Market Outlook for Q1 2022

The Struggle to Find Equilibrium Between Demand and Supply Continues

Entering 2022 Q1, electronic component manufacturers were unable to align supply with surging demand in various sectors due to persistent supply chain issues. While COVID-19 outbreaks are still a primary catalyst for disruption, other contributors include extreme weather, workforce shortages and geopolitical conflicts. The consequence has been surging prices across various commodities and lead times that extend from months to years.

2021 Q4 in Review

Government-mandated lockdowns due to COVID-19 continued to impact manufacturers throughout Asia in Q4. In particular, the lockdown in Ho Chi Minh City, Vietnam, which began in 2021 Q2, persisted through the fourth quarter and led to a mass exodus of workers from the Saigon Hi-Tech Park. Intel Corporation and Samsung Electronics have factories located in the tech park. Both manufacturers reported disruptions to operations because of the limited capacity and workforce during the lockdown. Restrictions have since lifted, but the setbacks are still felt through the supply chain.

Similar factory delays from pandemic lockdowns occurred for manufacturers in Malaysia. Demand for parts persisted even as limited capacity at factories continued during government lockdown, which also drove some IC prices to increase by as much as 40%.

These lockdowns also impacted lead times. Onsemi was among the manufacturers affected by the circumstances, which reflected in its 70+ week lead times for parts.

Mounting demand for raw materials in previous quarters led to increased prices of aluminum, copper and silicon. The continued supply constraints of these raw materials made it more difficult for manufacturers to allocate them as needed for component production. This issue will likely continue into 2022 Q1 following price spikes in the previous quarters that trickled down the supply chain.

At the end of Q4, additional challenges for factories located in Southeast Asia arose due to major flooding in Malaysia and a typhoon in the Philippines. Previously, challenges were a result of limited capacity and COVID-19 lockdowns, but the extreme weather conditions in December added to manufacturing woes. In Malaysia, NDK’s factory that produces quartz crystal products for automotive, 5G and IoT applications was completely flooded and resuming operations would reportedly take time. In tandem, the Typhoon Rai in the Philippines caused a temporary halt in production at Taiyo Yuden’s materials and electronics factory located there.

To wrap up the last quarter of 2021, Susquehanna Financial Group’s monthly report indicated average lead times were at an all-time high at an average of 25.8 weeks. According to Bloomberg, it was “power management and MCUs leading the charge” for the increase. Recovery to find demand and supply equilibrium will continue to be a challenge ahead.

A Look into 2022 Q1

Manufacturers continue to evaluate their supply chains to fill gaps caused by persistent disruptions. This is evident in initiatives to build up the workforce, regionalize manufacturing and various governments investment in chipmaking.

Workforce Shortages Continue Across the Supply Chain

In 2021, many manufacturers turned to factory expansion as a solution to align supply with demand. This included Intel Corporation, Samsung Electronics, Micron Technologies and others investing billions of dollars to build new chipmaking facilities. However, once the factories are built, the concern is a growing scarcity of talent to fill them. As a result, some governments and regional manufacturers are investing in feeder institutions.

For example, the local Taiwanese government and chipmakers like TSMC are investing up to $300 million in connected universities; the US passed a bill providing billions of dollars to scholarships, workforce programs and technology institutions to invest in the future semiconductor workforce; and the EU is moving to implement a Chips Act in the interest of growing its stake in semiconductor manufacturing. These investments will take time to make an impact, which means manufacturers will have to adapt to the current volatility of production lines.

Manufacturers Adjust as the World Seems to be Running Out of Everything

The raw material shortages that have been haunting the electronic component manufacturing supply chain continue in 2022 Q1. Digitimes reports “the supply of ABF substrates will continue to be at least 20% short of demand in 2022.” New capacities are unlikely to alleviate the strain until 2023. The shortage of ABF substrate is a concern that manufacturers like Intel, Nvidia and Advanced Micro Devices Inc. (AMD) have voiced as a primary setback to production lines. Intel is attaining ABF substrate from various suppliers in Vietnam, Japan, Taiwan and southwestern China. The increased demand of GPUs, CPUs and IC components amid the allocation battle between competitors will likely contribute to the anticipated 20% price increase of ABF substrate.

Similarly, silicon price and availability are impacting silicon wafer production, which has been tight since Q3 2019. The shortage of silicon wafers is doing little to alleviate current bottlenecks – the lead time of Diodes Incorporated parts is up to 80 plus weeks as the limited wafer availability stifles capacity. Siltronic AG, Shin-Etsu Chemical Co. Ltd and SUMCO Corporation are among the top silicon wafer manufacturers that supply wafers to chipmakers – making their output vital to operations of the rest of the semiconductor supply chain.

Electronic Component Supply Chain Vulnerable Amid Citywide Lockdowns in China

The COVID-19 Omicron variant has spread rapidly through global communities, leading to large-scale lockdowns in China reminiscent of early 2020.

In the city of Xi’an, Micron Technology and Samsung Electronics reported facilities operating at limited capacity. Micron’s affected facility contributes to its DRAM back-end testing and packaging. This is adding strain to its memory business, as well as the current shortage of DDR5 memory modules. Similarly, Samsung’s NAND facility in Xi’an, which makes up 40% of its NAND business and 15% of overall global capacity, is also impacted by the lockdown.

Similarly, Tianjin is under a mandated lockdown that is impacting NXP’s factory operations. Strained capacity is leading to a 20% increase on automotive products. The MCIMX series MCUs are the primary parts produced in NXP’s Tianjin factory.

Occurring in tandem with the current COVID-19 lockdowns in China are the Lunar New Year and the 2022 Winter Olympics in Beijing. The Lunar New Year begins Feb. 1, while the Winter Olympics begin Feb. 4. The adjacent events disrupting regular operations will leave many manufacturers, ports and warehouses standing idle. This draws concern to the pre-existing supply chain woes.

The Takeaway

As a result of the continuous manufacturing setbacks, manufacturers within the automotive, medical device, consumer electronic and other sectors struggle to find demand and supply balance.

Although manufacturers are re-assessing supply chain strategies to build more resilient processes, the results will take time to manifest. In the meantime, the deteriorating supply of raw materials, increasing logistics costs, workforce shortages and more will continue to impact production lines in Q1.