Jabil's Global Commodity Intelligence Archive

Global Commodity Intelligence

Q3 2023

DISTRIBUTION

OVERVIEW

As the global economy has slowed over the last few quarters, distributors are not posting the record revenues and margins seen in the past. The outlook for this portfolio of suppliers has also changed, as outlined below.
In general, revenue, net margins, and book-to-bills are on a downward trend, but inventory is experiencing the opposite effect, with figures at an all-time high. High inventory figures for suppliers are a daily issue within the industry, and not just distributors alone.
The “mix” and "golden screw” effects are primarily used as the rationale behind this increased inventory, in addition to restrictions imposed by some semiconductor manufacturers, who have moved backlogs to NCNR terms, limiting flexibility, but leading to increased inventory if the mix is off.

REVENUE & BOOK-TO-BILL

Overall, distributors’ revenues have shown a downturn which looks steeper from one quarter to the next. This is due to the softening of demand in certain sectors, predominantly the consumer space.
As distributors play a significant role in this area, they are hit hard on overall revenues.
Book-to-bill has been trending down given the demand drops and pushouts from OEMs. Book-to-bills went below 1.0 in Q1’23 on average for the first time, remaining “flattish” in Q2.

DEMAND OUTLOOK

With the decrease in lead times, distributors have seen most customers try to re-align their open orders based on the lower lead times resulting in additional pushouts and cancellations.
These cancellations and pushouts slowed over Q1 2023 and Q2 2023, signaling some stability approaching as well as better visibility to true demand. There is optimism for a gradual return of stronger demand by Q4 2023.

INVENTORY

Inventory has continued to rise in the channel. There has been more output from manufacturers to distributors on commodity items (while still short on key gating items) – i.e., a “mix”. Distributors are holding record inventory levels at present.
Almost all major distributors are reporting a steep upward incline in inventory figures.
With the shortening of lead times combined with cancellations and reschedules of backlog from customers, inventory sitting at distributors continues to build up.
Inventory has been slow to bleed off and inventory in the channel remains high.

SUPPLY OUTLOOK

Global supply chain pressures have decreased as more supply has become readily available, shifting the focus to managing increasing inventory levels.
Some product groups continue to be severely constrained (e.g., MCUs, crystals, or older technology products) and there is no sign of alleviation in the short, to mid-term.
Certain products remain on a long lead time, perpetuating the “golden screw” issue.

MARGIN TRENDS

Margins for distributors as a whole have trended downwards. There are fewer opportunistic purchases from customers and the slowdown of general price increases have resulted in returning margins closer to pre-pandemic levels.

PRICE

Pricing has moved downwards on certain commodity items where there is abundant inventory in the market or where production lead times have decreased significantly.
Distributors are moving prices down to move excess inventory. These decreases are, however, selective and pricing in general remains high. This is due to several factors:
Costs are still high and rising – i.e., labor, raw materials, and transportation. Inflation persists.
Fabs demanding more expensive capital equipment to continue innovating and developing smaller nodes.
The semiconductor industry experiencing an inflation rate of >4% in the US without clear signs of decrease.

SUMMARY

Facing the heat of a global market correction and imbalances between demand and supply, the distribution market is contending with increasing inventory and pricing fluctuations.
Optimism remains, however, with hopes that the current correction is short-term and that business will slowly return to some normalcy by the end of 2023 or early 2024.
Optimism remains, however, with hopes that the current correction is short-term and that business will slowly return to some normalcy by the end of 2023 or early 2024.