This article was originally published in AV ELECTRONICS (elettronica-av.it) - Issue 22 from September 19, 2023
The first half of 2023 ended with a surprisingly strong sales performance of electronics components distribution across Europe. However, as expected after two years of allocation and massive pre-ordering, the booking situation worsened, specifically in semiconductors. What does this mean for the remainder of 2023 and the near-term future? And will the AI processor fight between Nvidia, Intel, and AMD drive a new rush into semiconductors that will inevitably affect the “normal” market, too?
What does the AI Processor showdown between the CPU and Graphics giants above have to do with the distribution market in Europe? Nothing! Everything!
Nothing, because it happens in an industry sector that is removed from the shallows of a European market that is mainly driven by automotive and industrial sectors and customers.
Everything, because the next surge in semiconductors may be led by new processing superpowers coming from GPUs in servers for cloud computing. And that surge could end in the next major upcycle which in turn will influence lead times and availability throughout the entire components industry regardless.
So far, we are still in the “Nothing” state. We are just experiencing the tail end of the last allocation with availability falling back to normal (in most cases) and full inventories at customers that have been built by double ordering and strict NCNR rules.
Distributors in Europe, at least from a revenue perspective, had a run the last 2.5 years: 32% plus in 2021, another 32% in 2022, and despite the starting slowdown the first half of 2023 ended with almost 13% plus in sales. But that run is over for the moment. New orders have dropped significantly. The recent Q2 data revealed book-to-bill ratios under 0.7, which are as unprecedented as the 1.7 were two years ago, but equally unsurprising, given the behavior in the market. No good prospects for the second half of 2023, as low bookings will translate into low sales soon. Interestingly, while Germany, Italy, and France showed the same trends (low book-to-bill), the UK and Nordic countries still presented a positive order book.
The big question now is: “is the low demand just a function of full inventories or is it the start of an economic downturn in Europe and especially in key markets like Italy and Germany?” If you look at the industry confidence as represented by the well-known monthly Production & Manufacturing Indices (PMI), the psychological situation (confidence) has become worse than it was in the last downturn year 2019 and worse probably than the real situation is.
However, there is a lot of uncertainty in the single countries’ economies, low consumer spending, geopolitical problems of gargantuan scope, the lack of any growth impulse from China (both due to geopolitics and internal problems). There is also the Russian war against Ukraine which is taking an economic toll on the European economy by driving inflation and energy prices and disrupting food supply chains for half of the world. Industry-specifically, there is also the big elephant in the European room of a stuttering EV market and the lack of competitiveness of European car makers against a wave of cheap EVs from Asia.
After this lot of nothing, let’s look at “Everything”: the future prospects of semiconductors (and components in general) and where a major impulse for growth can come from. It’s the cloud. It’s actually a new cloud that needs much more horsepower than what we currently see. It’s a cloud that has more built-in artificial intelligence in software and hardware than ever before. A cloud that shuffles and stream more complex data than ever by using more GPUs, GPUs, High-Bandwidth-Memory (HBM). A cloud that turns people away from a dreadful reality into a virtual Meta-World. Whatever that may look like, it will be more powerful servers, more powerful computers, phones, tablets.
If that sounds too silly, look at IoT, 5G, more complex electric grids, robotics, self-driving cars and whatever piece of automation and digitalization that will come our way – none of that will work with the current cloud capabilities.
In other words, the components market will grow substantially to serve these additional needs. The widely proposed 1 trillion US dollars for the semiconductor market for 2030 sounds crazy but in fact is hard to miss under the above prospects. Which explains the race for leading-edge manufacturing subsidized by almost any meaningful economic region in the world. There might be some hard realities on this path in terms of delays and cost (for taxpayers and customers), but the AI-Cloud driven boom will happen.
If the current soft turnaround at the global level is already an indication of a next upcycle (in combination with the cutbacks on fab capacities that was reported recently for 2023), it will certainly start first in computers, servers, and smartphones and then drag everything behind it, with the usual mechanisms – huge fab capacities assigned to the digital giants, commodities following.
Or maybe a little diversity this time around? There is a huge awareness that the “Chip” market is not as homogenous as it may sound in the evening news. There is a need, especially in automotive and industrial sectors for more mature technologies that may not be interesting for each and every Integrated Device Manufacturer (IDM) but maybe for alternative sources who could use foundries instead of would come directly from a country that currently tries to create stakes in mature technologies – China.
What has this new Everything to do with the distribution market in Europe? Simply put, it will influence the business model. A lot of companies are pondering ideas how to rework their supply chains to mitigate disasters like the 2021/2022 shortage. Distribution needs to be aware of both the opportunities (different supply chain and service concepts as well as more digital efficiency) and the challenges (being circumvented or marginalized).