Signs of inventory normalizing, amid mixed demand signals

• The demand for passive components remains robust due to the growing adoption of electric vehicles (EVs) and the expansion of the energy market. However, most other passive market demand drivers are subdued.
• Numerous manufacturers have taken measures to decrease their capacity utilization rates. This strategic move aims to curtail inventory levels within their internal operations and distribution channels. Although most manufacturers maintain a capacity utilization rate of 90% for automotive grade components, the utilization rate for general grade components is noticeably lower, ranging from 50% to 60%.
• Indicators have emerged that point to a reduction in inventory levels. Some manufacturers are approaching their targeted inventory range of 2 to 2.5 months. Additionally, signs are emerging that suggest a declining trend in distribution inventory.

Greenfield investments - the preferred choice for capacity expansion

• Despite a notable contrast in capacity utilization between automotive and general-grade passive components, manufacturers are persistently channeling investments into new facilities to cater to the growing demand for automotive-grade passive components.
• This strategic choice is mainly motivated by the protracted approval process for converting machinery from producing general-grade to automotive-grade components. Note, however, that this transition comes at the expense of substantial capacity loss.
• There is an optimistic perspective surrounding the revival of demand for general-grade products projected for the latter half of 2024.
• Greenfield investments will support the requirements of any China+1 strategy.

PASSIVE MARKET OVERVIEW

Book-to-Bill Ratio Continues to Decline

• The book-to-bill ratio continues its downward trend, with most reporting figures at 70% or below. To prevent excess inventory, many manufacturers have reduced their output. These measures are proving effective, as seen in the gradual reduction of inventory levels.
• The recent demand from the smartphone market has offered some respite to the sluggish passive component market. However, this demand has not come close to levels seen in previous years, primarily due to extended replacement cycles and subdued consumer market sentiment.
• Lead times for most passive components have experienced a reduction, with a majority falling below 12 weeks and within the 13 to 25 weeks categories. The most recent instance of this trend dates back to 2019, when the demand bubble for MLCCs burst.
• Various manufacturers anticipate a market improvement in the second half of 2024, with differing views on the timing.
• Even with recent reports of Electric Vehicle (EV) growth falling short of market forecasts, manufacturers still view it as a pivotal area for expansion, expecting it to fuel demand for passive components.

Capacity Investments Supporting Automotive Market

• Ongoing capacity investments are notable in Southeast Asia, Vietnam, Mexico, Japan, and India, driven primarily by the China Plus One strategy.
• The majority investments are focused on new equipment to support the automotive market.
• The protracted approval process in converting machinery from producing general-grade to automotive-grade components is part of why manufacturers choose to buy new equipment. The conversion also incurs a substantial capacity loss, further underscoring the acquisition strategy.

SUPPLY

• The marginal rise in utilization among most manufacturers - reaching around 70% - is primarily due to changes in product mix.
• Presently, Japanese utilization is between 80 and 90%, U.S. manufacturers operating between 90 and 100%, while Taiwanese utilization remains at 50%.
• Although open orders remain adequate, there is a continuous decline in the backlog/Book-to-Bill ratio.
• Due to manufacturers' reduced lead times for automotive parts, we anticipate the potential for cancellations or push in backlog and open orders. Consequently, a slight decrease in utilization for the automotive sector is likely in the upcoming quarters.
• The notable decrease in consumer demand is the primary factor behind the market's ready availability of small case-sized commercial-grade MLCCs.
• Specialty automotive-grade MLCCs, distinguished by large case sizes, high voltage ratings, and uncommon capacitance values, continue to face ongoing supply chain challenges.
• Distribution inventory has reached a low level, and efforts are underway to initiate replenishment.
• Lead times for most manufacturers are stabilizing within the 12-16 weeks range, and we observe suppliers with exceptionally long lead times working to reduce them by approximately four weeks.
• Orders for Chinese mobile makers are experiencing an uptick, but the demand is not overwhelming.

MARKET DYNAMICS

• The PC/laptop business could experience a surge due to the replacement cycle. Additionally, the launch of Windows 12 might happen earlier than initially anticipated.
• While the Electric Vehicle (EV) market was once considered a high-growth sector with an impressive Compound Annual Growth Rate (CAGR), there is now evidence of a demand slowdown. Many industry participants are actively involved in inventory corrections.
• The launch of new smartphones by a few major players appears to have had no significant impact on the supply chain.
• Aligned with the China+1 strategy, numerous suppliers are bolstering their production capacities by expanding their operations into countries such as Malaysia, Thailand, the Philippines, Japan, and specific regions within Europe
• In response to market shifts, suppliers are focusing their efforts on the development and targeting of products characterized by high voltage and exceptional reliability
• Given suppliers' varied product development and capacity expansion strategies based on their unique business approaches, aligning technology needs and making well-thought-out intentional supplier selections becomes crucial. This approach ensures the establishment of a sustainable and reliable supply chain for the long term.

PRICE

• All major suppliers are consistently implementing competitive pricing strategies to maintain and enhance the utilization of their factories, whether for commercial or automotive products.
• The pricing of niche, high-reliability products, particularly those incorporating palladium, continues to stay elevated and shows an upward trend.
• The operating margin for manufacturers is eroding, and there is a possibility of a slower rate of cost reductions for the foreseeable future.
• strategies aimed at capturing market share through larger quantities of sales.

SUPPLY

• MnO2 capacitors are classified as legacy products, with no further investment in their production or development. The shift from this technology is due to market demand and technological advancements.
• Manufacturers are redirecting their resources towards expanding the production of tantalum polymer capacitors. This decision is driven by the growing market demand for their superior performance characteristics compared to MnO2. Several manufacturers are taking steps to meet the demand for tantalum polymer capacitors: AVX is building a new facility in Thailand dedicated to producing both tantalum polymer and MLCC. Vishay is increasing its polymer capacitor output by 30% at its Danshui Facility. Kemet is expanding its polymer capacitor production in Suzhou.

MARKET DYNAMICS

• MnO2 capacitors are classified as legacy products, with no further investment in their production or development. The shift from this technology is due to market demand and technological advancements.
• Manufacturers are redirecting their resources towards expanding the production of tantalum polymer capacitors. This decision is driven by the growing market demand for their superior performance characteristics compared to MnO2. Several manufacturers are taking steps to meet the demand for tantalum polymer capacitors: AVX is building a new facility in Thailand dedicated to producing both tantalum polymer and MLCC. Vishay is increasing its polymer capacitor output by 30% at its Danshui Facility. Kemet is expanding its polymer capacitor production in Suzhou.

PRICE

• Tantalum MnO2 costs continue to present challenges within the larger economic context. Suppliers are gradually shifting their focus away from this product, while the persistently high costs of raw materials further compound the pricing difficulties. It is projected that pricing for this material will remain relatively flat throughout 2024.
• However, prices for legacy products such as wet tantalum and military series are anticipated to rise due to the absence of economies of scale in their production. This lack of scale leads to higher production costs, translating into increased prices for the product.
• Tantalum polymer pricing foresaw more flexibility and improvement in the longer term with the planned capacity expansion from the major manufacturers.

SUPPLY

• Demand for aluminum capacitors has softened in markets such as automotive, industrial, and renewable energy. The automotive sector is a key driver of demand for aluminum capacitors, particularly due to the ongoing conversion of technology to electric vehicles (EVs).
• Japanese Electrolytic manufacturers dominate this segment, with an average capacity utilization of around 80%. Lead times for aluminum capacitors have improved significantly. Japanese manufacturers quote 24 to 36 weeks lead times; Taiwan and China manufacturers are quoting 12 to 16 weeks.
•  Supply situations for hybrid capacitors, which are used in automotive and telecommunications, have greatly improved. Lead times for these hybrid capacitors are now between 16 and 36 weeks. Capacity utilization is about 70%.

MARKET DYNAMICS

• Several manufacturers are strategically expanding their facilities to meet the growing demand for hybrid capacitors. Panasonic, Chemicon, Nichicon, ELNA, CHINSAN, Nantong Jianghai, LELON, and Aihua are all making significant investments to capture market share and drive innovation in the capacitor industry.
• CHINSAN and Nantong Jianghai are positioning themselves as niche leaders in the high-voltage snap-in capacitor technology space.
• Aihua has made impressive strides in the global rankings, now sitting at the #4 spot. Their emphasis on a full range of products, including film cap, indicates a commitment to providing reliable and widely applicable capacitor solutions.
• ELNA has announced NRND (not recommended for new designs) all series of Supercap with the plan to EOL the product in the near future.  NEC TOKIN (KEMET) will eventually become the major source in the market.

PRICE

• Aluminum and film capacitor pricing is expected to remain flat due to inflated raw materials prices, including, Aluminum foil and copper, electricity, and operational costs.
•  Supercapacitor prices are gradually increasing due to a limited supplier base and the recent announcement from ELNA on their withdrawal from the market.

SUPPLY

• The utilization rate of suppliers' capacity stands between 70% and 90%, showing a slight uptick compared to previous quarters.
• Lead times have stabilized, halting the previous trend of reductions observed in the preceding quarters.

Inductor

• • The lead times for multilayer chip inductors have slightly increased, now quoted at 10-12 weeks. TDK's MLF/MLZ 1005/1608/2012 remain 32 weeks and have been for many consecutive quarters.
  • Molded inductor lead times have reduced slightly. Vishay’s IHLP series lead times: IHLP2020 - 12 weeks, IHLP2525 – 12-20 weeks, IHLP4040 – 12 weeks, IHLP5050 – 12 weeks, IHLP6767 – 12-20 weeks, IHLP8787 – 12 weeks. TDK’s SPM series lead times are at 28 weeks.

Filter

• • The lead time for ferrite beads remains consistent at 8 to 12 weeks, except for TDK, which has a lead time of up to 28 weeks.
  • The lead times for common mode chokes typically range from 9 to 12 weeks, but TDK's lead time extends to 32 weeks.

Transformer

• • The availability of the crucial raw material, ferrite core, has improved, and the market has returned to ordering based on lead time.
  • Lead times are currently steady but are expected to increase slightly due to the upcoming Chinese New Year holiday, mainly because most transformer components originate from China.

MARKET DYNAMICS

• The merger of Pulse Electronics brands, including Chilisin, Mag.Layers, Magic, and Bothhand are progressing under their respective sub-brands.
• There is a noticeable trend of capacity expansion in Southeast Asian countries like Vietnam, Thailand, Malaysia, and the Philippines. This expansion occurs in new and existing facilities, and the ongoing trade conflict between the United States and China primarily drives it.
• Driven by the persistent cost escalation in southern China regions, there is a significant rise in new start-ups and an expansion of existing facilities in western and central China. This shift is primarily motivated by factors such as increased costs in labor, facilities, and other related expenses.

PRICE

• Despite the market‘s sluggishness, prices have remained relatively stable due to logistical challenges and decreased demand.
• Suppliers of SMD inductors and filters remain conservative and are making minor adjustments in their offerings, specifically focusing on reductions in the small-size SMD inductor and ferrite bead segments.
• Larger-size legacy SMD inductors and filters and customized inductors and transformers have stabilized after previous increases. Although logistics and transportation costs remain elevated, there has been a slight easing in these expenses.
• Raw material costs have receded from their recent peaks but remain higher than those observed in 2020. EU-based suppliers are maintaining price stability due to the impact of elevated energy costs.

SUPPLY

• Market remains soft for most segments other than EV, Renewable Energy, AI, and 5G/6G related applications. Most suppliers are projecting the market to pick up in the 2^nd half of 2024. 
• The book-to-bill ratio is around 0.8 – 0.9. Capacity utilization averages 70% to 90%, depending on products. Higher utilization for smaller size and Automotive grade products. The lower capacity utilization may force suppliers to implement factory shutdowns or shorten working hours where necessary, resulting in limited flexibility to respond to sudden demand upsides.
• The global demand for crystals will double by 2030, mostly on smaller packages and automotive-grade products. Many suppliers have expanded their capacity in the last two years and are holding back any expansion plans as the current supply exceeds demand. 
• Raw material ceramic package supply has stabilized and is no longer constrained.
• Raw material IC supply has generally improved, but longer lead times continue for certain products. Some IC suppliers had announced that some of their mature products were going to End-of-Life, further impacting the production of certain Oscillators.
• Lead times for most products have returned to a normal level. KHz and MHz Crystals quoted lead time at 8 to 10 weeks; Oscillators range from 10 to 14 weeks. The quoted lead time for automotive-grade products is slightly longer - another two weeks. Extended lead times, up to 40 weeks, remain for certain Oscillators using legacy IC technology.
• Most Tier 1 and 2 suppliers plan to EOL larger packages; downsizing is essential for better pricing and supply risk mitigation.
• The lead time of ceramic resonators remains 8 to 10 weeks.
• TCXO lead time remains at 10 to 12 weeks.

• In general, there are no products on supply allocation.

MARKET DYNAMICS

• Suppliers are exploring manufacturing locations outside China due to the geopolitical tension between the U.S. and China. Vietnam is the primary location being considered. Kyocera has set up a new manufacturing line for crystal production in Hanoi, Vietnam, with mass production expected in Q2’24. Hosonic plans to build a new factory in Hanoi, Vietnam, targeting production in Q2’25. TXC and Raltron are also exploring new production sites in Vietnam.
• Suppliers increasingly focus on Oscillator products, which command higher margins and less intensive market competition.
• TXC continues to expand its Automotive grade products, planning to increase capacity to 100Mpcs/month in 2024.
• Abracon announces acquisition of NEL Frequency Controls, Inc. in July’2023. Kyocera announced the addition of Bliley Technologies in September’23. Both NEL and Bliley will continue to operate independently until further notice.
• With an increasing number of products becoming obsolete due to maturity or unavailability of raw materials, OEMs must design their products and align with suppliers’ latest technology roadmaps.
• Downsizing is essential. We propose using the following packages: 1610 size for KHz Crystals, 1612 or 2016 size for MHz Crystals, and 2520 or 3225 size for SPXO.
• If there is a need to use HC49 Metal-can Crystals, we suggest the approval of Taiwanese/Chinese suppliers.

PRICE

• Price is on the downtrend. Cost reductions are more prevalent on the smaller size Crystal products. Suppliers aggressively offer cost reductions to maintain or gain market share.
• Prices remain flat with some increases for the larger size Crystal products.
• Marginal cost reductions are available on the CMOS Oscillators. Pricing stays flat for the Differential output.
• Labor costs continue to increase.

SUPPLY

• Supply improvement for most circuit protection devices.
• Market demand for automotive has slowed but is still growing.  Other growth areas are renewable energy AI-related applications such as server cloud storage.
•  Book-to-bill ratios are now below 1.  Factories are running at a range of 70-80% utilization rates.
• Lead times for Fuses have improved to an average of 8-18 weeks, depending on product. SMT Fuses are around 18 weeks, and Resettable Fuses are about 14 weeks.
• Lead times for Varistors, both Led and SMT type, are approximately 12-18 weeks.  
• Lead times for the Gas Discharge Tube (GDT) have improved to 18-22 weeks. Neon gas is used in GDT production, and its supply was somewhat impacted by the Russian-Ukraine war.

• Supply for circuit breakers has improved significantly, with lead times now ranging from 6-12 weeks.

MARKET DYNAMICS

• Rapid technological advancements, as well as the growing complexity of electronic devices in the electronics industry, drive the need for more advanced and efficient circuit protection devices to ensure the reliability and safety of these systems.
• The rise in renewable energy sources, such as solar and wind power, creates new challenges for circuit protection, as these sources have unique characteristics that must be addressed.
• Major manufacturers are investing in locations like Mexico and Malaysia as part of their China+1 strategy.
• Littelfuse is a global leader in circuit protection devices; leveraging this global position, they have expanded into power control and sensing markets mainly by acquisition.  Some of the acquisitions include CandK, RCD Technology, and Carling Technologies.

PRICE

• Pricing is stable across most product families, with some reductions on the standard fuses and varistors.  Raw materials costs remain high, but suppliers are willing to review and provide more flexibility to gain more share.
• Circuit Breaker pricing is expected to increase an average of 3-5% in Q1 2024 due to increased energy, utilities, raw materials, and labor costs.

SUPPLY

• Supply for resistors has improved significantly due to the market slowdown and inventory corrections. The market is expected to recover by the second half of 2024.
• Capacity utilization from the major manufacturers from the United States, Taiwan, and Japan is now at about 70-80%, with book-to-bill ratios below 1.0.
• Supply for automotive grade parts has also improved significantly, with only some pockets having a tight supply, particularly specialty resistors like thin film.  
• General grade resistor supply has improved significantly as the consumer and mobile market is down with book-to-bill ratios below 1.0.
• Vishay Dale’s book-to-bill ratio is 1.3 due to military-grade products.  Book The bill ratio for military-grade products is 2.5 – 3.7
• Vishay’s supply of current sense, MELF, and leaded resistors has improved significantly due to capacity expansion.
• KOA has removed allocation from thin film resistors with lead times of 20 weeks, except for the specialty product from Japan.

• The inventory dumping trend has slowed in the second half of 2023, with the market returning to normal in the first half of 2024.

MARKET DYNAMICS

Accelerated shift in technology in the competitive landscape

• Vishay continues to be the technology leader in resistors but increasingly faces competition from the lower technology players.
• Japanese suppliers have deemphasized mature or standard products like standard thick film resistor arrays due to low profitability, thus impacting the suppliers left to support the overall demand.
• Taiwanese resistor manufacturers have been approved on more automotive AMLs recently due to the severe undersupply situation from the traditional automotive resistor manufacturers.
• Demand for smaller resistors continues to accelerate despite the technical problems associated with the miniaturization of electronic devices.  Consumer demand for small, easily portable electronic products like compact smartphones, lightweight laptops, and tablets drives the miniaturization of electronic components such as resistors.
• Current sensing is expected to witness significant growth in the coming years; resistor manufacturers have either started to focus or are beginning new production lines for current sensing products.

Capacity Expansion Plan

• The key electronic component manufacturers have been making major investments and have planned capacity expansion into 2030; however, output production is not expected to begin until 2024. Major investments are in thin film, thick film, and current sense focusing on thin film.
• Major investments are driven mainly by the automotive/EV and Industrial markets.
• Manufacturers invest in locations like Mexico, Germany, Malaysia, and Japan as part of their China+1 Strategy.

PRICE

• Flat to decrease price for both General and automotive grade products.
• Automotive grade parts prices are projected to remain flat / decrease for the common case size, with slight increases for larger case sizes and legacy products.
• General thick film pricing remains stable, with some reductions provided in return for market share. However, some suppliers are not adjusting much of their prices due to reduced output, which has increased manufacturing costs.