Who can forget how “supply chain glitches” became part of our vocabulary from during the pandemic? As the head of operations at a technology company, my team and I closely monitor global conditions and macro-level trends that affect the cost and supply of materials used in electronic devices. At last, there is a good news story to share about the supply chain in the electronics industry and we are happy to tell it.
The shock to the supply chain was abrupt because it followed decades of relative stability and predictability of raw material lead times and prices. Additionally, strategies such as just-in-time inventory and lean manufacturing provided persistent downward pressure on prices for commodities and finished products. However, the pandemic turned that well-established ecosystem on its head.
After three years of unprecedented chaos, the electronics supply chain has not only recovered but is now positioned even stronger than before. A myriad of factors have shaped this development.
Electronics Components Supplies Are More Plentiful
First, in early 2020, as the annual Lunar New Year holiday drew to a close, most suppliers of electronic components and contract manufacturers in Asia did not reopen as planned. Those who did operate did so at a greatly reduced capacity. Our company supplies 4G and 5G devices that enable connectivity for a number of different applications across many verticals. By the spring of2020, with most of the world operating from home (e.g., remote work, remote learning, remote healthcare), demand for our products skyrocketed. Simultaneously, demand from other vendors who also use electronic components also accelerated across multiple industries.
The squeeze on the supply of electronic components caused lead times to increase to unprecedented levels due to greatly reduced production capacity and higher demand. For example, the lead times for semiconductors have typically ranged from 12-16 weeks for decades but suddenly increased to 26, 30 and even 52 weeks. In some cases, suppliers took advantage of constrained materials and further raised prices. Similar dynamics were seen across nearly all electronics commodities.
After three difficult years in an environment of long lead times and increasing prices, we have finally arrived at a point in time where the supply of most materials is plentiful, and downward pricing pressure has resumed. Vendors across the electronics industry have responded to the challenges faced during the pandemic and in many cases have over-rotated by over-producing once raw material became available. This is evidenced by the recent earnings reports from companies like Samsung, Micron and other semiconductor vendors that point to high inventory levels with lower earnings.
As a high-volume purchaser of electronic components, in recent months we have experienced lead times shorter than pre-pandemic levels and enjoyed abundant supplies from multiple vendors and distributors that have resulted in downward pricing pressure due to increased competition. Even many top-tier vendors who are quoting lead times of 12-16 weeks are often able to respond to expedited requests and deliver within 1-2 weeks.
Transportation Costs Are Easing with More Logistics Options
Second, logistics lead times via air or ocean from Asia to North America or Europe that had doubled during the height of the pandemic are now back to pre-pandemic levels. Logistics costs via air from Asia to the US that had more than tripled during the pandemic are now nearly back to pre-pandemic rates.
Transportation costs via the ocean that had more than quintupled at the height of the pandemic are now lower than pre-pandemic and all indications suggest that a price war is imminent.
The Diversity of Suppliers Is Expanding Beyond China
Third, starting with the trade war between the US and China before the pandemic—and accelerating as Covid spread worldwide—many vendors and contract manufacturers expanded their factory footprint beyond China. Manufacturing capabilities in countries such as Vietnam and India have expanded considerably in recent years, diversifying sourcing possibilities well beyond China.
Occasional supply disruptions have challenged OEMs since the electronics industry began manufacturing products at volume. Such disruptions may result from any number of causes, including natural disasters, sudden increases in demand, issues affecting a specific factory producing custom parts, or a single source. While the risk of point disruptions will never completely disappear, we have emerged from the pandemic with a global supply chain for electronics that is more geographically diversified, well-stocked and more competitive than any time before the pandemic.
Vendors will invariably adjust their strategies over time to optimize their economics, shifting the current dynamics once again, but at the moment, supply chain conditions for electronics OEMs have never been better.
Doug Kahn is executive vice president, operations and customer success at Inseego, a provider of 5G enterprise cloud WAN solutions.