There has been much talk about shortages in the CE supply chain, particularly silicon-based products as most foundries are running at or near capacity. With strong demand through 2H 2020 for a number of CE product segments (notebooks, monitors, and tablets), a result of the stay-at-home mandates related to COVID-19, the follow-through demand for drivers and similar products has also been strong, however foundry capacity is prioritized according to product profitability and customer. Recently a number of camera component suppliers have indicated that they are seeing reduced orders due to shortages of controller ICs and flash memory and have become ‘conservative’ about 1Q.
While it is difficult to trace back whether the alleged shortages are direct components (not likely) or customer related issues (most likely), we can look at monthly results for two of the companies that cite shortages as a reason for near-term weakness, and more directly, shipments of a specific product that would be only handset related. We note that this data is anecdotal and only a piece in a complex puzzle and should be taken as such, but rather than promote or debase company commentary, we looked a bit more closely. Here’s what we found:
While it is difficult to trace back whether the alleged shortages are direct components (not likely) or customer related issues (most likely), we can look at monthly results for two of the companies that cite shortages as a reason for near-term weakness, and more directly, shipments of a specific product that would be only handset related. We note that this data is anecdotal and only a piece in a complex puzzle and should be taken as such, but rather than promote or debase company commentary, we looked a bit more closely. Here’s what we found:
Company A - Monthly Revenue - Source: SCMR LLC, Company Data
Company A saw only a minor (6.3%) m/m drop in sales in December, the period during which this company saw shortages begin to affect its sales, however y/y sales were down only 3.7% y/y, so it seems to indicate that 2019 December results were more typical of normal seasonal patterns. With such a small m/m drop, we would surmise that the yearly trend (red line) was continuing and no unusual customer circumstances were the root cause, at least in December.
Company B - Monthly Revenue - Source: SCMR LLC, Company Data
Company B saw a larger (19.0%) drop in m/m sales in December, although y/y December results were up 29.7%. In 2019 Company B saw sales drop 4.9% m/m in December, so there could be some incremental influence from shortages here, but since these sales include all products, we would have to qualify how much of that December drop was from normal seasonality and how much was from order reductions from customers who were unable to procure components.
Company C3 - Monthly Camera Modules - Source: SCMR LLC, Company Data
Company C gives us a more precise picture, given the data is for camera modules only, and excludes all other products. December saw only a 3.4% drop m/m, although the y/y results were down 23.9%. While the December decline was moderate, November saw an 18.5% decline from what was the strongest three month period the company had seen since late 2019. To us, this has the possibility of indicating that shortages at customers could be affecting order patterns, and as Company C data is more directly related to smartphone demand, we put more weight behind this data.
All in, even with the fact that these are only three component suppliers to a vast smartphone industry, they do give some indication as to the direction of orders and the fact that regardless of the reason, seasonal or otherwise, there is enough weakness to light a cautionary lamp. We note that we have found reason to believe that component buyers for many CE products had been increasing orders above quota to insure that they received production time from suppliers, and had sufficient stock to satisfy demand. If silicon suppliers are at full capacity, secondary customers will be unable to garner sufficient component supplies and will burn through existing inventory. As those inventory levels decline, they have little choice but to reduce orders for other components, while primary customers are still buying above quota.
Such a disparity is harder to trace than a more across the board trend, as component prices could continue to rise, however even a small drop in actual (consumer) demand will cause even primary customers to slow orders, and while secondary customers might see this as an opportunity to replenish component inventory levels, they would likely be paying up for components that would start to see price declines. Again, the data above is a tip-of-the-iceberg look at component demand and pricing, so it will take a month or two more to draw a more solid conclusion, but the check engine light is on.
All in, even with the fact that these are only three component suppliers to a vast smartphone industry, they do give some indication as to the direction of orders and the fact that regardless of the reason, seasonal or otherwise, there is enough weakness to light a cautionary lamp. We note that we have found reason to believe that component buyers for many CE products had been increasing orders above quota to insure that they received production time from suppliers, and had sufficient stock to satisfy demand. If silicon suppliers are at full capacity, secondary customers will be unable to garner sufficient component supplies and will burn through existing inventory. As those inventory levels decline, they have little choice but to reduce orders for other components, while primary customers are still buying above quota.
Such a disparity is harder to trace than a more across the board trend, as component prices could continue to rise, however even a small drop in actual (consumer) demand will cause even primary customers to slow orders, and while secondary customers might see this as an opportunity to replenish component inventory levels, they would likely be paying up for components that would start to see price declines. Again, the data above is a tip-of-the-iceberg look at component demand and pricing, so it will take a month or two more to draw a more solid conclusion, but the check engine light is on.
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