UK distributors warn of stockpiling

UK distributors warn of stockpiling

Market news |
By Nick Flaherty

UK electronics firms are being encouraged not to stockpile components as the chip shortage eases.

This stockpiling has driven higher turnover in 2022, with the latest market estimates up 18%. The association that represents the majority of distributors in the UK and Ireland forecast that growth in 2023 could be as low at -4%.

The Electronic Components Supply Network (ecsn) canvases the opinions of its manufacturer authorised distributor (afdec) members about the prospects for the coming year and uses the data it collects to compile the association’s annual Forecast.

“The strong growth that global electronic components markets saw throughout 2022 exceeded the forecast ecsn issued at the end of last year,” said Adam Fletcher, ecsn chair.

Customer order backlog levels reported by ecsn’s manufacturer authorised distributor members reached unprecedented heights in 2022, a trend that looks likely to slowly reverse in 2023 due to improving customer confidence and declining components manufacturer lead-times.

The association is advising customers to gently “roll back the throttle” as their confidence increases in the supply of components and an uptick in orders from their customers: “Rapid changes by customers expose their organisation and their supply network to increased risk,” said Fletcher.

That change will happen as manufacturer lead-times inevitably decline but his members’ opinions about when this will happen and by how much, vary, he says.

“The consensus opinion arrived at by ecsn members is that by mid-2023 lead-times will have stabilised at around 12-to-16 weeks for most Semiconductor and Passives, with Interconnect and e-Mech components remaining on 8-to-10 week lead-time. There will remain some ‘outliers’ on much longer lead-times across all components categories,” he said, but remains concerned about availability.

“I suspect that all electronic components will remain on lead-times in the 6-to-16 weeks timescale for at least the next few years, so we are not going to see a return to the virtually zero lead-times that characterised the first two decades of this century.”

This has driven a strong market in 2022.

“Our members predicted strong growth in 2022 in the range 8%-to-12% but we now believe that the outcome is likely to be 18% growth, driven primarily by customers’ concerns about components availability,” said Fletcher. “The geopolitical tensions resulting from the Russian invasion of Ukraine, additional sanctions imposed as a result of the ongoing US / China trade war, and ongoing international and domestic logistics delays have encouraged customers to maintain their increased in-house inventory and order backlogs”.

Strong demand continued throughout 2022, but supply remained problematic, exacerbated by continuing extended lead-times – particularly for semiconductor and passive components – caused by ongoing disruption to long-medium-and local-distance logistics, price increases and cancellation of orders.

Customers in Europe and the USA have increasingly turned to Grey Market Brokers who have been able to source semiconductors from Asia in large volumes to satisfy customer demand, albeit at highly inflated prices.

ecsn members believe that semiconductor manufacturers must increase their capability to manage their global inventory, particularly in Asia. They must be able to exercise effective control over when, where and to whom their product is shipped, re-directing it as necessary to serve real customer demand and not the “phantom” demand created by organisations seeking to exploit failures in the market, says Fletcher.

Aubrey Dunford, ecsn Market Analyst, predicts that the UK & Ireland electronic components market will continue its modest growth in the first half of 2023, with sales growth between 0% and 6.3%, with a mid-point growth of around 3.5%. In the second half the association predicts that sales will slow modestly in the range -4% to 3%. This will see a full year growth as low  as -2% or +4.9%

“The problem however is trying to determine what the new “normal” is in a global economy still recovering from the after-shocks of a global pandemic such as double digit inflation, huge increases in energy costs, and a cost of borrowing money that has returned to pre-Bank Crisis levels, whilst at the same time dealing with a war in Europe,” said Dunford.

“The Distributor Total Available Market (DTAM) will have grown in 2022 by about 18%, higher than we expected when we produced our forecast in December 2021. That said, product shortages, extended lead-times, exchange rate fluctuation and rising raw material and labour costs have led to price rises higher than our members anticipated. Global demand has remained higher than we forecast and is still strong despite the slowdown in China as the handset and PC market cools.”

“Our members are therefore confident that we will continue to see growth in the market for at least the first half of 2023. Looking further into the second half of the year is more difficult, however. Many uncertainties remain, especially in the light of predicted recession in the global economy, so we are forecasting for growth to slow at the end of the year.”

He sees the industrial, defence and automotive markets holding up the business.

“In the UK, and indeed in most of Europe the component market is driven primarily by the automotive, industrial and professional application areas. We expect projects, such as the roll out of 5G and faster data communications that are by nature longer term, will remain strong although there may be a slowing down in investment. Also, demand from the Military and Aerospace sector will for more obvious reasons, remain strong,” he said.

Fletcher says he remains confident that even stronger underlying growth will return to global electronic components markets, driven by a host of competing applications: “The roll-out of 5G handsets and infrastructure, cloud computing / high performance computing and automotive are the likely main ‘push’ applications but I expect industrial automation, medical, aviation and military to run these sectors a close second in 2023,” he said.

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