Sourceability Insights: August 2024 Market Update

The temperature isn’t the only thing heating up this summer. Over the last few weeks, the electronic components industry has seen plenty of action, from rising spot prices to company expansion plans put on hold due to lingering challenges. As the industry enters the latter half of the fiscal year, original equipment manufacturers (OEMs), contract manufacturers (CMs), and electronic manufacturing service (EMS) providers could see shortages impact DRAM and NAND flash lines.?

Meanwhile, other industry sectors are still working to combat low consumer demand after the steep decline in 2023. While the memory market benefits from the increased utilization of artificial intelligence (AI), other industries, such as electric vehicles (EVs), are readjusting their business strategies due to poor sales.??

However, the expectation is that most industries, including those with low demand, such as EVs, will see an uptick in sales during the end of the year as inventory replenishment occurs. The end-of-year shopping season should prompt further market stabilization, aiding the semiconductor industry in returning to average growth by 2025. Analysts suspected that 2024 would mainly be a transition out of the downward sales trend seen in 2023. By 2025, new technologies, such as AI laptops, would contribute to a better sales market.?

DRAM and NAND flash Shortages Possible?

Throughout the first half of the fiscal year, memory manufacturers, including Samsung Electronics, SK Hynix, and Micron Technology, have been increasing prices for DRAM and NAND flash. Supported by AI’s growth, these products have seen price increases between 10% and 20% each quarter.??

Despite these efforts, spot prices within either market remained weak. However, reprioritization on high-bandwidth memory (HBM) and enterprise solid-state drives (SSDs) coupled with continued price hikes have supported the beginning of spot price stabilization.?

High demand for HMB and high-capacity SSDs utilized in AI applications is expected to see massive growth over the next decade, with SSDs experiencing an annual growth rate (CAGR) of 10.2% between 2021 and 2030. Despite slight contractions within the market over Q2, DRAM and NAND flash saw HBM and SSDs perform better than forecast.?

Samsung Electronics has shifted its strategy from prioritizing consumer electronics to focusing on enterprise markets where these components have been strongly utilized. The reprioritization will likely contribute to capacity crowding, which could be a primary factor contributing to concerns of upcoming memory shortages.??

Earlier this year, Western Digital Corporation had alerted clients to shortage-like conditions for some of its products. WDC went on to state that price fluctuations would be happening more frequently throughout 2024. Due to limited capacity, the company encouraged clients to make any necessary order changes well in advance.??

Likewise, growing interest in new AI tools, such as AI laptops, could exacerbate the shortage’s severity as inventory replenishment begins. There are concerns over how well the market will adapt once consumer electronics demand fully returns in the coming year. Many large original component manufacturers (OCMs) have shifted priorities, focusing on enterprises over their traditional clients. Could consumer electronics OEMs, CMs, and EMS providers end up in the same spot automakers suffered during the 2020-2022 shortage??

Companies should invest in proactively monitoring the ongoing market situation to prevent a repeat of the $210 billion automakers lost over the semiconductor shortage. Luckily, Sourceability’s global team of experts is ready to help those who don't know where to begin.?

EV Market Struggles Amid Slow Sales??

As memory manufacturers expand production capacity where they can, popular EV manufacturers and OCMs are scaling back on their once-ambitious plans. From EV automaker VinFast to silicon carbide (SiC) leader Wolfspeed, many organizations within the market are reassessing their strategies or cutting back on expansion plans.??

Wolfspeed has delayed its construction plans for its $3 billion plant in Germany, which would have focused on manufacturing the components used in EVs. Wolfspeed said it was not scrapping these plans; they had just been put on hold as the chipmaker sought new funding. The European Union’s slow-moving process of dividing funds from the anticipated EU’s Chips Act has only solidified Wolfspeed’s decision to delay.?

Likewise, Vinfast has postponed the construction of its EV and battery factory within the U.S. This is because EV demand has “faltered amid high borrowing costs and as buyers turn to cheaper gasoline-electric hybrids, forcing many automakers to reassess their plans for new factories and models.”?

VinFast did see an increase in vehicles sold during 2Q24. Still, ongoing uncertainties in the global EV market contributed to its postponement and the decision to cut its delivery forecast by 200,000 units in 2024.?

"While the second-quarter delivery results were encouraging, ongoing economic headwinds and uncertainties in different macro-economies and (the) global EV landscape necessitate a more prudent outlook for the rest of the year," VinFast said.?

"This decision will allow the company to optimize its capital allocation and manage its short-term spending more effectively, focusing more resources on supporting near-term growth targets and strengthening existing operations.”?

Similarly, Mercedes-Benz has elected to lower its battery plans while the company waits to see if EV demand increases. With lower expectations, the company no longer needs the capacity it had initially planned for by 2030. Due to the low EV demand, automakers have also paused two more ACC plants in Europe.?

Adding fuel to the fire, Chinese EV automakers have been struggling with recent EU tariffs, which have cut China’s auto industry growth by 20-30%. Domestically, China has also seen its car sales decline for the third month despite government incentives to increase consumer demand. So far, these efforts have fallen short.??

There is good news. Industry analysts and leadership expect EVs to see more robust demand in the year's second half. Like consumer electronics, there should be a more significant turnaround in 2025. For now, automotive OEMs, CMs, and EMS providers with a hybrid car lineup are paying more attention to these automobiles. Hybrids have seen greater sales in the same period fully electric EVs were flattening. It will be interesting to see how the EV market shifts as demand for all-electric vehicles returns or if consumers will remain more devoted to the dual nature of hybrids.?

NSEU Strike Continues

Members of the National Samsung Electronics Union (NSEU) have announced an “indefinite strike,” marking the first of its kind by the labor union in Samsung’s 55-year-long history. Over 1,500 workers from the NSEU were seen rallying and marching along the Gihueng camps in Yongin, South Korea, during the strike’s third week. This situation continues after the initial walkout failed to secure the gains workers are now striking for.?

The strike came after Samsung Electronics' recent gains from the AI boom. According to the NSEU, Samsung Electronics' profit increased 1,450% year-on-year (YoY) without workers experiencing pay growth. As a result, the NSEU demands a? 3.5% increase in members’ base wages, improved pay transparency, and other compensation.?

“If Samsung workers succeed in this undertaking, it will empower the rest of South Korea’s labor,” professor of Korean studies at the University of Oslo Vladimir Tikhonov told AFP.?

Since the beginning of the strike, Samsung Electronics has ensured its commitment to keeping its product line functioning normally without disruption. However, 90% of the NSEU members are employed within “device solutions,” which is an integral part of chip production. Union leadership has stated that the strike, if allowed to continue, will cripple chip production.??

According to media outlet Labor Notes, the union’s next step will focus on disrupting HBM chip production, which is in high demand thanks to its use in AI applications. Should negotiations continue to fall through, there is a high chance that disruptions could be inevitable for the DRAM and NAND flash markets, already expecting shortage-like conditions in late 2024 due to rising demand.?

Chip Industry Worries Over New U.S. Restrictions?

In late July, stocks began tumbling in Asia following a report from Bloomberg News announcing that the United States was considering tighter restrictions on advanced semiconductor technology exports to China. The companies hit were chip leader TSMC, Samsung Electronics, SK Hynix, Global X Asia Semiconductor ETF, and Tokyo Electron.??

The new restrictions would include the controversial Foreign Direct Product Rule (FDPR), which would allow the U.S. government to stop a product from being sold if it was made using American technology. Tokyo Electron and ASML--the leader in ultraviolet lithography equipment used to manufacture advanced semiconductors--would be in the crosshairs of these restrictions.?

The U.S. is also considering expanding the criteria for its unverified list, which requires companies to “obtain licenses for shipping certain restricted technologies.” Should the U.S. broaden this list, it could signal to firms that selling to China is a security risk and would face additional controls, preventing Chinese companies from circumventing current restrictions by depending on foreign expertise.”??

There has been pushback from investors and chipmakers alike on the possible restrictions with Applied Materials, KLA, and LAM Researching arguing that “FDPR and other measures could lead to non-cooperation from allies and incentivize global firms from excluding U.S. technology from their supply chains.”??

Kang Jin-hyeok, an analyst at Shinhan Securities in Seoul, South Korea, spoke to Reuters about possible problems. Samsung and ASML have a heavy sales presence in China, with the latter seeing China account for 49% of its lithography system sales in Q2. The announcement of the possible foreign direct product rule caused ASML’s stocks to fall more than 10%, even after a successful Q2.?

“It seems macro and geopolitical factors played a bigger role than fundamentals,” said Kang.??

Allies of the U.S. are concerned about the nature of these restrictions and could take an opposing stance should they continue. Many are worried that the new rules could pose significant economic challenges and risks for the U.S., harming the same companies these restrictions supposedly protect.?

The electronic components supply chain has significantly developed over the last few weeks. These events could disrupt operations across the global supply chain, contributing to component scarcity the market expects to occur in late 2024. It is still early, but OEMs, CMs, and EMS providers should closely monitor the market to remain aware of shifts.?

To stay ahead of market changes and proactively combat challenges like part shortages, Sourceability’s global e-commerce site, Sourcengine, and market intelligence tool, Datalynq, will help engineers and procurement teams overcome any problem. To contact our sales experts to secure the stock you need or leverage Sourceability’s digital tools, reach out here.??