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In this follow-up to his recent interview on the Q4 2022 outlook, Shawn DuBravac, IPC chief economist, provides an update on the incoming supply chain for EMS providers. Naturally, this conversation centers on component availability, where the supply crunch is easing, and by how much. It doesn’t seem we’ll be seeing any across-the-board relief for some time to come, but Shawn’s higher-altitude perspective brings insight to your daily planning.
Nolan Johnson: Shawn, while things may be easing up in the component supply chain, it’s still spotty.
Shawn DuBravac: Yes. There are still broad shortages in the market. We aren’t seeing a rapid reduction in lead times, but there are variables that point in the direction of healthier supply chains. For example, we’ve seen costs come down quite significantly, even falling rapidly, though they also rose rapidly. Shipping costs, for example, for a 40-foot container from Shanghai to Los Angeles are off about 32% over the last year. They shot up significantly, and now we’re seeing them come back down.
Johnson: I’m guessing that 32% decrease is not back to what it once was.
DuBravac: Correct. We’re not back to pre-pandemic levels yet, but we are getting there and that will continue. We have data through the end of June for motor vehicle assemblies, and this tells us about domestic production in the United States. In the last three months, we’ve had an annualized rate for auto production of over 10 million units. We’re not back to pre-pandemic levels, but we’re about a million to a million-and-a-half units higher than the beginning of the year. At the low point in September 2021, we assembled just about seven and a half million units on an annualized basis.
We are 30% up from September 2021, and there are several contributing factors. We saw in the most recent GDP report—which wasn’t very good—that both consumer demand for goods, and business investment and equipment, were all down. Anytime you see demand easing, it provides some breathing room for the supply chain to recover. Now, it isn’t necessarily great that demand is waning—these are two sides of the same coin. There is risk, but these factors contribute to the improvement of supply chain dynamics.
Johnson: How does this relate to semiconductors? If the supply chain is easing, that’s good. But I have recently spoken with a number of EMS companies and each one has shared some flavor of, “We can get most of the parts, but all it takes is one part that we can’t get and we’re stuck; the availability is not consistent.” What insight does IPC have about component availability?
DuBravac: You’re right, all it takes is one part to be out of stock or one part to have an inaccurate delivery date. EMS providers have been dealing with that for two years now. They place an order, think they have an accurate delivery date, and it ends up delayed two, four, eight weeks, or more. It will take some time for that to heal and for us to see those types of delays become less severe.
I know everyone wonders about the timing, but you must see it as a process—something that will continue through 2022. Will we see these issues next year? Definitely, in some instances. Certain components will still have low stock availability. There will be prolonged lead times. Some companies will try to work around that. For example, we hear of OEMs that have engineered out some of these components when they can.
Johnson: What other coping strategies have you heard about?
DuBravac: It’s many of the normal ones you would expect. I mentioned engineering out components that are in short supply, but it’s also stockpiling, or ordering based on anticipated needs, not just what you need today. Some companies have at times been able to find other sources as well.
However, we don’t get the sense there has been a lot of stockpiling. We don’t get the sense that there is excess inventory sitting out there which could come back to haunt the industry later. If you have excess inventory and your company decides to get rid of that, then you could see excess availability and prices dropping. In this environment, we probably won’t see that. Certainly, companies that were holding onto any excess inventory would have been selling it into the market when prices were elevated, so I think most people were holding stock for things they wanted and needed to use.
To read this entire conversation, which appeared in the September 2022 issue of SMT007 Magazine, click here.