Into the Fray?
As far back as April 2021 we noted our thoughts on a mindset change regarding CE component inventory in China. “Over the last two years, we believe such trade restrictions have changed the way Chinese CE managements look at inventory. When sourcing was unrestricted, many Chinese CE companies operated under JIT inventory rules, maintaining low inventory levels to keep costs low and avoid end-of-year write-offs. Once it became apparent that the US trade restrictions would have a real effect on sourcing, Chinese buyers became more aggressive and began building inventory in components that were specified in the US restrictions. After early January, when it became apparent that the new administration was in no rush to change the government’s stance on such restrictions, Chinese CE companies and OEM/ODMs stepped up ordering to build inventories further, unbalancing the supply chain even further than it already was.”
Later in 2021 we noted that certain components needed for display modules, such as drivers and TCONs (Timing controllers), that had been part of the aggressive inventory building mentioned above, still had not seen the effects of a slowdown in TV panel and set demand, as Chinese OEMs and assemblers were still stockpiling the parts as they assumed IT displays, such as monitors and notebooks would not be part of the slower demand seen for TVs, and prices for those components continued to rise against what was reduced demand.
Early this year the weakening demand for CE products caught up to CE IT products and prices for IT panels began to fall, considerably faster than most had expected, and suddenly the aggressive inventory accumulation, which had helped OEMs last year during silicon shortages, seemed less necessary, although buyers were relatively slow to adjust purchases and inventories for driver ICs remained relatively high into 2Q. Now that CE brands have made cuts in orders, pushing panel producers to curtail production, there is now an oversupply in the driver IC sector, with recent expectations of a 3Q price decline of between 8% and 10% and the potential for that to continue through 4Q. Foundries who had allocated resources away from drivers toward higher margin products last year are now looking to fill potential utilization gaps by filling driver IC contracts while driver buyers are trying to renegotiate those contracts toward lower unit and price levels.
We see these cycles are part of the natural order of things in the CE space but the overstocking seen last year was more than we might have expected. What was a reaction to the global COVID-19 pandemic in 2020 and the first half of 2021 was seem as the ‘new normal’ by many in the CE space, with a concomitant change in risk assessment, especially regarding inventory, and now, as the ‘new normal’ returns to the old normal, the question is whether the next demand stimulus, whatever it happens to be, will cause the same psychological blind spots across the CE space. Will lessons be learned or will be bounce right back into another up cycle that will suddenly become an abyss of inventory that buyers were willing to pay anything for months before? Perhaps the understanding that the politics of trade sanctions and tariffs don’t always work the way intended or have deleterious side effects might make some difference in the next cycle and that striving for market share is not always the way to go might have an impact, but more likely is the endorphin producing mantra that the new normal has finally arrived and the CE space can once again charge into the fray with a willingness to do or pay whatever it takes to squeeze out an extra 0.5% market share.
Later in 2021 we noted that certain components needed for display modules, such as drivers and TCONs (Timing controllers), that had been part of the aggressive inventory building mentioned above, still had not seen the effects of a slowdown in TV panel and set demand, as Chinese OEMs and assemblers were still stockpiling the parts as they assumed IT displays, such as monitors and notebooks would not be part of the slower demand seen for TVs, and prices for those components continued to rise against what was reduced demand.
Early this year the weakening demand for CE products caught up to CE IT products and prices for IT panels began to fall, considerably faster than most had expected, and suddenly the aggressive inventory accumulation, which had helped OEMs last year during silicon shortages, seemed less necessary, although buyers were relatively slow to adjust purchases and inventories for driver ICs remained relatively high into 2Q. Now that CE brands have made cuts in orders, pushing panel producers to curtail production, there is now an oversupply in the driver IC sector, with recent expectations of a 3Q price decline of between 8% and 10% and the potential for that to continue through 4Q. Foundries who had allocated resources away from drivers toward higher margin products last year are now looking to fill potential utilization gaps by filling driver IC contracts while driver buyers are trying to renegotiate those contracts toward lower unit and price levels.
We see these cycles are part of the natural order of things in the CE space but the overstocking seen last year was more than we might have expected. What was a reaction to the global COVID-19 pandemic in 2020 and the first half of 2021 was seem as the ‘new normal’ by many in the CE space, with a concomitant change in risk assessment, especially regarding inventory, and now, as the ‘new normal’ returns to the old normal, the question is whether the next demand stimulus, whatever it happens to be, will cause the same psychological blind spots across the CE space. Will lessons be learned or will be bounce right back into another up cycle that will suddenly become an abyss of inventory that buyers were willing to pay anything for months before? Perhaps the understanding that the politics of trade sanctions and tariffs don’t always work the way intended or have deleterious side effects might make some difference in the next cycle and that striving for market share is not always the way to go might have an impact, but more likely is the endorphin producing mantra that the new normal has finally arrived and the CE space can once again charge into the fray with a willingness to do or pay whatever it takes to squeeze out an extra 0.5% market share.
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