supply chains will remain resilient in the medium term.

The third issue is talent risk. This has always been a concern within the industry, but it has become somewhat less threatening because greater remote working opportunities have made recruiting easier than in the past.

The biggest priorities that KPMG identified for the industry were growth initiatives, talent management and improving supply chains. The most important aspect of driving growth in this sector is research and development. R&D needs to not only grow but also diversify into a wider range or product opportunities.

Talent management entails changing ways of working in the industry. Work from anywhere is now commonplace and many companies are finding ways to offer at least some permanent work from home options to staff. They see this as an opportunity to recruit from a wider talent pool, improve global collaboration and increase productivity.

McKinsey and Company have identified a series of long-term coping strategies for manufacturers impacted by the semiconductor shortage. They call on manufacturers to rethink the way they contract with semiconductor sources. In particular, industries may need to be more committed up-front to specific order volumes and honour them.

They also encourage businesses to reconsider the just-in-time inventory strategy. Maintaining such low stock levels throughout the supply chain has exacerbated the impact of the shortage.

Also, procurement professionals need to look at factors beyond price. When they consider sourcing resilience and the software life cycle, they may find ways to avoid making “penny wise and pound foolish” choices.

Avoid Making “Penny Wise and Pound Foolish” Choices

Single sourcing is another pitfall to avoid. McKinsey calls on manufacturers to look at alternative arrangements with multiple sources. They should also consider negotiating with semiconductor manufacturers to align supply guarantees with pricing levels.

Navigating all these supply chain issues will be challenging over the next few years. Kingstec can help your business strategize and move toward a supply chain that has the flexibility and resilience your company needs.

Kingstec has the ability to leverage our contacts across the globe to get the critical components you need in a cost-efficient and timely manner to ensure your projects stay on track.

Nobody knows the Asian manufacturing sector like Kingstec. We have been supporting brands who need offshore manufacturing capacity for nearly 40 years. We can introduce you to a range of high-quality, cost-efficient manufacturing partners in Asia, which remains the world’s workshop.

Why not call us today to discuss how you can mitigate the risks arising from future global supply chain volatility?

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