Electronics Supply Chain Seeks Balance in 2024

Editor's note: Vertical Voices will talk with industry leaders to get their thoughts on the state of their industries. It appears on the fourth Monday of each month. This month, we are looking at the electronics supply chain. If you are interested in future topics, you can see a full list of upcoming topics on our Editorial Calendar.

Electronics manufacturers are continuing to face rising labor costs, although pressures from materials costs, backlogs and ease of recruitment are lessening, according to the latest update from IPC, the global non-profit trade association for industry standards, training, industry intelligence and public policy advocacy for electronics suppliers.

The latest findings come in the association's February sentiment report. The survey was conducted between Jan. 15 and Jan. 31.

Overall, the monthly survey found that demand in the electronics supply chain remains in expansionary territory and new orders increased to their highest levels since November 2023. The demand outlook is positive, with the Shipments Outlook Index rising 6 points and the Backlog Outlook Index rising 5 points, an indication of expansion, IPC said.

The Materials Costs Index fell 1 point, but the Labor Costs Index rose 5 points to reach its highest level since August 2023.

Survey respondents see labor costs continuing to rise, with 67% of those predicting an increase while just 33% say labor costs will be flat or no change. Other indicators, though, such as material costs (51%), inventory availability from suppliers (56%), inventory availability to customers (58%), orders (52%), shipments (56%) and capacity utilization (64%) find the bulk of respondents expecting no change.

S&P finds falling sector

While component shortages, specifically semiconductors, dominated the news cycles in 2022 and early 2023, S&P Global found things improving in 2023 before a slight dip in December. That continued into February, when the S&P Global Electronics Purchasing Manager's Index (PMI) dropped to 47.9 on a seasonally adjusted basis, down from January's 48.8. A PMI above 50 indicates expansion.

The PMI is derived from a survey of purchasing managers in electronics manufacturing. It is a weighted average of survey responses on new orders, output, employment, suppliers' delivery times, and stocks of purchases.

“February's Global Electronics PMI signaled that the contraction in the global electronics sector was sustained as we move further into 2024,” said Jingyi Pan, economics associate director at S&P Global Market Intelligence, in a release. “Incoming new orders fell at an accelerated rate in February, reflecting persistent destocking efforts and subdued economic conditions worldwide. This led to a renewed reduction in production after it stabilized in January.”

S&P noted that prices continue to rise, concurring with the IPC data. It did differ from IPC's data on whether the sector is expanding.

“Due to the weakness in demand conditions, global electronics manufacturers further reduced their purchasing activity at solid pace, suggesting that we have yet to see a turnaround,” Pan noted. “Notably, output price inflation rose in the latest survey period, which may further dampen demand. Global electronics manufacturers opted to share their additional cost burdens, stemming from higher raw material and shipping costs, with clients in February, leading to the fastest rate of selling price increases since March 2023.”

Challenges still aplenty

The challenges facing the electronics supply chain are not much different from other supply chains: excessive demand, labor shortage and disruptions. Ultra Librarian, a CAD library firm offering CAD data and tools, also cited a limited number of manufacturers and geographic constraints on those manufacturers—domestic and/or nearshoring manufacturing is non-existent for some firms, it said.

“As shown above, the root causes for the electronic component shortages of 2023 are much the same as was the case for the previous year. Consequently, component availability lead times have shown little improvement since 2022,” it noted.

To counter some of these challenges, Ultra Librarian said some manufacturers are turning to bulk buying to build inventories and protect against price increases, and adopting more automation design software tools.
Another challenge facing many electronics manufacturers is the rapid advancement of technology.

“Agile supply chain management practices, continuous monitoring of technological trends, and strategic partnerships with technology providers are essential strategies to navigate the ever-evolving landscape of electronic advancements,” wrote Sejal Desai in an LA Progressive blog.

Growth ahead, but concerns

While the current market may be muted, research is predicting a robust global electronic supply chain moving forward. According to data from Straits Research, the global electronics component market is expected to grow to $328.5 billion by 2031, up from $186.38 billion in 2022.

However, in the short term, component shortages are still possible due to a combination of traditional supply chain disruptions affecting all industries, and the rapid growth of products requiring electronic components.

“Unfortunately, we predict lingering electronic component shortages in 2024, even though demand dipped at times in 2023,” wrote Marc Iacona in a December blog post for control panel manufacturer Simcona.

An example of this growth was provided by Frank Cavallaro, CEO of A2 Global, in an interview with Supply Chain Management Review last year, when discussing the impact semiconductor production has the electric vehicle industry.

A McKinsey report at the end of 2022 found that autonomous driving, connectivity and electrification will drive most of the demand for automotive chips through 2030, accounting for 89% of the total $147 billion automotive semiconductor chip market in 2030.

The report noted that demand for a critical component—the wafer—will increase from about 11 million units in 2019 to 33 million by 2030. Cavallaro, though, said most of the wafer investment taking place in the chip industry is in the sub-11 nm market, not the larger 90 nm space.

“Every single node size except for the 25-45ish range will be in an undersupply situation at current demand levels,” he says, adding that the 25-45 range is on par with demand.

“Semiconductor companies are increasing production of 90 nm chips, but our analysis suggests that the CAGR will remain at only 5% or so from 2021 through 2026—not enough to eliminate the supply–demand mismatch,” McKinsey wrote. “What's more, OEMs that rely on 90 nm chips for many applications have little incentive to migrate to smaller nodes, because the shift would require additional development and qualification costs, as well as more R&D staff.”

The challenges may be different, but the electronics supply chain—which so much of our current and future society depends on—is not out of the woods just yet.

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