Two seemingly benign announcements made in the fall of 2000, when fundamentals appeared to be stronger than ever across the supply chain, turned out to be major red flags that perhaps things were not so rosy.
The first came from a major electronics manufacturing services (EMS) provider, which indicated that its inventory levels were growing at a higher rate than sales. The second was word from a big component distributor that its customers were canceling orders because of an inventory overbuild. In no time, as end demand fell off, inventory days were at record highs everywhere.
But today, as the electronics recovery appears to be picking up steam, the inventory picture is markedly different. Inventory levels, which have declined quarter after quarter for more than three years, were down again in the fourth quarter of 2003, setting new historical lows.
Inventory days at PC OEMs fell two days, to 23, well below the five-year average of 32. EMS providers were at 40 days, compared with 45 a year ago. Component distributors were at 56 days, down from 63 a year ago. And semiconductor suppliers were down a day from the third quarter, to 70, or slightly above their five-year average.
The numbers were surprising in view of the broad pickup in demand for semiconductors, components and end products. Despite increased component lead times and urging from EMS providers to begin building buffer stocks, OEMs are still in the "denial" stage of the cycle, fighting average selling price (ASP) hikes and reluctant to build inventories.
Why? OEMs got burned with excess inventory in the last cycle, and they have enjoyed three years of abundant supply, increasing vendor-managed inventory programs and declining ASPs. In other words, customers have been calling the shots, and they don't want to give that up.
Now the balance is shifting, and OEMs that fight it will be caught short, big-time, in our opinion. First, manufacturing capacity utilization rates continue to rise. We see very little capacity being added in commodity areas in the next six to nine months, with just two exceptions: the high-end printed-circuit board business and certain specialty semiconductors.
Rising utilization rates have pushed lead times out across all product lines, to generally 10 to 14 weeks. That, coupled with low inventory levels and promising end-market demand, could lead to spot component shortages as we head into the summer. Component ASPs, in turn, should go higher.
To be sure, the supply chain is different from what it was in the late 1990s. The EMS sector has consolidated, as have distribution and the supply bases. The chip foundries also have a greater presence and therefore, in theory, a greater control over supply.
Still, while we think the supply chain doesn't need to go back to or above five- and 10-year average inventory levels, we believe there could be another substantial supply-demand imbalance"this one favoring the suppliers, at long last.
Matt Sheerin can be reached at email@example.com.