Introduction
You may remember a couple weeks ago that we talked about memory shortages. The topic is a key one for our industry, affecting literally every OEM and EMS. With that in mind, we thought you would appreciate another take on the memory chip and module market. Our Vice President of Purchasing, Dev Rai, volunteered his view from the buyer’s side.
I first started working as a junior buyer in 1999. The market we are experiencing now - extreme shortages across the board - was also present from 1997 to 1999. Except for 6 to 12 months in 2010 when there were some small shortages, it took almost 20 years for the cycle to return. I personally had to wait almost 20 years to experience a full-blown shortage market again so I can say yes! I am very excited – and very busy. It’s all part and parcel of being in the independent distribution business.
New Technology Demands More Memory
Overall, memory prices are up and allocation is heavily controlled by the manufacturers. The last couple years before 2017, memory prices went really low and bottomed out, so it’s not a surprise that the only way forward was up. Production capacity was reduced and the market changed from an oversupply market to an allocation market. Demand went up with the Internet of Things (IOT), PC, mobile, and server markets driving the memory resurgence. Pricing went steeply up from the bottom low in just 12 months.
The forecast is NOR-flash prices will continue to grow 20% this year with DRAM slowing down a little to a 5% increase. Manufacturers continue to end-of-life the older legacy products, causing shortages and extended lead times as customers struggle to find and qualify pin-to-pin replacements. Memory modules continue to be in demand; however, margins are low and the price increases month-on-month have slowed down to 2-3%.
The end-product profit margin in the smart phone and PC business has been most affected by this increase the last 18 months or so and, in my opinion, the next couple months should see an adjustment and a hold in prices in order to sustain a fair profit for the makers. The server makers, especially in the cloud computing segment, will likely still be able to afford the premiums as most of their products are for their in-house use and not for sale. End of the day, they will ride it out until they cannot anymore and will stop paying, which will leave [manufacturers like Samsung, Hynix, Micron, etc.] to decide what needs to be done with price adjustment.
The Passives Shortage
We all know passives are in a massive shortage. Per board, you use mostly passive components, and they’re also the cheapest products on the board, but without them nothing runs. Because of their relatively low value, customers are willing to pay 5 to 100 times the price in order to secure product and keep their lines moving along.
The major passive component guys [Murata, Avx, Vishay, Kemet, TDK] are all running at overcapacity and cannot take any more new orders. The Taiwanese makers look at their Japanese and American counterparts increasing prices and controlling production and they follow suit. It’s all-around “place the orders at high prices and hope for the best” in terms of delivery. You cannot blame them, they have had many years of over-production with weak demand and the entire passive market has been an excess market for the last 15 to 17 years.
In order to stay alive they have reduced capacity, closed down plants, and focused on other cost-cutting measures like shrinking the product size and sourcing cheaper raw materials. The IOT explosion and the shift to automotive focus is definitely driving demand and everything that comes with these segments, like all the smart gadgets, requires passive and discrete components.
Preparing for the Unknown
End of the day, could everybody involved have prepared better? Yes, of course they could have. But how could they have invested to increase capacity and manpower when they were burnt so badly in 2000, when the demand suddenly ended and the shortages were over? It took plenty years for them to recover and restructure. Because of this, they are not so easily trusting anymore.
There are still plenty of cases of panic buying where a customer goes to multiple sources and places orders with all of them hoping to get parts faster. This double or triple buying will eventually catch up with the market and we will face excess inventory because of “fake” big forecasts. That is where we have to watch the market. When it starts turning and inventory becomes readily available, prices will start going down and a new cycle will start. As most experts predict, we will see stability in 2019 and I agree with this assessment. There is, however, a big fire to fight still for at least the next 12 months - so let’s get to it.
