Outlook For The Electronics Industry for 2022

November 23, 2021

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If I had to choose a “phrase of the year” for the electronics industry for 2021, it would be “I’ve never known anything like it”.

The supply chain pressures particularly, but not only for semiconductor products, have caused a series of rolling crises across the industry. The knock-on effects have been lead times shooting up from weeks to years, and prices – in an industry that has typically been used to ever decreasing prices – undergoing double digit percentage increases. Moreover, with factories working at capacity and supplies of some raw materials constrained, even large volume buyers have lost their purchasing leverage.

There remains dispute about the precise causes of this, but there is a broad consensus on the key contributing factors. These include a lack of historic investment in chip foundries causing limited supply, the pandemic dramatically shifting spending patterns, with some manufacturers badly misjudging this, and a variety of random events including drought in Taiwan and a fire in a key factory in Japan adding spice to the mix. There is an element of “panic buying” adding fuel to the fire.

We have also been coping with another year of “pandemic life”, only slightly easing towards the end of the year.

So where do things go from here?

In the short term, nobody seems to be predicting that things are likely to get easier for the majority of 2022. Many component manufacturers have “closed the shop” for the entire year. Only OEMs who have planned well ahead will be delivering to schedule or indeed at all over the coming 12 months. The main difference for 2022 will be that we are now expecting this. It has become the “new normal”. We have moved from crisis mode to more of one of endemic strain.

For people on the commercial front line, in many ways, life has never been easier. Just don’t tell your boss at bonus time! It’s like setting out on a hunting expedition, only for the prey to stroll up, and politely die at your feet. The flip side of this is extreme frustration, as customers desperate for parts plead, shout, and scream whilst the salesperson has little they can do to help. Staff in production departments, by contrast, are busy losing whatever hair they have left.

Newton’s third law of supply chain management

What the more paranoid of us are concerned about is, following Newton’s third law of supply chain management, is what will happen when the inevitable “reaction” to this occurs. I suspect the snapback will be fast and brutal. It is hard to know when it will take place, but the factors that will cause it can be foreseen.

Price rises

Firstly, the price rises feeding through the supply chain are sooner or later going to hit demand. Whilst so far, these seem to have been largely accepted with a shrug, basic economics suggests this can’t persist forever. I also suspect that central government and banks are complacent about general inflation risks, but that’s a whole other story.

Stockpiling

Secondly, there must be a degree of “stockpiling” going on by the more cautious OEMs. This process has a limit. We may see requests to delay orders appearing, in particular for customers with complicated products, who may lack a few critical components and want to limit the amount of inventory sitting idle.

Innovation slows

Another more subtle issue building is that the crisis in supply chain management has led to a lot of R+D effort being diverted into essentially non-productive redesign work to match component availability. Also, whilst established projects can – after an adjustment period  - adapt to 52 weeks lead times, getting a new project ramped up is an order of magnitude harder. The net result is that there is a distinct lack of new product development, which will feed through into a dip in future demand eventually.

Geopolitical tensions

Then there is the geopolitical dimension. The world's dependence on electronics and the electronics supply's dependence on a small part of the world has come as a shock to many in the political world. Having around 60% of semiconductors globally produced in Taiwan – a territory with a unique and, shall we say, “delicate” status – is causing a great deal of high-level concern. It isn’t possible to build new foundries quickly, as it takes time, vast amounts of capital and significant technical expertise. Nevertheless, the desire is there to change this situation.

Differing Covid handling policies

One after effect of the pandemic is that Asia and the rest of the world remain significantly divided, with China and others in the region pursing a “Zero-Covid” strategy, whilst much of the rest of the world is accepting Covid as an endemic but manageable phenomenon. The way the world adapted to lockdown and travel bans surprised most of us with how successful and seamless it turned out to be. However, I remain sceptical that everything can carry on as before with Zoom or alternatives replacing physical visits. As with the supply chain issues above, maintaining existing activities online is a lot easier than developing new creative approaches. For a totally globalized industry, a divided world creates a kind of stasis, where day to day not a great deal changes, but longer term innovation and development, are restricted.

Outlook for 2022

So, in summary, how will 2022 play out? For the most part, we will remain “as we were,” albeit with a more stable, if still challenging, situation. Restricted supply and strong demand seem likely to continue throughout the year.

But as the year progresses, I believe headwinds will start to be felt. This will be driven by spending reverting to more traditional patterns, price increases dampening demand, stockpiling effects tailing off and – eventually – political pressure to lessen dependence on East Asia and consequent investment aiding the supply side of the equation. Increasing capacity takes a long time – years rather than months - but by the same token, it can’t be fine-tuned downwards easily. Excesses become as persistent as shortages.

My crystal ball doesn’t extend to being able to be sure if this will be a gradual reversion to the conditions we were previously used to or a violent snapback. I hope for the former - but will be watching nervously around a year from now for signs of the latter.