The Upside of the Electronic Component Shortage

With the predictions most analysts had regarding the electronic component shortage continuing through 2018 being right on target, many manufacturers are still struggling to find answers. Lead times for certain components in some cases are stretching beyond 30 weeks, and as the supply-demand balance continues, suppliers are increasingly unable to maintain stable prices. The market for passive electronic components has been hit particularly hard, with once commoditized components such as capacitors and transistors experiencing price hikes over 75 percent.

“The shortage appears to be coming from increasing demand across all sorts of market segments in a lot of different global markets, and suppliers having been impacted by excessive inventory in the past (during the economic slowdown/recession), not building up capacity to meet that demand,” says Steven Lustig, Vice President of Engineering at East West Manufacturing. “It’s gotten to a critical point where they’re just unable to meet it. It’s really a simple supply and demand imbalance. The imbalance is now in favor of too much demand.”

A word thrown around the manufacturing industry when viewing these trends is “fear.” Fear that their products will not be supported long enough to deem them profitable. Fear that the consumer base will pass them by as they are stuck sitting on their hands watching the clock.

Of course, these fears are very real, and extremely well-founded in the short term. What is commonly missed, however, is that these short-term setbacks are not signals of weak demand or a shrinking consumer base, but temporary obstacles that signal the incredible earnings potential of a rapidly growing industry that’s closer than most realize.

It’s ironic that, when discussing the state of today’s market, we are not talking about an industry that experiences issues actually marketing product. Consumer appetite for IoT devices and cloud-based technologies is continuing to drive demand to an all-time high across numerous sectors, including automotive, industrial, telecommunications, medical, and aviation industries. Looking back to 2017, the total sales of semiconductors, passive components, and electromechanical products increased 17 percent. Not only does this beat the Electronic Components Supply Network’s (ECSN) modest initial projections of 4.3 percent market growth, but it also represents the largest period of sustained market growth since 2000. By the end of 2018, the ECSN projects growth between 6.5 and 10.5 percent.

Keep in mind, these eye-popping numbers are in spite of the sky-is-falling headlines we read about component allocation and extending lead times. Are these issues concerning? Certainly, but it does little to diminish the fact that the market is healthy — healthier than it’s ever been, in fact.

The hard part in entering into a tech market is, without question, convincing a core audience that your product is not only desirable, but necessary. Sellers must be savvy in manufacturing a degree of demand that can be sustained for three, five, ten years — however long the market dictates the life cycle needs to be. If you don’t have demand, then the real problems surface.

But demand isn’t the issue. It’s there, and it’s just waiting to be fulfilled. As difficult as it is for sellers to leave guaranteed money on the table, this is an infinitely preferable problem to have than the alternative: a lack of demand for readily available product, which leads to lowered prices and questions regarding if there is any profit potential at all.

And the best part about all of this? Despite all the doom and gloom, there are solutions available in the supply chain market that are designed to mitigate the issues responsible for The Great Component Shortage of 2018 — production capacity, obsolescence, and supply chain disruptions. These are issues that are within your grasp to control; you just have to know where to look to resolve them.

As a contract manufacturer, East West Manufacturing recommends something even simpler: trust within all levels of your supply chain. “It’s a trust factor that the [CM] is going to do what’s in the customer’s best interest without creating negative financial impact to the manufacturer themselves,” says Lustig. “Having the willingness to create agreements where you order on a regular basis, not just in a crisis…may put you higher in the line than if you order a month later.” These are the types of simple strategies that will get you through even the most trying times.

So instead of caving to the fear, consider turning that frown upside down and researching how your company can thrive long enough to see the promised land. The day will come, soon, where the industry will catch up to market demand — the question is can you maintain a sound obsolescence management strategy that will get you there.

We think so!

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