Based on our client insights as well as LevaData community trends, it is clear that the semiconductor market supply outlook has begun to reflect tightening inventories, with spot supply shortages and extended lead times impacting across industries. Unplanned upsides and targeted price reductions are getting harder to obtain in this environment, as manufacturers are experiencing robust demand due to economic recovery from the initial dramatic COVID-19 slow down.
Reasons for the increased tightening in supply include the continued strong IT demand for work-from-home purchasing, 5G device and infrastructure expansion (including the latest news that Apple is driving for 30% production increases on iPhones in 2021 due to 5G demand), as well as demand shocks from Huawei advance buys due to US semiconductor purchase restrictions. In addition, supply impacts from backend material shortages and reduced capacity investments, are contributing to an overall tight semiconductor market.
It is difficult to predict how long this situation will last, especially given the renewed economic slowdowns that may come with additional COVID-19 outbreaks worldwide, but many industry observers are estimating the situation of tight supply lasting into Q3’21.
Given this situation, LevaData recommends the following actions for customers to assure supply as well as maintain price competitiveness:
- Ensure all EMS/ODM partners are driving full demand plus appropriate buffers to suppliers. In certain cases, buy-aheads of key components to ensure inventory may be warranted.
- Price declines in Q4 were as expected, but Q1 is showing flat or even somewhat higher pricing. Lock pricing soon and consider pricing agreements for the first half of 2021.
- Push back on manufacturer attempts to raise prices, using LevaData Target pricing insights. Wherever pricing is not "best-in-class" there is no real justification for higher prices. We continue to see some targeted reductions being given in this environment, given the right leverage.
- As always, stay in close contact with key suppliers, advising them of demand outlook and pressing them for priority in supply. Don't forget the smaller suppliers as well, which may have less influence in the fab or backend supply chain - consider sending out an updated RFx to gather updated lead times to ensure purchasing is aligned to the longer cycles.
Interestingly, the semiconductor industry has fared rather well during 2020 while many other industries have struggled, reflecting the importance of electronic content in distance communications, digital sales and online engagement, and even COVID-19 related mitigation systems, among other things. Maintaining a vigilant approach for supply, while utilizing LevaData insights to guide negotiations and targets, will enable those companies that are investing in digital transformation to stay ahead of the curve in managing supply and price risks.
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