Citigroup recently offered its view of the health of the global electronics supply chain. (cf. Citigroup Global Markets, "Electronics Supply Chain Inventory Update," 23 May 2010) The review makes the interesting observation that manufacturers are double ordering some key components. So, is this double ordering a positive, negative or neutral indicator of the health of our industry? Further, how do we understand what the Citigroup analysts say about any possible effects on the electronics industry's supply chain health? The following is a summary of the key data we've been tracking, their implications, and an overview of the reasons for the clean bill of health.
Let's review the key data points first:
- supply has tightened over the past couple of quarters, leading to increases in utilization at fabs (witness new CAPEX commitments here and here – FINALLY more spend!);
- order increases (witness book-to-bill ratio levels here);
- days-of-inventory (DOI) holding in a healthy range (overall numbers show March is up 3 days year-over-year (YoY) to 39 days, but well within healthy ranges, as cited by Citigroup, pp. 1, 3-5, 7-10, and see here for our more general comments);
- ASPs experiencing healthy cyclicity and strength (witness price strengthening and respective revenue improvements coupled with healthy product and sector forecasts through 2010-11 as summarized here);
- increase industry discussion about sourcing to assuage availability concerns (witness increased supplier editorials on quality, but compare with actual US Department of Commerce report assessing the industry and Smith's assessment in the recent MarketWatch Quarterly here); and
- lead-times now bumping up against high levels (witness spot shortages and capacity tightening (Citigroup, p. 1ff)).
The take-aways, or implications, from the above data include the following points:
- more normal seasonality is seen as returning, allowing for OEMs and EMS companies to better manage production through utilization rebalancing and capacity strategies;
- double booking (at fabs) and double ordering (mid-stream) is happening as companies attempt to replenish inventory and prepare for back-to-school ramps in the face of increased lead times and shortages;
- the doubling is normal in response to supply conditions and with the higher demand season ahead, the likely outcome will be a smooth adjustment as supply and demand drives meet during 3Q10;
- capacity expansions and utilization increases are not as troubling for semiconductors as numbers might caution because of the extreme lows in CAPEX and utilization YoY – therefore considering quarter-over-quarter (QoQ) numbers, as Citigroup recommends, the inventory and sales forecasts are moderated across the full supply chain, from hubs to vendors (cf. ibid pp. 4ff); and
- historical trending over a 13-year period to include both recent market drops (2001-03 and 2007-08) for electronics, reveal recent patterns to be more muted (less spiked) and resurgence not above normal trending (i.e., demand forecast increases are not out of line).
Why we're healthy and doubling is not a grave concern, some key findings:
- we are still below YoY inventory trending;
- sector strengths are holding, new demand is seen as realistically forecasted, and extremely lean conditions reduce concerns over any double-ordering;
- there is enough demand to absorb inventory builds, even with doubling, especially given the approaching high-demand season;
- there is enough need for new investment that capacity expansions are not overzealous, rather are necessary, and enough of the new builds are at new architectures (30-40nm) and new wafer sizes (300mm and some top tiers showng inerest in moving towards 450mm, eventually) which translate to new components/products and not a glut of ebbing technologies; and
- supply remains tight based on Citigroup's current wafer capacity projections and generalized component supply is thought to still be "insufficient in 2010." (cf. ibid, p.11).
NB, the above review represents a summary of the detailed report and therewith generalizations are made that may not hold for specified subsector components nor for all market sectors.