Industry Market Drivers, Inflation, and the Supply Chain

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In this wide-ranging interview, Shawn DuBravac, chief economist for IPC, discusses a variety of market drivers and pressures that are affecting PCB manufacturing and assembly. He also shares his thoughts on the relationship between inflation, wages, and the current supply chain challenges—and what all this may mean to your bottom line in 2022. 

Barry Matties: Shawn, as we look at the pressures the industry faces today—supply chain, inflation, labor and so on—how should our industry be viewing or reacting to these pressures? 

Shawn DuBravac: These are forces that are impacting not just companies in the electronics manufacturing industry but also everyone who is upstream and downstream of them. These forces, for the most part, aren’t likely to abate soon, and will likely stay with us well into 2022. These forces are causing companies to really rethink the type of relationships they have with their supply chain. It’s causing them to rethink pricing, their suppliers and supply chains, and what those relationships look like. 

Matties: Looking at our end-markets, what do you see? I’m thinking of automotive, military, medical, and so on. 

DuBravac: Speaking broadly, we definitely see pressure on the auto industry. We’ve obviously seen a significant extension of lead times. Many of those shortages are playing out in other industries. 

When demand picks up and lead times lengthen, it causes an acceleration of orders because people say, “I wasn’t going to place that order for three weeks when it was a three-week lead time, but now that it’s an eight-week lead time, I need to place that order today.” Ultimately, lengthening lead times pulls orders forward and exacerbates the problem. 

The supply chain is working to address the rapid rise in demand that we’ve seen over the last year. We’re not seeing lead times extend significantly, but they remain very high. We’ve also seen a slowdown in demand which will help drive us to a more sustainable equilibrium. We saw, in the U.S. in particular, things slow in the third quarter. At the same time, inventory levels are low across the board. The backlog of orders continues to grow. It will take some time to work through all these dislocations and many of these pressures will be in place well into 2022. 

Matties: Do you anticipate any surplus of inventory in 2022 which might result in a dip in our industry? Is there going to be a dip generally because of the slowdown? 

DuBravac: Right now, we have the opposite dynamic. We’ve seen somewhat of a dip in certain industries because of the inability to get parts. We see a slowdown because of supply chain dislocations. For example, Apple said recently that the supply chain constraints cost them about $6 billion in their fiscal Q4. They anticipate more than $6 billion in lost sales because of the constraints in their fiscal Q1, which includes the holiday quarter and bleeds into the new year. 

Some of the dip in the calendar Q3 in the U.S. was because of a rapid slowdown in consumer spending, which was still growing but at a much lower rate. I think some of the cutback in spending was a result of product availability. Recent research from Kelly Blue Book suggested new car buyers were holding off or exiting the car buying market because of lack of inventory and lack of product availability, coupled with stiffness of price. 

Now to your question: Do we see a big overhang of inventory forming in 2022? I don’t see that for several reasons. Have there been excess orders? Is there double booking? Possibly. But I’m seeing a lot of companies doing things to protect against that. 

Distributors aren’t taking on new customers in some instances as they’re protecting their existing customers. I’ve heard of distributors who are allowing companies to only order some multiples of what they had ordered in the past. Maybe it’s 10% or 20% more, not allowing them to try to double their orders over what they did in the past. Contract terms have stiffened somewhat, so the ability to cancel orders is not as relaxed as it might normally be or certainly has been in the past. They’ve done that as a mechanism to firm the orders. 

To read this entire conversation, which appeared in the December 2021 issue of SMT Magazine, click here.


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