Components – The Good, the Bad, the Happy, the Sad[1]
[1] “Let’s Stay Together” – Al Green - 1972
Taiwan-based Yageo (2327.TT) is arguably the largest producer of passive components (capacitors, resistors, and inductors), and while passives are essential for the operation of all CE devices, they get little of the recognition and fanfare that silicon-based products receive, and remain in the shadows in the CE supply chain. While CE products usually contain a few silicon-based components, they can have hundreds or even thousands of passives, and while they are small and quite inexpensive singly, CE devices can run without them. With growth rates in the 2% to 3% range in good years, components tend to be relatively low-risk investments, but ones that are highly cyclical, so component company investors tend to look for sub-categories that are seeing a technology or demand change, such as MLCCs (Multi-Layer Ceramic Capacitors) that are used to regulate current flow and remove noise from circuitry and have increasing applications in mobile devices and electric vehicles.
But we digress as this note is not about the virtues of MLCCs or components in general but about inventory, much of which in the component space, is carried by distributors such as Arrow Electronics (ARW), Avnet (AVT), TTI (BRK.A), Future Electronics (pvt), and Digi-Key (pvt), who stock millions of components for their customers who are typically not large enough to buy directly from the producer. Some are supplier authorized or franchised, while independent distributors have no direct affiliation with component producers and buy in the open market.
In the distribution business, there are a few factors which are most important, first, are the distributor’s components legit?, and while this seems a bit odd, if a CE company finds that product failure is coming from a specific component, they will want to trace that component back to its source and that is why working with an authorized distributor has a bit premium attached. Second is availability, which can translate into lead time if larger quantities are needed, and again the added leverage with producers that authorized distributors have can shorten those wait periods and keep CE product roll-outs on schedule. Last is price, and this is where independent distributors have the advantage as they can negotiate deals in the open market, which are not constrained by producer list pricing.
Back to Yageo, who just came of the best quarter in the company’s history, up 3.9% q/q and up 13.0% y/y, but warned that it is expecting sales to drop between 2% and 3% q/q as both direct customers and distributors hold back orders as they try to reduce inventory levels, which are unusually high against weak smartphone and notebook demand. The company expects to reduce factory utilization rates in 3Q by ~10%, from 70% top 60% for standard passive components, in order to bring down inventory levels from 130 days to between 100 and 110 days, which is considered normal, by the end of the year or during 1Q ’23. Premium passive products are still seeing strong demand from automotive, networking, and industrial customers, and will still see utilization rates between 90% and 100% at the company, but commodity passives will be the burden for the remainder of the year.
Optimistically, and perhaps rightly so, Yageo expects only minor impact from the expected pricing pressure for the remainder of the year, as the premium segment accounts for ~75% of the company’s sales (1Q), but much will depend on how quickly inventory can be drawn down to more normal levels, with the company’s view being about six month at 60% utilization to bring inventory levels down by ~20%, while little was said about how and why those inventory levels continued to build in light of the many indicators that have been pointing to a slowdown across a number of Yageo’s end market segments for some time. We guess that if distributors are asking for product, regardless of the macro picture, Yageo had little choice but to supply whatever they were asking for, although knowing how close to the edge of a precipice they were heading and we expect other passive component manufacturers felt the same way, leading up to what will probably be a weak 2H for all..
But we digress as this note is not about the virtues of MLCCs or components in general but about inventory, much of which in the component space, is carried by distributors such as Arrow Electronics (ARW), Avnet (AVT), TTI (BRK.A), Future Electronics (pvt), and Digi-Key (pvt), who stock millions of components for their customers who are typically not large enough to buy directly from the producer. Some are supplier authorized or franchised, while independent distributors have no direct affiliation with component producers and buy in the open market.
In the distribution business, there are a few factors which are most important, first, are the distributor’s components legit?, and while this seems a bit odd, if a CE company finds that product failure is coming from a specific component, they will want to trace that component back to its source and that is why working with an authorized distributor has a bit premium attached. Second is availability, which can translate into lead time if larger quantities are needed, and again the added leverage with producers that authorized distributors have can shorten those wait periods and keep CE product roll-outs on schedule. Last is price, and this is where independent distributors have the advantage as they can negotiate deals in the open market, which are not constrained by producer list pricing.
Back to Yageo, who just came of the best quarter in the company’s history, up 3.9% q/q and up 13.0% y/y, but warned that it is expecting sales to drop between 2% and 3% q/q as both direct customers and distributors hold back orders as they try to reduce inventory levels, which are unusually high against weak smartphone and notebook demand. The company expects to reduce factory utilization rates in 3Q by ~10%, from 70% top 60% for standard passive components, in order to bring down inventory levels from 130 days to between 100 and 110 days, which is considered normal, by the end of the year or during 1Q ’23. Premium passive products are still seeing strong demand from automotive, networking, and industrial customers, and will still see utilization rates between 90% and 100% at the company, but commodity passives will be the burden for the remainder of the year.
Optimistically, and perhaps rightly so, Yageo expects only minor impact from the expected pricing pressure for the remainder of the year, as the premium segment accounts for ~75% of the company’s sales (1Q), but much will depend on how quickly inventory can be drawn down to more normal levels, with the company’s view being about six month at 60% utilization to bring inventory levels down by ~20%, while little was said about how and why those inventory levels continued to build in light of the many indicators that have been pointing to a slowdown across a number of Yageo’s end market segments for some time. We guess that if distributors are asking for product, regardless of the macro picture, Yageo had little choice but to supply whatever they were asking for, although knowing how close to the edge of a precipice they were heading and we expect other passive component manufacturers felt the same way, leading up to what will probably be a weak 2H for all..
Yageo Monthly & Quarterly Sales - 2019 - 2022 – Source: SCMR LLC, Company Data
Yageo - 2Q Sales by Segment - Source: SCMR LLC, Company Data
Yageo - 2Q Sales by Channel - Source: SCMR LLC, Company Data
Aggregate Smartphone Shipments - 2018 - 2022 YTD - Source: SCMR LLC, VArious, Company Data
Aggregate IT Panel Pricing - 2019 - 2022 YTD - Source: SCMR LLC, IHS, Witsview, Company Data
Aggregate Notebook Panel Pricing & ROC - 2019 - 2022 - Source: SCMR LLC, IHS, Witsview, Company Data
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