Global Market Trends #2: International Industry Response
In our previous blog post, we outlined the reasons for the current market trends affecting our industry partners and customers. From chip shortages to congested shipping routes, the global supply chain is continuing to face extensive difficulties. So, we know why these trends are happening. But how is the international industry responding?
Companies across the globe have been forced to react to these market trends in a variety of ways. Industrial processes are struggling to meet demand, from product design to manufacturing to distribution. Prices have been raised across the complete supply chain: in one study by the global trade association IPC, for example, 71% of manufacturers were found to expect to have to raise prices by an average of 14.5% in 2022. Semiconductors are in particularly short supply, with some manufacturers reporting lead times of over 52 weeks. In addition, distributors are continuously choosing to expedite only after these extensive lead times have been fulfilled. Some manufacturers have even taken to “scavenging” silicon and other components from household devices — although Component Sense’s CEO Kenny McGee would argue that “buying brand new finished goods, if true, just to salvage a few components is highly irresponsible and a shocking waste of the planet’s resources. A less intensive and potentially more profitable solution would be to redistribute excess components held by large OEM and EMS companies that are sitting unused. This would prevent landfill waste, ensure quality, and hinder the growth of the counterfeit black market”.
A key result of the current supply chain difficulties is an increased interest in re-shoring from Western companies, otherwise known as on-shoring or in-shoring. Indeed, US Treasury Secretary Janet Yellen has so enthusiastically endorsed this interest that she labelled re-shoring efforts as “friend-shoring”. To encourage US reshoring efforts, President Joe Biden has introduced the 2021 Innovation and Competition Act. This bill outlines plans to spend up to $52 billion on the semiconductor sector within the US and would give the American government power to block billions of financial investments into China from US-based companies and individuals. As Reuters reporter Alexandra Alper has noted, this act “puts the industry in the tricky position of aggressively seeking the grants but facing headwinds to their foreign direct investments in Chinese factories and financial backing of Chinese start-ups”. The European Union has followed suit, announcing ambitious plans to create an advanced European chipmaking “ecosystem”. Ultimately, these reactions from the US and EU signal an increased desire from Western industry to distance themselves from Asia-based manufacturers and avoid future disruptions to their respective supply chains.
Alongside these industry-specific reactions is a more general sense of uncertainty and unease amongst manufacturers, distributors, and customers alike. Many companies are choosing to overbuy stock to avoid future supply issues. Businesses are opting for a “just-in-case” mentality in purchasing, meaning that certain organisations are paying extraordinary prices to store excess stock whilst others are struggling to fulfil orders. These practices of overbuying, along with global price increases, have resulted in the availability of items becoming “king,” as Z2 Data‘s Chase Correll describes it, meaning that “suppliers and manufacturers […] have leverage over their customers”. Writing for JJS Manufacturing, Neil Sharp has noted a more positive outcome: according to him, the ongoing supply chain insecurities have encouraged closer relationships between original equipment manufacturers (OEM) and electronic manufacturing services (EMS). Due to the Covid-19 pandemic, OEM-EMS relations have become more spontaneous, frequent, focused on customer satisfaction, and dedicated to increasing interconnectivity.
As we have outlined, the current global supply chain is fraught with uncertainties. Correll sums it up in his research for Z2, stating that “[nobody] is sovereign from advanced […] disruptions. Consumer electronics continue to experience delays, the automotive industry is still fighting for components, and record-level price increases are surfacing to take advantage of insane demand.” Kenny McGee our CEO at Component Sense states, “whilst we certainly don’t condone it, we have heard of clients being prepared to pay 500 times the standard cost of some devices”. Additionally, our Director of Sales, Rose McGee, has said that she has “never seen the market boom” as it is now. Rose told us that “it’s hard to predict what the future holds for the global component market. Right now, I’m seeing almost constant fluctuations in prices and demand.”
We will be analysing future market projections and providing our advice as our editorial series continues. How will the international manufacturing industry transform to adjust to a post-pandemic world? How can your business insulate itself against potential disruption and losses?
As part of our series on current Global Market Trends, we will be analysing the industry response to supply chain issues and international market projections. In our final editorial instalment, we will be offering our advice on the best way forward to our customer base. If you want to keep on top of our analysis and bolster your company’s success in such a fluctuating market, you can follow us on social media and receive notifications of our forthcoming editorial pieces for this series.