Market Overview

• In terms of demand, most network and Infrastructure companies remain at a pre-pandemic or higher level.
• We are continuing to see longer lead times on most network hardware orders and over 12 months on some infrastructure equipment - primarily Cisco products within the Jabil network. ​
• Price increases have continued on most hardware products throughout the current calendar year.    ​
• Cloud continues to be a top strategic priority for a growing number of companies globally. Gartner expects cloud spending to exceed 45% of all enterprise IT spending by 2026.       ​
• Cracks in demand for components appear to be showing.  Suppliers have stated that components were a key issue for their supply shortage and drivers of long lead times. ​
• Recent headline reports from Intel, Micron, Nvidia, TI, and AMD could lead to better supply for equipment manufacturing companies in near future.   ​
• Geopolitical risks remain a concern as the war in Ukraine continues and tensions between China and Taiwan grow.    ​
• While Russian gas can be replaced with other forms of energy, microchips made in Taiwan cannot in the short term. ​
• Despite that, Taiwan will remain the world's largest chipmaker - covering around 90% of high-end semiconductor demand globally.   ​
• Global wage inflation – driven by tight Labor markets - could contribute to limited supply for the industry as components become more readily available.   ​
• Demand destruction and a reduction in inflation are required before improved lead-times within the infrastructure and cloud category.    ​
• We recommend that organizations buy now on known demand to avoid near-term price increases.    ​
• Current Covid cases in China and lockdowns have weighed on network infrastructure equipment manufacturers during the recent quarter causing constraints in supply.    ​
• Pricing pressures will continue until lead times improve. This could occur should the market experience increases in supply or decreases in demand - however, there is no significant improvement anticipated throughout this calendar year.

Demand Commentary

• Network and infrastructure equipment remains in high demand with long lead times for factory orders.   ​
• We do not forecast a near-term change in demand unless economic or political factors drive the change.  ​
• The pandemic created a huge demand shift towards remote working and appears to have changed the way we will work permanently.  Corporations are encouraging workers to return to the office with varying degrees of success.  This dynamic could have a big impact on demand for infrastructure and productivity in the coming years.​
• Collaboration tools such as Zoom, Microsoft Teams, Cisco WebEx, Google, and Blue Jeans have created extraordinary demand on company network infrastructure.  We do not see this demand for infrastructure altering.  ​
• Although there is a movement to return to the office, remote working appears to be an ongoing reality in hybrid work environments.  In addition, the use of tools in the office as well as at home has become the new normal.    ​

• We continue to see more applications move to cloud-based architecture creating demand and capacity requirements in infrastructure.    ​
• As more technology has moved to the cloud, we have seen the need for tools to manage cloud and cloud spend sourced.     ​
• We continue to see the expansion and development of AR collaboration applications & tools. With these tools and technology in place, we are seeing faster service capability with reduced need for onsite support.   ​
• With the cloud being an alternative to traditional servers and storage of data which is growing exponentially, the demand for servers and storage remains moderate.    

Component Demand

• Fabless semiconductor businesses are experiencing increased costs following supply chain disruptions and their concerns are being compounded by the ongoing Taiwan-China-US tension. ​
• Taiwan Semiconductor Company is seeing more demand than it can fill, and being a manufacturer is in a position to continue raising prices.     ​
• In 2021, Taiwan won 26% of the world's semiconductor revenue and accounted for 64% of foundry revenue. ​
• In 2022, Trendforce predicts the global foundry market to increase by 20 percent, to $128.7 billion, and Taiwan's share of that revenue will increase two points.    ​
• NVIDIA has been impacted by softness in cryptocurrency and the gaming industry. Their CEO, Jensen Huang, said "As we expect the macroeconomic conditions affecting sell-through to continue, we took actions with our Gaming partners to adjust channel prices and inventory."  

Supply Commentary

• Component shortages are affecting availability and lead times for orders. ​
• Component supply may improve for equipment manufacturers due to erosion in demand for chips but may take until 2023 to impact infrastructure equipment orders.        ​
• Covid in China and summer lockdowns have continued to cause supply constraints in 2022.   ​
• We currently expect component shortages to begin to subside due to demand erosion in mid- 2023 as a result of continued interest rate increases and inflationary pressures.   ​
• Component shortages remain a constant and are anticipated through 2022 and at least early 2023.    ​
• The recent announcement that Taiwan's second largest semiconductor manufacturer is to expand operations in Japan should improve the supply of some semiconductors in the near future.     ​
• Congress recently passed legislation that should increase the volume of semiconductors manufactured in the US, however - as new fabrication facilities take between 2 and 3 years to complete - the benefit would not be experienced until at least 2024.    ​
• As the utilization of cloud technology has grown at exponential rates, we continue to see the development of cloud management applications and security tools.​
• New technology and players in the supplier space are important to monitor to remain competitive.    ​
• IT & Cloud Security will remain in focus for the foreseeable future due to the change in architecture and remote work dynamics    ​
• Ransomware remains a threat to every organization, and we are seeing an increasing number of publicized cases.    ​
• Most category managers advocate a multi-source strategy with technology that easily integrates into architecture design environments.    ​
• We have experienced a limited easing of logistical challenges; however geopolitical issues could cause continued constraints and congestion.    ​
• The ongoing container shortage is causing supply chain delays as China attempts to reduce carbon emissions with utility companies operating at full capacity.   

Pricing situation

• Due to an increase in core costs for network and firewall components, we expect suppliers to raise prices in the near to longer term as demand remains strong. ​
• With constraints remaining and continued demand, suppliers are increasing pricing without an immediate impact on demand. We expect this to continue until demand erosion begins to impact revenue.   ​
• We recommend that a long-term pricing strategy is adopted to lock in favorable discount structures.   ​
• Demand planning becomes even more critical as the market dynamics extend lead times.  ​​
• Loud pricing continues to provide opportunities for buyers as providers are offering discounts for commitments.    ​​
• Equipment available in non-factory order environments is seeking higher prices and is not supported by negotiated rates.    ​​
• Server and storage costs remain stable, however increases due to component shortages and labor pressures cannot be ruled out.

Supply analysis

• We continue to see supply constrained in the infrastructure technology market and expect this to remain for the foreseeable future.  ​
• Lead times remain between 4 to 6 months on most network hardware on factory orders and over 12 months on some - primarily Cisco equipment within the Jabil network.    ​
• For the HP DL360 server, the lead time is between 15 and 17 weeks upon PO release.   ​
• Cloud supply and capacity continue to remain available when required.  ​
• Jabil is engaging in advanced bulk ordering as a result of 14-month lead times on new product orders.    ​
• Infrastructure equipment within retail and distribution channels have yet to return to pre-pandemic levels.    ​
• In addition to the utilization of spares and refurbished equipment alternatives, we have asked primary OEM suppliers to extend support on the end of support product until a new product is available.    ​
• Cisco expects revenue growth as supply chain pressures ease and China recovers from Covid-19. 

Market Overview​

• The global business software and services market size was valued at USD 429.59 billion in 2021 and is expected to expand at a compound annual growth rate (CAGR) of 11.7% from 2022 to 2030. ​
• The growing volume of enterprise data and increased automation of business processes across industries such as retail, manufacturing, and healthcare are driving the market growth.  ​
• The rapidly increasing use of cloud platforms, owing to benefits such as flexibility, cost-effectiveness, and mobility, has triggered the demand for cloud-based software solutions and services among small and medium-sized businesses.​
• Furthermore, the market is expected to benefit from the rising use of innovative technologies such as blockchain, hybrid architecture, artificial intelligence, and machine learning over the forecast period.​
• We continue to see upward pricing pressure across software publishers.  ​
• More publishers continue to be available in the public cloud  ​
• We have not seen any major changes in market dynamics from the last quarterly update​

Demand Commentary​

• While the cloud has made it easier to procure software, it has also made it easier to overspend – particularly on SaaS.     ​
• Gartner predicts that by the end of 2022, annual end-user spending on SaaS products will reach $649 billion. ​
• The explosion in enterprise SaaS investment has revealed vulnerabilities in how enterprises manage the associated costs. At the root of the problem is toxic spending. ​
• Gartner estimates that 30 percent of cloud fees paid by organizations are for licenses or subscriptions that are dormant or for features that are not being used.      ​
• We see increased demand for new security and cloud-based software as a result.   ​

Supply Commentary​

• Software supply is generally readily available once developed and ready for market.  Licenses are subsequently sold with maintenance and support.        ​
• To remain competitive, it is important to monitor new technology and new players in the supplier space.        ​
• We continue to see the development of cloud management applications and cloud security tools as utilization of the technology has grown rapidly.​
• IT & Cloud Security software will remain in focus for the foreseeable future due to the change in architecture and remote work dynamics    ​
• In June, ServiceNow announced that it has signed an agreement to acquire Hitch Works - a company that uses data and AI tools to help map people and skills to projects.  ​
• IBM has acquired Israeli data observability specialist Databand.ai to beef up its IT operations performance management portfolio alongside Instana APM and IBM Watson Studio. ​
• In June, Unit4 - a leader in enterprise cloud applications for mid-market people-centric organizations - entered into a definitive agreement to acquire Scanmarket, a global vendor of cloud Source-to-Contract software. ​
• PTC acquired Intland Software, an application lifecycle management (ALM) company headquartered in Stuttgart, Germany, for approximately $280 million. Intland Software develops the Codebeamer ALM family of products.​

Pricing Situation​

• We are seeing software suppliers raising prices or attempting to raise prices across all categories.    ​
• Long-term pricing negotiation is the best practice to lock in favorable discount structures.   ​
• Utilizing alternative suppliers and POCs to express interest is a best practice to introduce competition and offset supplier price increases.    ​
• Over the past two years, we witnessed unprecedented changes to supplier businesses, especially as it relates to eCommerce, supply chain relationships, and the technology platforms that support them.​
• Suppliers have adopted new processes, seen the increased cost to their organizations, and had to optimize their respective resources.  As a result, suppliers are increasing prices to offset costs.​
• As a result of increased pricing, managing the utilization of software licenses has become more critical to maintain the total cost of publishers. ​
• To ensure optimized pricing is obtained, utilization of third-party assessments of software pricing is gaining traction and is considered best practice.       ​

Supply Analysis ​

• Economic headwinds are forcing vendors to turn to aggressive revenue tactics – from informal and formal software license audits to unjustified price increases.   ​
• We expect this behavior to become more apparent as vendors approach fiscal year-ends.​
• If you have a purchase or renewal with any of the following vendors on the horizon, prepare now. ​
• 12/31, Amazon Web Services, Citrix, Google, IBM, Quest Software, SAP. ServiceNow, 1/28, VMware ​
• 1/31, Carbon Black, CrowdStrike, Mulesoft, Okra, Salesforce, Splunk, Snowflake. Tableau, Workday, Zoom​
• We are continuing to see more publications available in cloud applications and expect that to continue for the foreseeable future.      ​
• New entrants in cloud optimization and cloud security have created more supply options with good ROI.   

Market Overview​

• Average delivery lead times have reduced over the past quarter, falling from 4 to 6 months to between 2 and 3 months.​
• Supply chain challenges – including rising logistics costs and the well-documented tight supply of semiconductor components – have increased prices.​
• Alterations in consumer spending patterns have led to a reduction in demand for discretionary items and devices - including PCs, smartphones, and gaming consoles.​
• This represents a major setback following two years of strong growth driven by the pandemic. Commercial demand, however, remains stable.​
• The resumption of workplace activity to near pre-pandemic levels – coupled with the technological requirements for remote working – has driven industry demand.​

Demand Commentary​

• Whilst Covid-19 restrictions begin to ease in almost every part of the world, rising demand and geopolitical conflicts continue to disrupt global supply chains.​
• Many organizations have embraced hybrid working following the pandemic - driving demand for PCs and other technology to improve at-home productivity.​
• Driven by interest rate increases and inflationary pressures, it is anticipated that component shortages will begin to subside due to demand erosion by mid-2023.​
• Innovation and software upgrades will also impact demand for new equipment.​
• The release of Windows 11 is currently underway:​
• OEMs adopted the new technology in January and February this year on compatible systems, with Windows 10 Pro for business and Enterprise with Windows 11 included.​
• Minimum CPU capability is required and drives refresh purchases in addition to normal capacity requirements.​
• Emphasize Software as a Service (SaaS) and native application capabilities on mobile devices to reduce dependence on traditional laptop and desktop devices.​

Supply Commentary​

• As outlined, the chip shortage is anticipated to continue until at least the end of this year.​
• Ongoing geopolitical concerns are expected to apply further pressure on semiconductor supplies across all major producers.​
• As both Russia and Ukraine supply large volumes of neon gas - a critical input in the production of semiconductor chips - manufacturers are likely to pay inflated prices as global supplies dwindle.​
• Increased demand for electronics and automobiles is expected to limit manufacturing capacity.​
• Global logistics disruptions stemming from the pandemic continue to limit the flow of consumer goods into key markets – particularly in China, South Korea, and the US.​​

Pricing Situation​

• It is anticipated that these challenges and price fluctuations will continue throughout the current calendar year​
• Direct fulfillment and prices for OEM are anticipated to increase year-on-year by 6 to 8% through FY22.​
• The top 4 manufacturers control 45% of the market space, indicating strong pricing power by a single or group of suppliers.​
• To lock in favorable discounts from suppliers, it is recommended that a long-term pricing strategy is pursued alongside investigating the viability of substitute options, such as leasing and rental.​
• It is also recommended that an emphasis is placed on working with the OEM to evaluate and qualify the availability of new cost-effective technology within the desired specification.​

Supply Analysis​

• Whilst lead times have fallen in comparison to the previous quarter, the average remains around 2 to 3 months.​
• Constraints will continue throughout this calendar year due to ongoing disruptions in the supply chain, with the movement of goods highly dependent on the semiconductor indicator. ​
• Despite the relaxation of many pandemic-related restrictions, the labor market continues to experience challenges. Global wage inflation is anticipated to contribute to supply chain disruptions as the component shortage subsides. ​
• Logistics disruptions at the beginning of the calendar year led to an imbalance in container distribution, delaying exports from Asia.​
• The top exporters of PCs remain China, Mexico, Taiwan, and Thailand.​
• Emergency demand is driving the use of refurbished and alternative equipment as a solution. ​
• A more effective alternative in strategic planning is to purchase safety stock and combine it with spares to minimize disruption. Jabil has also experienced success in reducing lead times by bulk ordering products based on forecasts, as well as utilizing new leasing models based on placement into service.​
• Buffer stocking under Device as a Service represents a further option to mitigate disruptions through this tumultuous period.​