Excess electronic component inventory was a challenge 2023 tried to shake. Strategic production cuts and inventory corrections have led to progress, but it wasn’t enough to solve the problem entirely. According to analysts from Edgewater Research, the first half of 2024 will likely be marred by the same inventory difficulties experienced in 2023.
How excess electronic component inventory grew to be such a problem in 2023 is a relatively easy question to answer. The disproportionate inventory overhang grew from market uncertainty over the length of the global semiconductor shortage. Aggressive stockpiling by original equipment manufacturers (OEMs), contract manufacturers (CMs), and electronic manufacturing service (EMS) providers over the pandemic originated from a place of desperation in the face of high consumer demand.
Disruptions from Covid-19 lockdowns shuttering facilities alongside bad weather, facility fires, and even a container ship blocking the Suez Canal contributed to numerous bottlenecks along the supply chain. Desperation fueled double ordering, which falsely inflated market demand. As consumer demand began to drop in 2022, amid inflation and recession concerns, many OEMs, CMs, and EMS providers had an inventory overhang by an average of 6 months. When the steep decline began in late 2022, companies were still receiving ordered stock from the height of the pandemic with no way to cancel orders.
Some Tier 1 manufacturers, such as TSMC, allowed customers to return or cancel previous orders for a fee or renegotiation of prior contracts. After a year of inflated prices, with some raw materials seeing price hikes of 200%, many small to mid-sized OEMs, CMs, and EMS providers lacked the buying power to negotiate returning unnecessary stock.
Saddled with months of inventory overhang and no buyers, many businesses could only store their excess inventory in controlled warehouses to prevent degradation of the electronic components while waiting for demand to pick up. However, the additional costs of storing electronic components safely to avoid deterioration from humidity or electrostatic discharge (ESD) can be expensive.
Over the last year, efforts to mitigate excess stock have slowly chipped away at the months of inventory overhang. Memory manufacturing, including Samsung Electronics and SK Hynix, engaged in strategic production cuts to some of their product lines. According to Edgewater Research, mitigation efforts contributed to progress in 3Q23 and 4Q23. Unfortunately, the electronic component industry isn’t out of the woods yet.
Consumer demand hasn’t yet fully recovered, and while artificial intelligence (AI) softened the bullwhip from shortage to excess, it did not erase it. During 2023, TSMC mentioned in the same timeframe that it was delaying and halting production for some advanced semiconductor production lines since demand was simply not there. Meanwhile, TSMC struggled to keep pace with the advanced packaging used for Nvidia’s coveted GPUs as demand exploded.
Over the coming months, DRAM manufacturers will continue to engage in strategic production cuts to keep the supply-demand stable, said Trendforce. In Edgewater Research’s report on the market outlook for 2024, demand in most markets will be relatively subdued compared to previous years. It might not be enough to digest the remaining excess, so further mitigation will be necessary.
Despite the remaining excess challenges, most analysts agree that a market rebound is coming in 2H24. While opinions vary between research firms on how dramatic the recovery will be, the market will turn around in the last half of the year. The International Data Corporation (IDC) is very optimistic about U.S. market resilience and China’s commerce recovery, which could result in double-digit growth year-on-year (YoY) for the semiconductor industry.
Ironically, after seeing the steepest decline in demand over 2023, memory components will be the primary driver of recovery in 2024. The World Semiconductor Trade Statistics (WSTS) believes that the memory will see a 40% increase from 2023 over the year. Even now, DRAM contract prices are rising across PC, server, mobile, graphics, and consumer markets, fueled by uncertainty regarding 2024’s outlook. This has contributed to a re-emergence of bolder procurement strategies and stockpiling of some DRAM components, such as DDR5.
With market recovery soon, it’s imperative that OEMs, CMs, and EMS providers, alongside original component manufacturers (OCMs), continue excess inventory mitigation efforts.
There are several ways that manufacturers can mitigate their inventory overhang if demand is low.
1. Return Excess to Your Supplier: During the pandemic, many OCMs made orders un-cancelable due to the widespread use of double-ordering. However, some suppliers, such as TSMC, allowed clients to cancel or return their orders for a fee.
2. Trade with Other Manufacturers: If your organization benefits from good relations with other companies in parallel markets still seeing high product demand, trading your excess inventory can be a beneficial and collaborative way to offload excess quickly.
3. Recycling Components in Other Products: If your excess inventory can be used as a drop-in replacement (DIR), form-fit-function (FFF) alternate, or functionally equivalent component for a part in another product that is experiencing stable demand, your company can digest excess by using it in another production line.
4. Reselling Your Excess: One of the fastest ways to regain lost capital from excess inventory is to sell your excess inventory to other manufacturers that require your stock.
Depending on your company’s needs, each method has pros and cons. While some businesses have the capital to return or recycle their excess inventory, others may not be able to do the same. The easiest way to mitigate electronic component excess is by selling it with the help of a global distributor.
One of the problems organizations encounter when trying to sell excess inventory on their own is the lack of market presence and inability to sell products globally. Without the logistics to ship electronic components worldwide, it can severely limit the audience to which a business can market its excess. OEMs, CMs, and EMS providers with excess inventory they want to sell should work with a global electronic component distributor with a significant digital presence and buyer audience.
Sourceability has both. With the ability to ship anywhere globally and its leading e-commerce site for electronic components, Sourceability has worked with OEMs, CMs, and EMS providers of all sizes to help sell their excess electronic components. Through Sourceability’s e-commerce site, Sourcengine, users can quickly estimate the real-time price they can sell their excess for through Sourcengine’s free-to-use Excess Estimator. This calculator leverages market intelligence from Sourcengine’s historical transactions and supplier offer data to gauge the maximum price.
Once you have your estimate–though it’s not required–you can turn around and work alongside Sourceability’s experts to sell your excess on Sourcengine’s site, where it will be indexed and searchable on all major search engines for thousands of buyers to find and purchase quickly.
If you want to prepare for a market rebound and hold on to your excess inventory longer, Sourceability’s premier and award-winning market intelligence tool, Datalynq, uses predictive analytics and alerts to reveal which components could be more likely to face disruptions or bottlenecks in the coming year.
2024 will be a year filled with opportunities, and Sourceability can help you prepare to grow with every single one.