Market Outlook for Q4 2021

Rising Demand and Continued Shortages

Shortages, which were originally attributed to the COVID-19 pandemic, have continued to worsen in 2021. Continuous demand growth in various sectors like 5G, automotive and IoT, ongoing raw material shortages and catastrophes are the primary culprits.

2021 Q3 in review

Little relief and mounting pressures continued to severely limit production in numerous sectors throughout Q3, stunting any market growth for manufacturers as they battled one disruption after another.

The quarter began with major manufacturing hubs taking a hit in Southeast Asia amidst continued raw material shortages, causing supply chain setbacks. Extreme weather conditions in the region, including severe flooding and typhoon season in the Pacific, added to growing manufacturing delays.

Then, renewed COVID-19 government lockdowns forced manufacturers to operate within strict guidelines or shut down altogether. With more than 50 semiconductor plants forced to operate at 60% capacity in Malaysia alone, the lockdowns contributed to increased lead times and supply gaps.

Later in the quarter, a large-scale power disruption in Dresden, Germany, temporarily halted chipmaking operations at the Infineon Technologies and Bosch factories, further exacerbating the already-strained global supply chain.

Finally, power cuts in China added to production disruptions at the end of Q3 as factories were forced to limit production or halt operations entirely as the country looks to reduce carbon emissions and ration energy used in industrial sectors. The delays and impact to operations at some China-based factories will be mandated through Q4, which could increase lead times and pricing of parts produced there.

A look into Q4

Manufacturers struggled to meet demand in the previous quarter, with the most recent disruptions leaving a dim outlook for markets in Q4 as raw material shortages continue, causing manufacturers to prioritize production to growing markets and higher-value components.

The Trickledown Effect of Shortages

As a result of the continued raw material shortages, the production of integrated circuits (ICs) has taken a huge blow, resulting in ongoing supply constraints for other components. Additionally, rising demand from all sectors persists to contribute to the severe shortage of these parts with lead times currently growing to an average of 34 weeks.

Qualcomm, for instance, is struggling to produce ICs due to the scarcity of wafers, causing new orders to be delayed until Q3 2022. As a result of Qualcomm’s growing lead times and prices, manufacturers have raised the price of their own products by 20-30% and are looking to find other alternatives.

Automakers, for example, are desperately searching for other solutions to their supply issues as they plan to manufacture more advanced electric vehicles. Tesla is the first automaker to announce plans to produce its own in-house chips using a new material technology called Silicon Carbide, which it has successfully used in its newest models.

Because traditional silicon wafers are facing heavy supply constraints, Tesla’s in-house production of semiconductor materials will help prevent potential supply chain bottlenecks of 6+ months. With the industry already struggling to secure chip allocation, automotive manufacturers are likely to continue experiencing production setbacks as lead times grow from a lack of necessary components.

Furthermore, the production of other components like diodes and MOSFETs is expected to be heavily undersupplied in Q4 from manufacturers shifting production capacities to focus on more profitable ICs. Lead times for MOSFETs are currently stretching to more than 60 weeks, while diodes face growing lead times of 52+ weeks for Q4. With demand for diodes expected to increase exponentially in this quarter, the supply of diodes is not expected to recover until 2023.

SSDs are also expected to take a hit due to a lack of controllers and voltage regulators essential to their production. Because of this, manufacturers are choosing to increase the production of SSDs with a higher return on investment, such as high-capacity drives. Intel, for instance, is predicted to increase production by 50% for certain high-capacity drives, such as its P4510 series 1TB and 2TB, and will raise pricing going into Q4.

With IC constraints causing bottleneck issues for manufacturers across the board, constraints are likely expected to continue throughout the coming year.

Renewed Mobile Demand

The development of 5G and wireless is putting further strain on the supply of components. Mobile growth, in particular, is expected to reach 20% as demand continues to rise globally and telecommunications companies continue shifting from 4G to 5G. As a result, manufacturers are modifying production to focus on this industry.

Companies are dedicating capacities to increase the production of components necessary to 5G networking and smartphone applications, such as low-power MLCCs. Murata, Samsung and Yageo, for instance, have all announced price increases of up to 20% as the supply of high capacitance MLCCs continues to tighten from a lack of prioritization.

Demand from the 5G and telecommunications sector is also adding stress to the supply of wireless modules. Manufacturers like Thales, Gelmato and Sierra Wireless have been the most affected by this as Qualcomm and Intel face chipset shortages and factory lockdowns.

With the price of IC components on the rise, 5G and wireless products are being affected. One such example is TSMC, which has implemented price hikes on its products, resulting in higher retail pricing for most devices, including smartphones, notebooks and PCs. As competition grows for TSMC’s costly 5-nanometer and 7-nanometer node chips, smartphone production is likely to be severely hindered, especially since the company has already released plans to raise pricing by an additional 10-20% beginning in 2022.

The Takeaway

As the scarcity of raw materials continues, the lack of ICs will continue to cause a chain reaction that trickles down to numerous products throughout the remainder of the year. Though manufacturers are shifting capacities to prioritize high-profit components pertinent to 5G/wireless and automotive production, demand will continue to put a strain on supply as bottlenecks continue to hinder production output.

Customers in need of de-prioritized products will see the worst of these constraints in Q4, while companies across the globe re-assess their supply chain strategies to navigate the lack of key components and materials needed for production.