Sourceability Insights: February 2024 Market Update

The new year has only just begun, and the industry is already experiencing a world of change. Natural disasters, aggressive price hikes, and excess electronic component inventory challenges are just a few of January's surprises. The semiconductor market is hardly lacking in excitement as breakthroughs in graphene and artificial intelligence set the stage for new avenues of digitalization.??

Let’s begin with the outlook for the electronic components market in 2024. According to analysts from the International Data Corporation (IDC), World Semiconductor Trade Statistics (WSTS), and Edgewater Research, the worst of the post-global shortage market decline is now behind us. There will be opportunities for growth across all market sectors in 2024, with aerospace and defense likely to see the most significant spikes.??

That said, there is a caveat about the market rebound. Most analysts agree that the first half of 2024 will see many of the same problems from 2023, particularly the challenge of excess electronic component inventory.??

Despite strategic production cuts by original component manufacturers (OCMs), a considerable inventory overhang is still plaguing many companies. Despite the popularity of generative artificial intelligence (AI) last year softening some of the steep declines, it wasn’t enough to bolster consumer and corporate demand enough to aid companies in digesting inventory.?

For Q1 and Q2, many companies will focus on continuing mitigation efforts, selling their excess, or finding other avenues of correction. Just remember, there’s a light at the end of the tunnel.?

Japan Earthquake Temporarily Halts Production at Key Chip Plants. Damage Appears Minimal?

Natural disasters are often one of the most unexpected and devastating disruptions to the global semiconductor supply chain. They can occur without warning and range in severity. Even if the effect is minimal, the slight delay can cause larger challenges due to how widespread and complicated the semiconductor supply chain is.??

On New Year’s Day, Japan was rocked by a deadly 7.6 preliminary magnitude earthquake in the Noto region of Japan’s Ishikawa Prefecture. Home to many of Japan’s semiconductor and electronics facilities, operations ground to a halt out of concern for structural damage. Many citizens are still left without water and access to main roads.?

According to Ritesh Kumar, Director of Procurement and Supply Chain Intelligence at Smart Cube, the global impact could be minimal.?

“From a business perspective, the earthquake is expected to have a limited immediate impact on the semiconductor industry. A number of semiconductor suppliers have manufacturing facilities in the impacted areas, such as Kaga Toshiba Electronics and Murata Manufacturing, have manufacturing facilities in the impacted areas. These companies have halted production, which will tighten the supply-demand gap and drive a surge in the prices of electronic components globally, especially in the event that the resumption of operations gets delayed for an extended period of time.”?

The impact will likely stay localized, with prices for raw materials increasing as rebuilding efforts commence. TrendForce echoed this sentiment earlier in the month, stating that the earthquake did not significantly damage the critical chip-related facilities. Each plant was temporarily shut down so authorities could thoroughly investigate each building for damage. The preliminary reports appeared optimistic.??

Early inspections reveal no damage to essential chip machinery, which should prompt a speedy return to operation. So far, most chip-making organizations, such as Taiyo Yuden, Murata, TDK, GlobalWafers, and Toshiba, haven’t reported significant damage or delays to their production.?

The humanitarian impact of the recent earthquake has been devastating. However, Japan’s disciplined approach to earthquake preparedness prevented it from worsening. Likewise, the increased use of drones in disaster relief has aided efforts in search-and-rescue operations and damage inspections.??

DRAM and NAND Contract Prices Rise in Q1 2024 as Manufacturers Cut Production?

The memory market saw the steepest decline in demand last year. Memory chipmakers, including Samsung Electronics and SK Hynix, engaged in strategic production cuts to prevent excess inventory build-up and continued price drops. During the last two quarters of 2023, SK Hynix and Samsung Electronics began to see the inklings of a recovery.??

Recent reports from TrendForce have indicated price increases coming to DRAM and NAND Flash contract prices across 1Q24. Analysts believe this is due to uncertainty in the market outlook for DRAM in 2024, which stems from unfulfilled DDR5 orders and companies increasing their inventory levels of NAND Flash products.??

According to TrendForce data, there will be an average rise in DRAM prices between 13-18%. Unpredictable demand in PC and mobile DRAM markets, and because of the uncertainty, manufacturers are unwilling to ramp up production despite positive trends. SK Hynix plans to continue strategic production cuts throughout the first quarter, alongside others, to keep the supply-demand tight.??

Similarly, due to the ongoing uncertainty, companies are making more aggressive purchase decisions and stockpiling components. The market is also experiencing a continued shift from DDR4 to DDR5, with SK Hynix planning on expanding DDR5 and high-bandwidth memory (HBM) over the year. The latter is vital in cloud servers and artificial intelligence, such as generative AI.?

NAND Flash products are witnessing similar price hikes over 1Q24. According to TrendForce data, buyers are increasing their purchases to establish safe inventory levels despite facing a traditional low-demand season. This will contribute to an estimated 15-20% increase in NAND Flash contract prices. The price hike is being initiated by manufacturers to offset losses. However, with demand struggling to keep up with these rapid increases, future price escalations hinge on the resurgence of enterprise SSD procurement.?

TrendForce forecasts that the most significant increases will be seen in eMMC and enterprise SSD, with prices estimated to rise 18-23%. While demand has yet to spike in North America, Chinese CSPs and servers are filling the gap left behind. Buyers rushing to increase orders are contributing to the larger increases. Likewise, eMMC manufacturers are hiking prices from persistent production cuts, tightening the supply, and stabilizing the supply of smartphones and Chromebooks.??

Overall, NAND Flash, seeing the same market uncertainty that is triggering DRAM price hikes, the market sector will witness a moderate increase in 1Q24. It is still relatively early in the year to determine how the market uncertainty will play out. Edgewater Research warns that it will be imperative to keep watch on pricing throughout the year to watch for market shifts.??

That will be necessary considering the impact artificial intelligence continues to have on the electronic components market and its integration into new technologies.??

Artificial Intelligence Will Lead Recovery, But Excess Remains?

The ongoing interest and use of AI in corporate technologies and consumer electronics will continue through 2024, specifically in generative AI and large language models (LLMs). SEMI’s recent World Fab Forecast report said global wafer capacity would increase globally to 30 million wafers per month, driven by AI and high-performance computing (HPC). Gartner shares this forecast, citing that the market will return to growth this year with AI paving the way.?

At the Consumer Electronics Show (CES) 2024, artificial intelligence dominated the floor with AI super-charged hardware. These new foundational AI technologies presented at CES 2024 will likely transform products and other services in the coming years, fueling the ongoing adoption of AI applications. ChatGPT continues to lead in popularity, with others still developing similar LLMs.??

Despite AI driving demand recovery, the market rebound expected to help lift the industry from its decline will not occur until 2H24. Edgewater Research analysts state that excess electronic component inventory will be a challenge for the year's first half.??

Mitigation attempts and production cuts by manufacturers have progressed in 3Q23 and 4Q23, but it wasn’t enough to wipe the slate clean before 2024 began. Memory manufacturers are still utilizing production cuts to keep supply-demand tight. Artificial intelligence demand will pave the way, as it has done through 2023, but for now, it will take a few more tough months to reach the other side.???

For original equipment manufacturers (OEMs), contract manufacturers (CMs), and electronic manufacturing service (EMS) providers continuing to grapple with excess, the best thing to do is to sell it on a global e-commerce site to gain the maximum cash return.?

Logistics Complications Continue in Two Important Canals??

It has been years since the container ship Ever Given ran aground in the Suez Canal, blocking traffic for six days and holding up nearly $60 billion in trade. During the peak of the Covid-19 pandemic, the obstruction led to an estimated 60-day shipping delay in the global supply chain for various industries–which were highly overtaxed before the setback.??

While an iconic meme, the billions racked up in its removal and repair alongside what was lost during the delays was no laughing matter. The importance of the Suez Canal in international shipping is, quite simply, enormous. It is one of the most famous canals in the world, alongside the Panama Canal.??

Both canals are facing challenges that have the potential to impact international shipping companies and logistics immensely.??

Panama is currently experiencing one of its worst droughts. With low water levels, the Panama Canal Authority has restricted the number of ships passing through the canal. The organization has lowered the usual 36 ships per day to 22. Unfortunately, due to the placement of the Panama Canal, it is an imperative crossing between the Pacific and Atlantic Oceans, with only a few alternative routes available. Most companies have had to reroute around Cape Horn in Chile to bypass the Panama Canal.?

Cape Horn’s passage is far more challenging than the Panama Canal. The waters around the tip of South America can be hazardous with strong winds and currents alongside the possibility of dangerous icebergs. This is without mentioning the additional fuel costs, and days it takes to travel around the South American continent.??

Unfortunately for global logistics, the Suez Canal is facing a similar situation. Due to the devastating Israel-Hamas conflict, the Red Sea has seen an increase in tension due to rebel attacks on passing ships. More significantly, security insurance for vessels traveling through the Suez Canal has increased in cost.??

Reuters recently reported that navigation through the Suez Canal is flowing normally, with the canal authority analyzing the impact on shipping. The Suez Canal is used by roughly one-third of all global container ship cargo and redirecting ships costs an additional $1 million in fuel. The alternate route around South Africa’s Cape Good Hope is equally hazardous to Cape Horn, with frequent storms and rough, choppy currents causing over 3,000 shipwrecks.??

There is no indication of when either canal might face stabilization, but Panama’s situation might resolve sooner. Air Cargo News reported that rainfall and lake levels have been higher than expected, causing the Panama Canal Authority to reexamine previous plans for restrictions in 2024.?

“Restrictions were set to become stricter with ships to be limited to 18 by February next year,” Air Cargo News said. “Due to higher water levels, the Panama Canal Authority will increase the transit number to 24 ships in January.”??

Companies should remain aware of both challenges and analyze their effects on their supply chain. They could prove problematic if they last well into 2H24 when a market rebound is expected. However, some analysts believe the coming rebound will be muted, thereby not causing major disruptions despite canal blockages. If the market recovery follows a more positive outlook, lead times could grow following these shipping delays. Only time will tell.??

Want to learn more about component lead times, price trends, and availability from your favorite manufacturers? Sourcengine’s complete Lead Time Report, which provides information on market trends, component availability, and industry news, is available for download anytime.?