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Electronic component shortages – a South African perspective
12 September 2018, This Week's Editor's Pick, News

It goes without saying that our insatiable demand for ever more advanced and ubiquitous electronic technologies is a good thing for the electronic engineering industry. The thriving market supports countless jobs throughout the supply chain and has made lots of companies very rich – just ask Apple.

The electronics supply chain is so sprawling and of such a global nature that when demand begins to outstrip supply, many interlocking cogs have to match up to keep the wheels turning. This has all led to a situation where there is currently an acute shortage of electronic components, and the industry is taking severe strain globally.

What’s the problem?

The shortage is resulting in long lead times for manufacturers of electronic products. Radio Data Communications (RDC), a company specialising in communication for the security sector, is one of the South African companies dealing with the consequences, according to chief technical officer Terry van Zyl.

“It’s been affecting our production planning for a few months already,” he says. “Some components are difficult to find and some are now on 40 to 70 weeks delay. This means we have to order almost a year ahead of production, which means our stock values increase, which is affecting operational and production costs.”

There are knock-on effects too, such as the introduction of relabelled, out-of-date parts entering the supply chain in an effort to meet demand, as well as sub-standard and counterfeit components entering the market at a more attractive price.

When scarce components are available with shorter delivery times, they are 50-100% more expensive and only available in small numbers, says van Zyl: “Some components are more popular in certain sizes, usually the latest and smallest sizes used in cellular phones, tablets and other handheld devices. Because these popular components are also normally cheaper due to high production volumes, they are sometimes used in local designs to lower the overall cost and size.

“Now that these devices are increasingly taken up in huge numbers due to forward-buying by large companies to protect their new product stock for many months, smaller manufacturers are feeling the pinch. To satisfy this huge demand more component production lines are geared for these components and less capacity is available for the slightly larger but now lower-volume components. This is another reason why the most popular components locally used are more difficult to source.”

For manufacturers, the result is not only frustration but also a financial penalty. “We already had to do some small design changes to be able to use alternatives - mostly the package size that differs slightly. When such a design change is done, new printed circuit boards must be made and existing stock becomes unusable. This obviously affects the cost of a device and can only be absorbed up to a certain point before increasing the selling price,” van Zyl explains.

Who’s to blame?

In a sense, we’re all to blame for this problem since it’s our relentless demand for electronics that’s behind it. The major culprits, though, are the automotive and smartphone sectors, as the number of components that goes into them has risen dramatically, with no signs of slowing down.

“The major cellular manufacturers like Samsung, Apple, LG and recently Huawei are buying up huge amounts of stock, leaving very small numbers for the rest of the manufacturers,” van Zyl laments. “They’ve got the buying power to do so, including signing contracts with manufacturers with penalty clauses included to guarantee continuous supply.

He says another problem that SA manufacturers face is the volatile exchange rate, recently hit by others developments in the world markets and affecting raw product cost. This applies largely to imports but also locally manufactured costs as most local products still have some imported cost components.

Saro Murabito, Johannesburg regional sales manager at broadline component distributor EBV Electrolink, believes that objectively speaking the problems are not necessarily worse in South Africa. “This is a global problem,” he says. “For sure, the larger companies, with larger forecasts and abilities to place longer-term orders longer in advance, would have been able to manage the shortages a bit better, but no one is immune to this.”

He goes on to point out that the current situation is nothing new: “The industry has generally run cycles of shortages and long lead times, followed by waves of ‘stock in abundance.’ The industry has been predicting this for some time now, and unfortunately the impacts are extreme on companies that were not in a position to plan long-term orders when the warning signs started appearing more than 18 months ago.”

What components are affected?

According to figures released recently by the Electronic Components Industry Association (ECIA) all component categories are being affected to a greater or lesser degree. Those figures indicate average lead times for interconnect and electromechanical components of roughly 67 days, and around 85 days for passives and semiconductors. Digging into these categories, the worst offenders were resistors (more than 125 days), capacitors (almost 110 days) and discrete semiconductors (roughly 130 days).

Van Zyl singles out high-volume components like small multi-layer ceramic capacitors and resistor packs as being the most problematic, due to the fact that all electronic devices use them for various reasons. “There is no substitute as other component variations can either not perform the same function, or when they can they normally cost many times more than the original component.

“Certain components are also made of scarce or rare-earth materials which are only mined in limited areas around the world, often in countries with unstable politics. Tantalum capacitors are part of this group. When a large manufacturer secures new product stock for many months, importers and distributors are finding it very difficult to supply local manufacturers with stock at short notice and often with many months’ lead time,” says van Zyl.

What’s to be done?

It’s only a matter of time before the market corrects itself, but the light at the end of the tunnel is still far in the distance, with even the most optimistic analysts predicting that a significant improvement won’t come until 2020 at the earliest. Not being able to do anything about the problem, companies have no choice but to ride it out, or at best take mitigating measures.

For their part, distributors such as EBV generally increase their backorders on manufactures of components as the lead times start extending. “We would also make it our duty to warn clients as soon as we become aware of this type of problem, as our clients would need to do the same,” Murabito states.

“A reactive approach is quite a difficult problem, and unfortunately many customers have been forced to pay a huge premium to buy (normally) low-cost commodity items,” he continues. “Others have been burnt by sourcing ‘grey’ parts and receiving fake or non-functional parts. It would make sense to embark on a long-term (12 to 18 month) purchase plan with your trusted suppliers, to at least try get out of this problem in the next six months.

“It would appear that for the rest of 2018 this problem may persist, and we are hoping that it will start to ease before the middle of 2019. But with the dawn of artificial intelligence and autonomous vehicles there may be a renewed increase in demand for certain products in the near future, and in some technologies (like memories) maybe the shortages will continue for some time to come as a result of these new markets.”

On the manufacturer side, van Zyl advises companies to change ordering, manufacturing and component content strategies. “Create and strengthen a solid relationship with your component suppliers. Place larger orders to reduce the price increase due to shortages (unfortunately still at a higher cost than normal and also with higher stockholding as a result).

“Order from smaller manufacturers when available. Components are not always of the same quality and lower tolerance. This can be acceptable for some applications but for high-quality or sensitive equipment it will affect stability, reliability and overall quality, which is not acceptable for items designed for security purposes.

“Base order volumes and forward-buying on more accurate sales forecasts to ensure availability (obviously this can change anytime with new competing product launches and may eventually affect product prices due to unused stock.

Redesign existing products to be less affected by the latest global component shortages (at a time delay and still higher costs) and base new designs on components that are not likely to be severely affected for the next few years,” van Zyl concludes.

For more information contact Saro Murabito, EBV Electrolink, +27 11 236 1900, saro.murabito@ebv.com, www.ebv.com; Terry van Zyl, Radio Data Communications, +27 11 452 1471, terry.v@radiodata.co.za, www.radiodata.co.za


Credit(s)
Supplied By: EBV Electrolink
Tel: +27 21 402 1940
Fax: +27 21 419 6256
Email: saro.murabito@ebv.com
www: www.ebv.com
Supplied By: Radio Data Communications
Tel: +27 11 452 1471/2
Fax: +27 11 452 1503
Email: brent.a@radiodata.co.za
www: www.radiodata.co.za
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