The Semiconductor Market has Changed almost beyond Recognition

The semiconductor industry has gone through an extremely tough time in recent years and it’s fair to say that the landscape has changed almost beyond recognition. Established companies that had previously planned on buying components based on their production patterns are having to make purchasing decisions much further in advance than ever before – two years in some supply bases and even up to 2025 in others.

For start-ups, it is now crucial that they revisit their original plans in terms of time-to-market. They need to consider every single element of the boards that they're building, every single semiconductor on that board, and look again at the feasibility of them getting what they need when they need it. This situation of planning so far ahead is likely to continue for the foreseeable future and – whether established or start-up – companies must look close at whether they have the factory space available for the production levels that they need to be planning.

Even distributors, such as Farnell, who have been helping companies to tackle supply chain challenges for many years are now seeing the sector being hit from two sides at the same time - supply issues for essential components coupled with increased demand due to greater automation and the continuing trend towards miniaturization.

Evolution of the industry

One of the key factors influencing the evolution across the semiconductor industry in recent years is the continual drive from a technology point of view to get more from less in terms of power requirements. The trend is for interconnection, with increasing numbers of devices being required to communicate with each other. Interoperability is the key. However, this puts significant pressure on how to balance greater levels of power consumption with reducing carbon footprints. On the one hand the sector needs to be driving more power but on the other hand it needs to consider the impact on the environment.

For some years prior to the COVID-19 pandemic, there had been a conscious drive to get smaller with objects that are used in our daily lives. From around 2014 onwards, the wearables market really took off, whether it was smart watches or wireless headsets or medical devices such as the insulin detection patches that you wear on your arm. There was also a growth in ‘disposable technology’ which increased the turnover of components.

The market has also been affected by various application factors based around technology that helps to make doing business easier… and COVID-19 helped to accelerate that process. Looking back10 years ago, most companies were dealing with customers around the world via e-mail and never expected to meet. Today, thanks to videoconferencing software, much closer relationships are being built with customers in every country and it has opened up a whole new world. Everyone operating in the microcontroller market around the world has been able to get closer than ever. This simply wasn't possible 10 years ago and it’s had a massive influence on market growth and competition.

The other key – and equally huge – factor that has increased demand for semiconductors has been the advent of the electric vehicle. As more manufacturers are offering them and increasing numbers of houses have a charging facility, technological advancements in terms of batteries and electronics are borne out of this growth. A market emerges that has to feed the modern vehicle with its numerous electronic sensors that monitor automatically temperature, tires, engine performance and more. As automotive companies increase their production levels, semiconductor companies design their technology around the new requirements. With this boost in demand comes a push down on costs, which in turn opens up advanced technologies to a much wider range of industries and applications.

The most constrained market ever

However, there are challenges in the semiconductor market that have not been seen before.

Supply is considerably constrained with significantly increased lead teams. At the moment, for components that would normally have a 12-week delivery time, with most distribution resources having stock, all of a sudden it’s taking a year or more to get them, and even that's not necessarily guaranteed.

Increased demand puts pressure on supply chains and can extend lead times during normal times but when the impact over the past two years of the pandemic is introduced, including having to fight with factory shutdowns, the issue has become much more acute. Even now, parts of Shanghai aren’t fully open. We’ve had this period of 18 months to two years where we've not had good consistent production and this has made a big difference to how people plan.

"Trying to get that balance right between not having huge amounts of stock and being able to have a rapid reaction to demand is absolutely crucial"

Other passive products areas are also seeing these issues, but not the level being experienced with semiconductors. An average lead time can be up to 18 months and businesses are having to rethink planning completely. As a distributor, Farnell would normally do a purchasing review over six months, maybe 12 if carrying out a large exercise, but as standard now, we're looking two years in advance, three with some manufacturers. We're having to manage our pipeline to that level as we look to anticipate demand.

Hope for the future

However, there is definitely hope for the future, because the experiences of the last two years have generated a greater level of intelligence in the overall market.

In the past when there has been periods of allocations in different technologies, people have gone into panic buying. In recent times, people have doubled purchases and then cancelled orders, and there’s been a surplus in the market because nobody was really sure what the true level of demand was. It’s different now because people have really learned a harsh lesson from those periods. They know it could take a year to acquire a component and they are planning accordingly. There is just a wider intelligence out in the market. Not many can predict what's going to happen in the next 12 months but people are most certainly planning a lot better.

Farnell has always been adept at reacting quickly to changes and, through the element14 website, information has been shared across the community, which has helped people to react faster to what's happening in the market.

Trying to get that balance right between not having huge amounts of stock and being able to have a rapid reaction to demand is absolutely crucial. Start-up companies in particular need to think hard. Whether it is a 12-month plan of action or a 10-year plan, a lot of thought needs to be put into it, much more than might otherwise be the case.

It used to be easy to say these are the parts we can get and this is where our buyers are going to be so we can enter the market. The truth now is that you can't guarantee your time-to-market, you really have to look incredibly closely at your timescales and at what you need to do to get there. Planning and scheduling are now absolutely vital factors for companies operating within the semiconductor industry.