Is Electronic Component Demand Trending Downward? Here Are the Details

By Logan Wamsley

The escalating electronic component demand further exacerbated by component manufacturers’ inability to adequately ramp up production appears to have plateaued – and according to one report published by Technology Partners Consulting (TPC).

“Based on our findings,” says TPC, “we believe the industry has yet to see a bottom as demand and bookings continue to weaken, as well as inventories continuing to rise.”

For those operating inside the industry, such news might be met with slight skepticism. As of late 2018, many analysts were predicting continued component shortages well past 2019, thus driving increasing levels of double ordering, extended lead times, price inflation, and various supply chain disruptions related to premature component obsolescence.

“A little more than a year ago we were told things would be scarce for nine months to a year, and we heard that same thing all last year,” said Morey Corp. COO George Wittier to EPS News in May, 2018. “Now we are hearing this will last two more years and if demand is real, I think definitely two years…Manufacturers are not building capacity to meet demand.”

Fast forward to today, this may not be the case. According to the Institute for Supply Management, manufacturing orders had declined for the month of February, and the Semiconductor Industry Association reported that global chip sales decreased in January from the previous year.

While logic says that such a “downturn” in overall sales should bring relief to equipment manufacturers who have seen lead times for once commoditized components stretch in some cases beyond 52 weeks, such findings may be misleading. Even if component sales are declining from a record $481 billion in 2018, lead times are remaining relatively stable – and, in some cases, even increasing.

In an earnings conference call, Avnet Global President Phil Gallagher spoke about this discrepancy:

“You really get into the lead times, and that’s really the leading indicator. And the lead times are really all over the map. Everyone is assuming the lead times in all caps are coming in due to some announcements for some large consumer companies, and frankly we’re just not seeing that yet…And all indications are, particularly in passives and…resistors, the lead time is going to stay up there for a little while. It can always change.”

Another troubling trend is a continued increase in the number of order cancellations. According to TPC, 45 percent of respondents reported that cancellations increased from January to February. At such a rate, this would be at least partially responsible for the decreased demand, as well as artificially inflated distributor inventory levels. Such a trend could be compared to the unemployment rate as reported by the Bureau of Labor Statistics; if a greater number of unemployed workers choose to exit the unemployment market entirely, it creates the illusion that the percentage of unemployed is trending downward.

The same reasoning can be used to describe the component market; demand may not necessarily be decreasing, but OEMs may be opting to pursue alternative inventory sourcing channels as distributor lead times remain stable at inflated levels. The existence of this possibility means that OEMs should not feel complacent in the news of declining demand. Lead times remain high, prices overall continue to experience gradual inflation, and the recent declining demand has yet to translate to any tangible market relief. To proactively remain ahead of supply chain disruption, OEMs must continue to emphasize commitment to an established obsolescence strategy that includes systems such as real-time BOM monitoring.