How companies are securing electronic components now
German SMEs have been hit hard by the current shortage of raw materials, and electronic components are also at a peak in demand. We talked to Jörg Menkhaus, senior manager at Kloepfel Consulting, about the market situation, the causes of the price explosion, and short- and long-term strategies for securing supplies.
What does the current market situation or supply situation look like for which electronical topics?
Economic performance in Asia and the U.S. was surprising last year, with strong growth in Asia and at least not as weakened in the U.S. as it had been predicted. But many suppliers of chips, semiconductors, etc. had predicted a worse economic situation and accordingly reduced their capacities in the factories. In some cases, unprofitable production sites were closed – especially in Asia.
This has now resulted in much higher demand for electrical parts. As a result, suppliers of electronics and electrical components are currently experiencing strong growth in the market. This growth is not only creating a tense spot market situation but is also having a lasting impact in the medium term – a development towards a seller’s market is emerging that is surprising for many. The bottom line is that the situation has worsened to some extent, although I would not call it dramatic now.
What effects are looming or can already be observed?
First, around electronic components such as switchgear, there are already greatly extended delivery times. These are already the order of the day and must be considered.
Moreover, the development of raw material prices for steel, aluminum and copper, for example, are causing headaches for many entrepreneurs. Purchasing is being confronted with demands from suppliers for sometimes serious price increases. In the oil, steel and plastics sectors in particular, there is a trend towards massively increased price demands, sometimes in the double-digit percentage range.
Which components and which sectors are affected?
Parts and components that support digital applications are currently particularly affected. But also scopes that are for example needed for battery cell production.This also explains the massive impact on the automotive industry: not only is the proportion of electric components in modern vehicles high, the e-car boom is also creating increased demand for electric components and electronics.
What consequences does the current market situation have for which industries?
Bottlenecks in supply are emerging for all industries that use electronic components to a strong extent and are more dependent on them. In addition to the automotive industry, mechanical engineering, for example, is already affected. From current experience in customer projects, I can say that, because of the developments, changes in production and assembly planning are already becoming necessary to counteract delivery delays of several months in some cases.
What does this mean for production and assembly planning in concrete terms?
Let us take an example: If for a large manufacturer the delivery of switchgear for control cabinets suddenly takes 30 weeks instead of six, this leads to limited availability in terms of inventories. Assembly planning must be adjusted accordingly and the sequence redefined according to the availability of parts and components.
What are the causes?
The poor forecasts were due to the Covid 19 pandemic, but also to geopolitical developments such as tariff restrictions or the Brexit that occurred. Capacities were reduced accordingly. Then came the surprisingly good market developments already described. Especially in Asia, but also in the USA. Added to this was the – fortunately! – the economic downturn in Europe, which was not as severe as forecast. However, these are not the only factors. In the winter of 2021, there was the devastating cold snap in Texas, where important semiconductor producers are located. The outages there contributed to worsening bottlenecks. Also playing a role is the fact that the ongoing lack of investment by companies is also having an impact by the time.
How dependent are German-speaking companies on production in Asia?
There is indeed a dependence of German companies on Asian sources of supply, including China, for the procurement of electronic components. However, beyond the well-known economic policy of the People’s Republic of China, I do not see any forcing in this area.
What can companies do now in the short term? And how can Kloepfel Consulting help companies in the short term?
Now, companies are primarily building up safety stocks at different stages of the value chain. There are also ways to secure supply by entering into quantity contracts with fixed purchase volumes that typically cover 18 to 24 months of demand. Long-term supplier relationships play a decisive role in contingency planning. Of course, Kloepfel Consulting can provide support in this regard because we maintain good relationships with suppliers. In addition, through our supplier networks, we identify alternative sources of supply stock and residual inventory that would not otherwise come to the customer’s attention.
What do companies need to do in the long term? How can Kloepfel Consulting support sustainable solutions?
In the long term, parts and components from at least two manufacturers should already be tested and approved in the development process, where the applications allow this. But in exceptional cases or with monopolistic relationships, this is not possible. Then consideration must be given to how the risk can be reduced: For example, for the life cycle of a product on a contractual basis or confirmation of fixed, mandatory orders and safety stocks of the company. The sales side can provide support here by agreeing appropriate purchase commitments or input material releases with customers over life cycles. The possibility of passing on adjustments to selling prices based on price escalator clauses in the event of serious price fluctuations is a further contractual option for risk reduction and is common practice in any case.
In this context, it is important to identify developments as early as possible by continuously monitoring the market. Only then countermeasures can be taken. Here our consulting support can help, too. Due to the manifold project activities of Kloepfel Consulting, there is a high market transparency. This enables us to develop a concept together with the respective companies, which then becomes a valuable building block in risk management.
How will the market develop in the coming months?
It is relatively difficult to make an assessment, as changes and bottleneck situations occur at ever shorter intervals in the electronics sector as well. This is also due to the fact that the electronics industry has consolidated very strongly and manufacturers are mainly located in Asia and the USA. The supply chains for electronic components are also exposed to the risk of recurring trade conflicts. The overall market is growing thanks to the megatrends toward digitalization and automation. More and more sectors are being penetrated with electronic components. During Corona, inventories were reduced too much to conserve liquidity. This is leading to pent-up demand as the economy picks up.
A cautious assessment of the turbulent situation is that capacities will now be rebuilt in the short and medium term to meet the increased demand within acceptable delivery times. Depending on the further waning of the pandemic, I see the situation easing in the medium term. A new equilibrium will settle on the market. In this situation, capacity can then also be built up again in a more relaxed manner.
Mr. Menkhaus, thank you for the interview!
Press contact
Kloepfel Consulting
Gerrit M. Schneider
Pempelforter Str. 50
40211 Duesseldorf
T: +49 211 / 882 594 17
gm.schneider@kloepfel-group.com
www.kloepfel-group.com