Panic, the Chip crisis ended! in4ma Reports

The EMS industry grew by 13.9% in 2022 and by ~10.9% in 2023. Whether or not there was a chip crisis during this time is answered differently by different experts.

According to the in4ma half-year surveys in 2022 and 2023, 1/3 of the growth was due to price increases and 2/3 was attributed to volume growth. This translates into 9.3% volume growth in 2022, a figure that the EMS industry had never achieved in the previous ten years. Which begs the question: where did the semiconductors come from to make this growth possible?

The semiconductor industry had already increased its volume output by 21.6% in 2021 (Source: IC Insights). In 2023, many companies were suddenly surprised that the semiconductors they urgently needed, when finally delivered, had relatively old date codes.

However, all the talk about the chip crisis led to artificially inflated panic orders in 2021 and 2022 from OEM buyers who wanted to make sure their company had sufficient supply. The EMS industry delivered, and in quantities that had never been reached in previous years. At the same time, the EMS companies were pleased with the high order backlogs, some of which had a range of more than two years.

OEMs’ warehouses filled up and from 2023 onwards, OEMs realised that there were no supply issues. Therefore, new orders were not placed, and while the OEMs would have preferred to cancel existing orders, through negotiations with their EMS partners they agreed to postponement of the delivery dates, in some cases by more than 9 months into 2024. As a result, some listed EMS had to issue sales and profit warnings. In the case of the smaller EMS, this was already noticeable in the 2nd half of 2023, and nervousness arose.

At the beginning of 2024, this partly turned into panic, with EMS wondering why no more orders were arriving. Did their customers suddenly no longer have demand? The answer is quite simple: The orders, which under normal circumstances would not have been needed by the OEMs until 2024, were already produced by the EMS companies in 2023 and were now in stock with the OEMs.

Contrary to the rumours that were spread in the industry, the growth of the last two years was not caused by AI, 5G or digitization, but by a lot of hot air. Now the warehouses of an extremely large number of companies are full, because there was no increased demand from the end market.

This is all the classic evolution of the bull-whip effect, which signalled significantly excessive demand in 2022 and 2023 and is now plunging into the valley of tears in 2024. The absolute bottom has not yet been reached, and is not expected until the middle of the year. For many EMS companies, this leads to shorter work schedules and, in some cases, to staff reductions. In Germany alone, the 112 EMS companies participating in the IPC/in4ma annual survey, which account for about 61.2% of sales in Germany, predict a decline in sales of 8.8% for 2024. Just looking at the last 10K reports of global players one sees similar developments. Jabil’s revenues saw a decrease of 14.7% for the last two quarters compared to the same period last year.

But after the rain comes the sunshine, and so hopefully a normal level will be reached again by the end of this year. The fact that the above does not apply equally to all companies is also easy to explain. Companies with a high dependence on a few A-customers are more likely to be affected. In addition, there are significant differences depending on which market segments are served. Details can also be found in the IPC/in4ma Annual Survey 2024.

Unfortunately, there are apparently some companies that are now spreading rumours that there will be another chip crisis at the end of the year, and that this time it will even be more extreme than the last crisis. They are telling OEMs they should already order the requirements for the next 12 to 15 months to have security of supply. The rumour is also caused by a distributor who uses a mafia-like approach á lá: “buy now, or you will suffer” claiming that from the 3rd quarter of 2024, the Far East will have an exorbitant demand for components, with the additional volume growth being greater than the entire demand of Europe.

Don’t buy into this. Once again, the argument is that AI is the cause of the extremely high demand for semiconductors. Ask your supplier to explain exactly which part numbers are affected and what new delivery times are expected. After that, contact some brokers and request these part numbers from them. We did the same in the last crisis. We received offers from brokers to be able to deliver the part numbers, some of which were subject to 40 weeks delivery time at distributors, within 3 working days. The unnegotiated prices hardly differed from the prices of the distributors. In addition, it is undisputed that there are some exotic semiconductors that have always had delivery times of up to 80 weeks, but this cannot be generalized.

Don’t be misled by any nonsensical rumours you might hear, and demand verifiable facts. Even the argument about the recent “earthquake in Taiwan” having an impact does not hold up to scrutiny because the new crisis was already being talked about two weeks ago. In addition, major foundries are already giving the all-clear and Samsung also confirmed the end of the downturn and expects significant increases in profits.