On September 19, market analyst Dieter Weiss from in4ma took the stage at the Evertiq Expo in Gothenburg and raised important questions about the semiconductor crisis that plagued the industry a couple of years ago. With a provocative comparison between semiconductors and toilet paper, he challenged the notion of scarcity and shared insights on how artificial demand has affected the European EMS industry.
How could the revenues for EMS companies increase so publicly during a semiconductor crisis? That is the question that market analyst Dieter Weiss from in4ma poses to the audience from the stage at Evertiq Expo in Gothenburg.
The floor is silent. completely silent. (Click this link to View youtube video of the event).
He illustrates his point with a stack of toilet paper, arguing that the toilet paper crisis that emerged during the pandemic demonstrates the same phenomenon as the semiconductor crisis. Toilet paper has a relatively constant demand, and the same can be said for semiconductors, Dieter explains. People did not go to the bathroom more often than before during the pandemic; they simply bought more toilet paper. This was after a persistent rumour about a risk of a shortage had taken hold, which he claims also happened within the semiconductor industry.
“Artificial demand is not grounded in reality and will sooner or later backfire,” says Dieter Weiss.
The automotive industry can be blamed to some extent, but not for the reasons one might think. It was not that they stopped production due to a semiconductor shortage; rather, they had simply produced too many cars during the years before.
What he describes is a traffic jam: someone lightly brakes, the car behind slams on the brakes, and another car further back comes to a complete stop. And now we have a queue. Actions always have consequences, and they are not always equal. A light break – or a rumour – can set off a chain reaction.
The European EMS industry grew by 4.9% in 2023. Western Europe saw an increase of 11.2%, while Central and Eastern Europe (CEE) experienced a decline of 1.8%. Despite the growth in 2023, 2024 has so far been a tough year for manufacturers. The question is: Where have the orders gone?
The answer is unfortunately painfully simple, according to Dieter: they have already been produced, two years ago, and are now sitting on the shelves of OEMs — nothing is reaching the end customer. Only when OEMs manage to clear their overflowing inventories will the market pick up again.
Between 2015 and 2019, the raw material inventory for Europe’s EMS companies constituted about 15% of annual revenues. This has since increased dramatically. In fact, manufacturers in 2022 had EUR 6.4 billion in excess inventory compared to normal levels. And despite the industry’s efforts to reduce these inventories in 2023, Europe’s EMS companies still had EUR 5.2 billion in surplus stock.
A supply chain consists of several different companies working together: the manufacturer, the distributor, the wholesaler (or in this case, the EMS company), and the end customer. Each works independently of one another, but at the same time, they rely on each other for a constant flow of products that allows companies to fulfill their requirements. And that supply chain was totally disrupted in 2020.
Was there an actual shortage? In short, yes, but it was not as widespread as the “artificial shortage” made it seem. Microcontrollers were indeed in short supply during parts of 2021; beyond this, Dieter argues that the crisis the market experienced was a self-fulfilling prophecy. A troubling rumour about an impending shortage created panic among OEMs, who in turn increased their orders with EMS companies, and the dominoes were set in motion.
“For the various markets within the electronics industry, the average growth rate over the past 10 or 20 years has been about 3.6 percent — and there is a very clear rule: the market never jumps,” says Dieter Weiss from the stage. “So don’t think that from one day to the other, the market jumps up by 20-25%, because that doesn’t happen.”
On the screen, a chart for 2021 is displayed, showing that the semiconductor industry managed to scale up its production that year.
“During 2021, the semiconductor industry was able to increase the output, and I’m talking not about revenues, I’m talking about quantity, by 21.6%. A quantity that is much higher than what actually the market needs. So you must ask yourself: Why did we have a shortage?”
Dieter rewinds to the automotive industry. It is often said that the automotive industry collapsed due to the semiconductor shortage, but that is not true. According to Dieter, this is actually completely wrong, and the numbers show it. The decline began as early as 2019.
“The problem was that the automotive industry, and particularly two players — Nissan and Volkswagen — were constantly fighting for the number one position in global sales. They were competing hard, and in 2018, Volkswagen manufactured so many cars that they had to store around 800 of them at Berlin’s non-finished airport because they didn’t know where to put them.”
That was the situation. The automotive industry started slowing down as early as 2019 and manufactured fewer cars. Then came the COVID-19 pandemic, which created significant problems for the automotive industry. But apart from that, there were no other major factors. So, why did everything suddenly become scarce?
Dieter paints a scenario where purchasing managers tried to be smart with their planning, and distributors found themselves unable to handle all the orders.
“In response to this, distributors implemented a new rule: no fixed order, no delivery date. So, you could not do any logistical planning anymore, because you had to order the product in order to get the delivery date.”
Then a new problem arose: What happens if a company has the semiconductor but lacks the other parts needed for the PCBA?
The industry responded by starting to order the entire bill of materials and purchasing everything at once. By doing this, they fulfilled exactly what the distributors had planned — to move their stock to the OEM and EMS companies. “And all of a sudden, you build up huge inventories.”
Again, Dieter echoes: There has never been any real shortage of semiconductors. It was merely a self-fulfilling prophecy. False information about an impending shortage caused companies to buy more than they actually needed, and now all that material sits in stock.
Now, in 2024, many wonder: Where have all the orders gone?
“You manufactured those orders to your customers already in 2022. And in the first half of 2023. And they are now lying on the shelves of your customers. And as your customers did not see a jump in the market for their customers, they still have their inventories full. So they pulled in the second half of 2023, they pulled the brakes and said no further deliveries anymore. We don’t need anything. And many also said we don’t need anything in 2024 anymore.”
That is why revenues for many EMS companies are decreasing by 10-15%, and for smaller companies, they are dropping by 20-25%. This is, by the industry, a self-inflicted problem.
“When you ask me today when the orders will return? The answer is: Forget 2024. Nothing will happen in 2024 anymore. You will have to live with the fact that your revenues will be much lower. Only in the first half of next year, you will see a relief,” Dieter concludes, urging all listeners to look for the right planning tools that can help avert situations like this.
Editor: Dennis Dahlgren
Original article can be viewed at: https://evertiq.com/news/56445
