Current Market Conditions

• China’s underlying business conditions remain very strong. While demonstrably managing all Covid issues proficiently, China continues to pursue a stronger self-reliant position going forward.
  • Investment uncertainties due to Covid in Asia remains a challenge in the short term – Taiwan, Thailand, Vietnam, Malaysia, India in October through next quarter.
  • Lead times of many products present a challenge due to semiconductor shortages (For example pre-pandemic lead time was 12 weeks and has increased to > 20 weeks). The data below exemplifies the increases in ICs lead times.  (extremetech.com)

• Rental or loan machines are being considered and sought as a short-term solution.
• Forecast volume is crucial not only with tier 1 and tier 2 (frequent audit / partner allocation is required to avoid a sole source concentration).
• Some Chinese companies are moving their operations to Vietnam due to the US-China trade issues, while Covid-19 issues are placing significant constraints on available workers.
• Freight cost increased due to limited capacity, flight diversion and crude oil price increase.
• SMT is projected to reach $5.6B by 2025 due to demand for mobile communications devices, electronics manufacturing, age of wireless, smart factory, surgical devices, IOT and a continued digital revolution. Asia-Pacific represents the largest growing market worldwide with a CAGR 8.2%. (researchandmarkets.com)
• Many supply chains have diversified toward Malaysia, Thailand and Vietnam as the Covid pandemic caused production slowdowns in China and suppressed supply of key components, such as semiconductors or finished electronics devices, although China still, and will continue to, dominate electronics imports to the US.

 

• Semico research forecasts Y2Y average 10% CapEx growth (FY21 reaching ~ $127 billion).
• Top outlays from 2020 to 2021 are presented as below table. This remains the same until year end FY21. The big hitters in TSMC and Samsung are striking a more positive chord on the reliability of the forecast data than others in the more modest strata. https://semiengineering.com/semiconductor-capex-to-grow-13-0-in-2021/ 

New Technology Entering the Market

• It is expected that 03015 will be a component of the future supplanting the old 0201case size. 03015 is next generation technology, not yet in mass production and its area size could be compared to the those of dust particles.
• http://www.iconnect007.com/index.php/article/104813/aoi-capabilities-study-with-03015-components/104816/?skin=smt 
• The table below helps offer more detail and context on the size. The various types of SMT components are in Imperial and Metric: We can confirm 01005 (Imperial) is already heavily used in high-end mobile phones in the past 2 years (009005-03015 in metric) and will be in used extensively when more features are included in new products.

• Exploring closer spacing between components and narrower circuitry width, all in the pursuit of continued miniaturization or putting more into limited PCB real estate.
• AI at CapEx investment.

 

General Overview on Supply Base Developments

• Suppliers are looking to become less reliant on single, heavily invested locations due to geo-political, economic, social uncertainty.
• There will be an imbalance in supply and demand leading to overbooking and backlogs when there is a restoration of normalized economic conditions.
• Some countries are very lean/sole sourced in their tier 2 supply chain – some planning and transformation is required to avoid potential disruptions in supply.
• Healthy competition will continue to be prevalent among the CapEx suppliers.
• We expect an uptick in short term Leasing equipment options due to IC shortages and longer lead times.
• OEMs are directly experiencing the IC impact causally affecting elongated lead times.
• Business investment decision will help determine any lead time improvement from suppliers.
• Second-hand markets are showing limited availability of Capital Equipment, and pricing for this equipment can near the cost of New Equipment for highly sought-after machines.
• Supply chain disruptions continue to exert significant pressure on electronic manufacturers.
  • Both inventories available to customers as well as inventories available from suppliers have declined 
  • Capacity utilization continues to expand 
• Government is not invested in the electronic industry’s success. Our estimates include 20% (North America), 30-40% (Europe) and 50-60% (APAC).

 

Commodity Market Fluctuations Will Impact SMT/CapEx Categories

• Work from home and remote working are causing increases in demand or PCs and network infrastructure.
• In the automotive sector, the trend towards electric vehicles and the consequent requirements for charging stations is increasing the electronics content in the industry.
• We are seeing very significant upward pricing pressure on IC components due to imbalances in supply and demand and in the allocation constraints we believe will persist for some time.
• There is a deliberate capital utilization focus/review potentially resulting in deferment of CapEx investments.

 

Recommendations on Ways to Mitigate Current Market Issues
(BOM Constraints, Allocation, Supply/Demand)

• Develop strength in regions that align geographical with end customer sales market to avoid supply chain disruption and reduce the cost of transportation.
• Investing in long standing partnerships is of course key but avoidance of sole sourcing reduces risk and offer optionality by introducing partners at the NPI technical qualification stage to stay ahead of the game and have available contingencies.
• Plan ahead and engage 3rd party partners to hold appropriate levels of inventory to mitigate risk.
• Build alternatives in new technology solutions to mitigate high risk BOM.
• Business development and operations teams should provide up front visibility to investment plans to proactively secure CapEx.

 

Pricing War Situation - Mitigation Plans

• Consider annual forecasting vs standard quarterly execution to mitigate cost increases.
• Optimization and collaboration with OEM suppliers will yield improvements and cost savings.
• Taiwan/China CM are engaging in a more short-term price war vs US CM who are investing in the interests of business stability and for longevity.

 

Any Significant Disruptions to the Market in the Foreseeable Future

• Massive stockpiling has resulted in component shortage and longer lead times resulting in high uncertainly in the credibility of the macro demand picture.
• The US-China trade dispute will continue to cause uncertainty. The escalating tensions raise risks and uncertainty, and about 30 to 50 percent of companies surveyed by various institutions indicated that they were considering adjusting their supply chain strategies by seeking alternative sources or relocating production to other geographies. Covid-19 has intensified the debate, with several governments calling for companies in critical sectors to relocate their operations back to their home countries and announcing financial support packages to facilitate this. Twenty percent of companies surveyed by AmCham China believe Covid-19 may accelerate “decoupling”.
• A recent paper published by the European Union Chamber of Commerce highlighted how diversification now tops the agenda for many European companies in China. Global trade and investment have slowed sharply, and the movement of people has become highly restricted. (mckinsey.com)

 

Integration Labor Impacts and Challenges Due to COVID

• Reduction in manpower and Movement Control Orders in many jurisdictions are causing factories to run below full capacity.
• Increase in leasing of temporary office and warehouse due to local government compliance SOP.
• AI in CapEx design represents the future direction in this space to minimize the labor assets required on SMT lines.
• Automation will also feature heavily in the pursuit of low touch, efficient automated SMT lines.
• Material and labor costs continue to be two of the largest issues facing the electronics supply chain. Material costs are rising industry–wide and doing so at a higher rate in North America than other parts of the world. 

 

Inflation and the Impact on Pricing 

• Products from China face increases in price due to a weakened USD and strengthened RMB. Currency markets are of course volatile, and subject to rapid change. It remains to be seen if the USD position as the world’s primary trading currency will be impacted long term.
• The “tit for tat” on tariffs being levied on imported goods is being weaponized causing short term damage and volatility. The current US administration should restore some normalcy, given the size of both trading blocks and consumer populations, even though tensions will remain strained.
• Material price increases are caused by:
  • Semiconductor shortages 
  • Reduced capacities in air freight
  • Recent crude oil price increases and if these increases are “pass-through” 
  • Raw material and commodity markets. Significant constraints and allocations prevail as well as inflationary pressure on wages in China. Suppliers have choices to make on how to mitigate increases by realizing offsetting efficiencies in process or in assessment of manufacturing locations. 

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Introduction

Prior to 2020, the criticality of having strong supplier relationships with your MRO partners and firm control on the procurement of the goods they provide would have been predicated on your organizational metrics, and/or volume of spend within a specific subcategory. Some organizations may have even managed MRO on a per diem basis tapping into a well-developed market to purchase these goods. However, over the past 18 months, things have drastically changed, and thus requires a different approach to how organizations maintain stability in this “new normal.”

MRO Definition

Maintenance, Repair and Operations (MRO) is defined, in general, as supplies that are required for production but are not part of the finished goods or not part of an organization’s strategic indirect spend profile. MRO consists of many subcategories including chemicals, safety equipment, office & shop supplies, electrical, etc. Historically, MRO supply heavily outweighed demand, goods flowed freely and with speed across borders, and supplier competition was high which provided stable pricing.  Whether your company is a multinational organization or one facility within a country, you had options and relatively low concerns over business impacts barring any catastrophic event. 

Rewind time by 20+ months and fall victim to an unpredictable and catastrophic event.  

Managing Through the Global Pandemic

Since the first case of Covid-19 hit Wuhan in December 2019, MRO has been in a constant state of flux. Safety equipment, or more specifically Personal Protective Equipment (PPE), has been in a constrained state from the onset. Masks, gloves, gowns, and sanitizer all became a very hot commodity in a short period of time leaving many organizations with limited options of recovery.  

Organizations had to quickly evolve and implement new supply chain metrics in hopes to mitigate impacts to their business. A ripple effect of events cascaded region by region as Covid moved from China westward. Countries went into mandatory lockdowns significantly reducing commercial flights which applied logistics pressure to most modes of transportation, as well as limited the availability of workers in manufacturing plants. Consumption of PPE increased significantly beyond production capacity and raw material became scarce which impacted the OEMs ability to scale. Local governments implemented export regulations to prevent safety equipment from leaving their country in an understandably nationalistic effort to keep their people safe. All of this while the world is still turning.  

For most this is old news, but for Supply Chain and Procurement professionals these scars are fresh, and some organizations are still being impacted even in the current state. Demand for PPE is still high, and by some estimates double as compared to the first quarter of 2020. So how are organizations evolving into this “new normal”, and what should they be prepared for over the next 6 months?

Most organizations are focused on maintaining a routine and steady supply, or Days of Inventory on Hand (DOH), of masks, gloves, gowns, and sanitization. A study was recently performed by Premiere Inc. to understand how healthcare organizations have adjusted their DOH since the onset of Covid-19. Gowns, gloves, and surgical masks increased by 1.5X-2X over standard inventory levels, while N95/KN95 mask DOH increased by almost 10X further emphasizing the constraints we are still experiencing within the market. Furthermore, there were a huge numbers of new entrants to this market globally. Supply chains became polluted with intermediary buyers and sellers and margin stacking became commonplace to unprecedented, and unethical, levels. Vetting suppliers is incredibly important on any given day but became an enormous challenge during the pandemic given the market volatility and number of willing buyers. This is an area we will be reassess to ensure our business process resiliency is sufficiently strong, should we encounter any repetition. We would encourage our partners to do the same.

Control of inventory and allocation can be a challenge for any organization. One unique method for managing these variables is the implementation of PPE Vending Machines. These machines can be leased or purchased through several global partners, and in some cases be provided for free if an organization has a high enough spend profile with an MRO supplier. The benefits of vending machines are that the goods are readily available, can be setup as Vendor Managed Inventory (VMI) to further improve your inventory levels, can be networked into your Enterprise Resource Planning (ERP) system to monitor employee consumption data, and can be customized to align distribution of goods to your organization’s employee health standards.  

Organizations are also focusing further down the supply chain beyond their tier 1 partners to understand who supplies the raw material or sub-assembly that goes into their key MRO products.  Knowing where raw materials originate, who the OEM is, and where the sub-assemblies are manufactured will empower supply chain and procurement teams to respond faster, and with improved agility, to potential supply impacts.

The Outlook for MRO and PPE

The outlook for MRO and PPE entering 2022 is positive. As we enter Q1, global demand levels are still exceeding production capacity for some PPE, specifically nitrile gloves. Nitrile gloves are currently constrained due to the limited number of intra-region manufacturing for consumers (i.e., produced in the US, for US consumption), government-imposed shutdowns of key glove manufacturers, and shortages in labor, raw material, and capacity. 

Organizations are more prepared now than ever to respond to the everchanging dynamics within the MRO market. Vaccines and boosters are being administered at a record pace, hygiene and employee safety protocols are limiting the rate of infections within the community, and supply is increasing to move closer day-by-day to the new global demand levels. The positive outcome is that supply should become more readily available as the year progresses.  

With this improvement, many organizations will look to reset their inventory levels and panic buying will diminish. Supplier optionality and competitiveness will pick back up providing unit cost normalization, albeit probably not to the levels seen pre-pandemic.

As we enter 2022, market conditions remain roughly the same. Even when there has been changes on few factors (PPE demand, stock availability, changes on planning), the strategy recommendation remains as the same, and continue to be aligned to what the market experienced during the year.

• Key actions remains as the same:
• Safety stock
• Preventive maintenance (to avoid line downs or spare parts shortages + transit time)
• Metal market affecting the cost of some other items
• Logistics remains constrained, so FCST based on Historical + Expected consumption is suggested.

Even when there was a reduction on these “top constraints” a few months back, as the winter season came, in addition to a Covid variants such as Delta and Omicron, the looming issues returned, pushing the market to a “emergency reaction mode."

General Conditions:

• The industry has evolved to a point where smaller developing companies or newly created focused business units provide MRO solutions (e.g., labels, ESD Bags, fixtures, pallets, packaging, etc.).
• Businesses need to be prepared not only for the day-to-day impacts and needs, but also to develop and validate contingency plans with capable strategic suppliers to mitigate potential supply chain risks. A 1+ (x) supplier strategy has proven a reliable approach in challenging market times.
• The chart below provides some insights into how industry leaders think about the risks in the space. This visibility can help focus efforts on those higher areas risk to assist in formulation of mitigation plans in response.

**46 percent of respondents to the annual survey were senior executives – either in C-suite posts, vice presidents, or above; nearly 80 percent were director level or above (1)

 

 

 

• Structured planned maintenance and repair programs are driving increasing investments in MRO, and digitization, to realize efficiencies and to utilize resources effectively.
• Overall economic and associate manufacturing growth continues to drive maintenance and repair demand in developed and developing economies.
• Adoption of smart technologies and a smart factory philosophy improve overall management by enabling real-time monitoring and full traceability of components via smart devices. Nobody should ever go line down for MRO components and this approach will aid in avoiding unnecessary down time. Alternative fulfilment and technology models should be considered to drive efficiencies e.g.,    “smart auto ordering” set around appropriate replenishment logic across a range of components
• Due to increasing demand, many market participants are expanding their presence and capacity to cater to a larger customer base to pursue growth opportunities. An optional part of this expansion is having small “shops” or “hubs” at customer location that enable improved communication, service levels and customer’s understanding of throughput.
  • Develop a Safety Stock program with strategic supplier for recurring consumption items:
  • PPE e.g., Nitrile Gloves, Anti-static clothes, Glasses, etc.
  • Packaging e.g., ESD Bags, Tapes, Pallets.
  • Small Tooling e.g., Screwdriver Tips, Hex keys, Tweezers.

 

Energy

• Manufacturers have been looking to optimize their processes to reduce their overall energy consumption and ensure compliance to government regulations.
• Although the pace of renewable projects is much faster than other conventional sources the prevalence of wind energy projects in China fell by 50% and solar PV by 25% mainly due to lockdown protocols. As restrictions have eased China’s commitment to Photovoltaic cell manufacturing (solar), wind energy and hydropower has been revived and accelerated.
• Green energy can help to reduce environmental impact, directly contribute to carbon neutrality and allow access to  better rates on energy consumption.
• An average of 25% federal investment tax credit could be available when using solar based systems. Solar systems are capable of producing up to 40-45% of the required energy in manufacturing industries.
• You will hear much  more on the energy category in the next edition. This category has an increasing prominence and importance to organizations at a tactical and macro level as many pursue accelerated environmentally friendly strategies in response to global pollution and climate change concerns.

Maintenance

• Predictive maintenance is expected to be the primary focus for the manufacturing industry to adopt cutting-edge technology-based MRO solutions in their facilities.
• Predictive maintenance helps to improve the efficiency of the manufacturing facility and increase and accelerates the ROI on new machines.

 

Emerging Technologies

• Robotics in MRO is now emerging strongly and is one of the fastest growing new MRO technologies, Some examples of automation in this space would include, but not limited to, vending machines for recurring MRO items and carousel storage.
• The use of drones is another new MRO technology. Practical applications being considered include remote asset inspection and remote delivery. Drone usage would introduce headcount efficiency, reduce lead times and be a real time data source for accurate planning.
• Another widely discussed topic, already benefiting from significant investment in some organizations, is Additive Manufacturing or Additive Layer Manufacturing but more commonly referred to as 3D Printing. This innovative process makes use of computer-aided-design (CAD) software or 3D object scanners to create 3D printed goods.
• As a future MRO technology, Additive Manufacturing will enable the ability to seamlessly print replacement parts that are strong, durable, lightweight and inexpensive to create, while reducing inventory costs for maintenance providers.
• This technology could mature to a point where, if raw materials allowed the capability, operations teams would be able to create their own on-Wave pallets, stencils, etc. reducing operational process time and costs. NPI  teams would be a further beneficiary as product design changes could be simulated quickly as updates and changes to tools can be done more real time.

Recycling

Many governments now offer stimulus packages to encourage companies to pursue environmentally friendly policies and strategies including investment in equipment that recycles materials. These are available on application and will differ in different geographies. The indications are these types of subsidies will grow in popularity as a more global unified approach, through formal legislative agreements, gains momentum. 

• Companies can take advantage of the benefits extensive recycling offers and will be a key component for those striving for carbon neutrality. 
• How organizations think about packaging can drive many advantages. Re-purposing corrugated boxes, used in transportation, for use in internal storage and goods movements will causally impact the consumption of natural raw materials. Converting to longer life corrugated plastics, in favor of cardboard, will again have a direct environmental impact and provides optionality for alternative internal usage.
• Responsible environmental sourcing is a differentiator at best and at worst ensures customer selection criteria can be met. Given the inexorable drive, that will not relent, on these topics there may be business development opportunities for organizations who are already part of ecological supply chains to diversify themselves naturally.

Raw Material Elaboration

• In the nitrile gloves market, production has been impacted by raw material shortages, causing extended lead times, and logistics delays causing slippages on delivery dates and disruption in what is now, in today’s world, a key supply chain component. Additional demands specifically from the health care sector has also imposed additional pressures on raw material suppliers who cannot rapidly scale capacity or procurement to cope. We expect these issues to linger for a little longer in pockets, alleviate and then ultimately the market will normalize.  
• Cost increases have been experienced too due to increasing demand for wood and corrugated based products, The Americas region specifically has been affected due some border restrictions and delays on deliveries. Average cost increases for raw material moved from 10% to 15% as standard.
• Silver, tin, copper and lead are other metals commodities that should be monitored closely for price fluctuations. These base commodities are widely used in many small tools that directly impacts purchase pricing. The rising cost of silver is a specific concern, given its increase in industrial consumption, and a 30% uptick compared to last year is not uncommon.