Rising Prices for Electronic Components: The Full Story
The current component shortage has had a profound effect in all aspects of supply chains. Suppliers’ inability to increase capacity to meet demand in the automotive and IoT markets, for example, has extended lead times to unmanageable levels. In some cases, passives for once commoditized components such as MLCCs and resistors have been reported to be on allocation for longer than 30 weeks — and in some cases even over a year. Many analysts have gone as far as to compare the current state of the market to 1999, when lead times for tantalum stretched beyond 52 weeks and spurred an industry-wide shortage. The comparisons are certainly not unwarranted.
Unfortunately, the story does not end with widespread component allocation. Across the board, components are also seeing blanket price increases from 5 to 15 percent that many OEMs did not foresee. The simple economics of high demand against limited supply has partially driven this price increase, but interestingly, this particular scenario has also been driven by the suppliers.
As suppliers work to rapidly increase capacity, they are going to do so with the intention of catering to where customer demand is the strongest. These happen to be divisions where OEM product life cycles are narrower, where rabid competition forces manufacturers to continually introduce smaller, faster, more efficient components into their designs. Without the bandwidth to cater to all customers, many suppliers are opting to consolidate their buyer base by pushing them toward their newer offerings.
In EPS News, The Morey Corp COO George Whittier describes the situation succinctly. “What many suppliers are trying to do is move customers to the newer technologies so they can obsolete less profitable lines,” he says. “So, they’re increasing prices on the legacy products but not on the newer technology.”
For some manufactures, especially those operating in the IoT and automotive sectors, this is a non-factor (although this does not make them immune to the aforementioned allocation issues). In industries where extended product life cycles are the norm, however, such as healthcare and aerospace-related industries, this artificial inflation can prove a significant obstacle.
These industries are not equipped, financially or practically, to implement the latest technologies quickly. The healthcare industry, for example, has long since adapted their supply chain to operate primarily with legacy products to both support long-term service agreements and comply to strict FDA regulations. Every design alteration made to their original design requires going through a certification process, which, depending on the product’s application, can take as long as 250 days. No one disputes the necessity of having such a process to ensure the quality of life-saving equipment, but the implicit costs of implementing such a measure is nevertheless something healthcare OEMs must take into account.
No one is surviving the current component shortage unscathed, but for some manufacturers, a combination of basic supply and demand economics and supplier price hikes is creating a perfect storm ripe for supply chain disruption. If these trends continue, OEMs must prioritize implementing a proactive solution in place to acquire critical inventory on the front end of a product’s life cycle. Not only will this allow OEMs to circumvent price inflation, but it will also ensure business continuity throughout even the worst component shortages. While competitors struggle with allocation and extended lead times, your place in the market — as well as your brand’s reputation with customers — will be secure.