Diversifying Your Electronic Component Suppliers is More Important Than Ever: Here's Why
October 13, 2021
In the last few years, the global electronic components supply chain has been through a lot.
The 2018 passives bottleneck, the U.S.-China trade war, COVID-19, and the 2021 global semiconductor shortage have highlighted the weakness of the current ecosystem. That upheaval has prompted unplanned factory shutdowns and major revenue losses for chipmakers. Simultaneously, those events have been saddled OEMs with higher-than-expected tariffs, extended lead times, and stockouts.
If there is one lesson to be taken from the last half-decade, it is that traditional methodologies do not work. Pandemics, geopolitical conflicts, and nonseasonal shifts in consumer behavior did not give warnings before they struck. Accordingly, companies need to operate in the landscape where “the new normal” changes annually.
One of the best ways to mitigate ongoing and future supply chain problems is greater supplier diversification. And the best time for professional buyers to take action is now.
Why Semiconductor Supply Chain Disruption Are Becoming More Frequent
Like any industry, the electronic component sector is subject to volatility that constricts part availability and fluctuates pricing. But in the last decade, its supply chain has experienced several major disruptions, unpredictable events that negatively affect participants across the world.
Because the main contributing factors behind those disruptions have not been resolved, they will continue popping up.
For instance, the passives shortage that plagued OEMs in 2018 arose from changes in the global marketplace.
In the 21st century, several top automobile manufacturers began adding more new energy vehicles to their fleets. Electric and hybrid cars have become increasingly popular, in part due to widespread government purchasing incentives.
Also, cars loaded with multifaceted infotainment centers, precision route guidance, and enhanced rider safety systems have emerged as a major automobile sales driver. It turns out consumers enjoy driving personal transports that function like mobile third places.
As a result of those changes, vehicle manufacturers expanded their orders for parts like MLCCs and resistors. That meant car vendors had to compete with consumer electronics companies for supplies, which eventually caused the 2018 passives bottleneck. The same issue precipitated the more severe 2021 shortage.
Unfortunately, another shortfall of critical microelectronics is the possibility. In 2020, EV sales rose by 43 percent year-over-year despite the destabilizing impact of the coronavirus pandemic. Moreover, experts predict purchases of battery-powered vehicles will experience a compound annual growth rate (CAGR) of 29 percent through 2026.
The consumer electronics field also saw significant growth during the COVID-19 outbreak as businesses and individuals transitioned to functioning remotely. Analysts forecast the segment will reach $487.1 billion in value by 2026, up 35.87 percent from 2020.
Those projections suggest automobile and consumer electronics demand will continue disrupting the components supply chain for the foreseeable future.
Technological Advancement is Affecting Component Availability
Another factor affecting electronic parts availability and pricing is the rapid advancement of microelectronics technology.
Large OMEs are facing pressure to impress consumers with products that boast sophisticated features. Commonly, that means upping the chip content of their devices to enable new functions, such as enhanced connectivity. As a result, those multinational corporations will ramp up their component purchases to remain competitive.
As an example, Apple’s iPhone 5S housed 400 MLCCs, while the iPhone X model contained 1,100 MLCCs. MarketsandMarkets estimates that 5G-enabled handsets like the iPhone 12 can include up to 30 percent more MLCCs than 4G devices. As the Big Tech firm has not shipped less than 150 million smartphones per year in almost a decade, it will continue being a major capacitor buyer.
Apple’s focus on generational innovation also has a seismic impact on other parts of the semiconductor industry.
For over a decade, the Silicon Valley giant has sought to bring the key technologies that power its devices under its umbrella. Most notably, it began designing the processors for its mobile and computing devices in-house and outsourcing their production to Taiwanese Semiconductor Manufacturing Corporation (TSMC). Because of the merchant’s massive footprint, TSMC heavily invested in expanding its capacity, especially its cutting-edge production lines.
Other electronics companies followed Apple’s lead by equipping their phones with state-of-the-art functions like 5G connectivity.
This trend has pushed OCMs and contract chipmakers to gear their investments to more advanced nodes. That is a smart move from their perspective because aligning with prevalent trends enables them to maximize their earning potential. But as IHS Markit pointed out, this development has led to firms making some older but still viable parts EOL to spend more money on newer components.
Unfortunately, top industry players competing to release better mousetraps have created serious procurement problems for small and midsized OEMs.
The Long-Term Promise of Expanded Production Capacity
The instability affecting the global electronic components supply chain has not gone unnoticed by the industry’s leading providers or world governments. Many large corporations and nations are tackling the issue by establishing new production capacity and creating robust domestic microelectronics ecosystems.
On the business side, Intel, the world’s foremost IDM, is spending $20 billion to build two state-of-the-art fabs. In addition, Samsung, the industry’s biggest memory chip provider, is dedicating $151 billion to enhance its non-memory product fabrication capabilities. TSMC, which counts AMD and Nvidia among its clients, is investing $100 billion to expand its production capacity.
On the federal side, many countries are actively investing in their local electronic components industries for a variety of reasons.
China and the United States are eager to make their semiconductor supply chains independent of each other. South Korea is offering local manufacturers multibillion-dollar subsidies and generous tax breaks to protect its automobile and technology sectors. The European Union wants to bring the financial and social benefits of digitalization to its citizens. Plus, India is looking to cultivate a thriving national chip sector to become a digital innovation hub.
That said, it is important to note that many public and private development initiatives are centered on establishing state-of-the-art capacity.
The multinational push to develop greater semiconductor fabrication resources is a positive development. But greater microelectronics production capacity will not be available soon. It takes an average of $15 billion and several years to construct and equip an advanced fab.
By the middle of the 2020s, OEMs will benefit from operating within a supply chain with greater production capacity. But not tomorrow, and not if they depend on lagging-edge hardware.
Supplier Diversification Is the Best Way Forward
Ultimately, there is no “magic bullet” solution to fixing all the problems within the electronic components ecosystem.
Increased demand from the automotive and consumer electronics industries will continue putting strain on the supply chain. Private and public institutions are pouring billions into establishing new capacity, but that is a long-term project. And countries and corporations are concentrated on establishing bleeding-edge facilities.
With so much instability affecting the sector, the path to stability for OEMs lies in greater supplier diversification.
In the past, it made sense for companies to use a one-supplier model to fulfill their needs. The methodology allowed for simplified communication, financial predictability, and streamlined data system integration. But as the 2021 chip crisis demonstrated, putting all your eggs in one basket is an outdated strategy.
By contrast, partnering with multiple suppliers, especially those with extensive international networks, can protect OEMs from the inevitability of disruption. Working with a broader range of vendors enables firms to have a high degree of procurement flexibility when the unexpected happens. Providers can ensure their customers get access to the microelectronics they need, regardless of geography.
Supplier diversification can also let professional buyers source components made by leading manufacturers at competitive prices. Given that consumer preferences can shift at gigabit speed, OEMs need maximum operational agility. Joining with digital parts marketplaces opens the door to full traceability, amendable contract terms, and better customer service.
Plus, it is easier than ever for firms to connect with new suppliers. Many vendors offer a host of API integrations that make browsing, cost calculation, and ordering seamless. That means professional buyers can act immediately to make their organizations more resilient to the complications that will crop up tomorrow and next year.