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Are Normal Industry Cycles Still Normal?


The holiday season, much like the back-to-school season, is a time that the electronics industry has typically expected peaks in demand. That’s the normal cycle of this business. Yet we know that there's been little to call normal since the global economic recession and the slow march back to improving growth and confidence levels. Should we then expect that as we begin to see the returning of growth for some sectors, that we might then also see a return to our once "normal cycles" in the industry?

Taking inventory

By looking at orders, measuring volume for growth and market swings is relatively straightforward. However, alongside of orders, we typically overlay inventory data (holdings). Taking these two important data points together alters the perspective in ways that bear on how we understand industry forecasts, supply chain changes, and how we track cycles and cyclical shifts.

Measuring (days of) inventory itself has not changed, but over the past few years the sentiment around inventory holding levels has shifted. The assessment of risk aligned with holding inventory increased in the wake of the 2008 recession and we have not seen any real return to inventory comfort. The downgrade in inventory holding was in part due to the macro-economic recession and slow growth return with tepid (at best) confidence, and in part due to the increasingly fast-paced (shortened cycles) of component and device shifts. As a result, inventory holdings are dramatically curtailed across the industry and market sectors and whenever possible, the risk of holding inventory has been pushed up the supply chain in order to be off the books of "downstream" companies (based on Citi Research Group's ranking of equipment and electronics vendors).

As Citi Research argues in their 3Q13 analysis, 14 October 2013 "Q3'13 Supply Chain Preview & Playbook," growth in the supply chain has been stabilizing this year, a first since 2010. Additionally, as Citi underscores (10/14/13, ibid p.8): "However, it should be noted that inventory management remains challenging given short lead times and clouded end demand visibility; as a result volatility in the spread between estimated sales outlook and sequential inventory persists but to less extremes than “pre-crisis”. Ultimately, management teams seem to react quicker to the environment that in the past."

"Lean inventory" and squeezing EMS companies and Distributors to hold more of the supply chain inventory continue to be the dominant strategies. As end-product demand continues to be strong for the smart wireless device sector while other sectors are gaining new or renewed momentum (e.g., new health & fitness devices, wearables, industrial electronics, automotive, aerospace, etc.), the question is how to balance supply and demand? Competition and shortened cycles dictate rapid responses to demand increases, but having the supply to do so is a real challenge with very lean inventory strategies. Does this mean a return to normal seasonal cycles or a different model of demand cycles?

Normalizing demand vs. cycles

If we see a continued strong demand and increase for key (hot) market sectors and upcoming sectors, is it reasonable to associate this demand with a return to historical industry cycles and "normal seasonality"? This is a great question and one that we can turn to a recent, related discussion by Barbara Jorgensen in Electronics Purchasing Strategies (EPS). As she notes, there are a number of reasons for changes in how we and how industry analysts view the various data points that inform the labeling of market trends as cycles or seasonal patterns, and then how we judge the health or problems with those trajectories.

Certainly, the supply chain has become more agile and capable of handling shorter forecasting timelines that are in pace with the changes in device and component offerings and consumer demand trends. Also, we know there has been a roughly decade-long shift in where inventory is held in the semiconductor and electronics supply chain (moved to the "Hub" – EMS and Distributors), as Citi's 3Q13 research reminds us (p. 11, ff.). As Jorgensen points out, analysts continue to show concern about inventory holdings while the industry itself seems less concerned about these numbers.

How do we reconcile these views and understand where our industry is heading? The answer lies with both industry analysts and those of us actually in the industry. Jorgensen's questioning of whether seasonality will be replaced by something else, is echoed in the industry analysts note of pointing readers to secondary variables for understanding the semiconductor and electronics industry's cyclicity. Namely, if we look at utilization, orders, lead-times in conjunction with demand seasonality, as Citi recommends (ibid, p. 12., ff), we understand that those at the Hub section of the supply chain are more agile in their ability to manage inventory fluctuations, and therefore the more negative impact of inventory holdings is not as severe as it has been. Strategically managing lean inventories with moderate changes and spikes is proving successful.

Does this mean we have new cycles in the semiconductor and electronics supply chain? Perhaps. What we do know is that the relationships along the supply chain have been and continue to change, the dynamics of our supply chain requires greater agility, global reach, deep knowledge and relationships as well as sophisticated market views to handle inventory fluctuations. This maturation is evident in the health that has been restored to the industry post-2008 and bodes well for forecasts as a solid base upon which new growth and new "normal" will be created.

Lisa Ann Cairns, Ph.D.
Written on Friday, 15 November 2013 20:23 by Lisa Ann Cairns, Ph.D.

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