Managing the impact of the global digital component shortage
Teddy Daka, Group CEO, Etion.
Technological development inevitably brings with it unexpected consequences, and the advent of the fourth industrial revolution is no exception. Fuelled by rapidly increasing demand for technologies such as smartphones, new generation vehicles and advanced defence hardware, as well as by an explosion in the use of the Internet of things (IOT) in industry, the 4IR is causing a global shortage of critical electronic components that is affecting most sectors that are dependent on such components.
All electronic devices, from smartphones to satellites, require parts called multi-layer ceramic capacitors (MLCC). These are essential to the functioning of the device's electrical circuitry and are used in thousands of applications. Since 2017, a surge in demand for MLCCs and a parallel shortage of the raw materials needed to manufacture them has impacted heavily on supply, which is now more constrained than ever.
While the global output of MLCCs is well over a trillion pieces a year, with China accounting for the lion's share of this, demand since 2013 has skyrocketed so much that manufacturers just can't keep up and a worldwide shortage has developed.
The demand-driven shortage is further being exacerbated by capacity problems across many electronic component manufacturing segments. This has come about partly because, as MLCC technologies are increasingly adopted, prices have fallen, with the result being a perfect storm that is seriously affecting capacitor supply, a phenomenon that is likely to continue for some time.
As MLCC manufacturing is a complicated and high-precision process. It is not easy for manufacturers to scale up production quickly or for new manufacturers to enter the market. Existing manufacturers are also being cautious about investing in new plants and equipment for fear of demand fluctuations, so while we are certainly seeing some increase in capacity, this isn't happening at the pace necessary to meet immediate demand.
In practical terms, this means equipment and technology providers like ourselves are experiencing long waiting periods between placing orders and receiving stock, which is, of course, impacting on our ability to deliver. This backlog obviously affects delivery times and, while we are managing the situation using best-practice procurement methodologies, it is naturally having a knock-on effect on our clients. And it goes without saying this not only has a bearing on revenue, but puts a strain on key client relationships as well.
Pricing is also being affected by the shortage of these vital components as well as by upstream materials shortages, rising labour costs and the need to upscale equipment to deal with the pace of technological development. This, in turn, is having a negative downstream impact on companies that use these components, especially local companies that are also having to deal with the ailing rand-dollar exchange rate.
What, then, is the prognosis?
The combination of growing demand, materials shortages and limited expansion in capacity means the shortage is likely to extend well into 2020. Within this context, MLCC manufacturers are trying to address current shortages by discontinuing older or obsolete MLCCs in order to focus on those models for which there is the highest demand.
Unfortunately, while there is some flexibility in terms of which stock items can be used for various applications, alternative stock was rapidly bought up when the MLCC shortage became apparent. The most probable alternative for device and equipment manufacturers is to manage purchasing and delivery times within the framework of the current situation. Redesigning products to minimise the need for MLCCs, while theoretically an option, would be a costly and lengthy process, and would almost inevitably require products to be re-certified.
For the South African manufacturing sector, this component shortage will have an impact for the foreseeable future and we can only ask that customers bear with us as the implications of this massive, increased demand are absorbed and addressed by the global MLCC supply chain. The situation is expected to correct in the medium to long term.