With businesses rebounding from the first wave of COVID-19, 2021 was a fruitful year for many Asian supply chain companies. While companies on the Asia Supply Chain (ASC) top 100 list are celebrating robust growth in revenues and earnings in 2021, many have started to brace themselves up for another roller-coaster ride in 2022.
DIGITIMES vice president Eric Huang identified a paradigm shift in this year's results. "Although automotive manufacturers continue to occupy half of the top 10 spots of ASC 100 list, the increase in the number of semiconductors and EV-related electrical and machinery component manufacturers in the list symbolizes a shift towards the technology side."
The number of semiconductor, and EV related electrical component, automotive components and equipment companies increased by 2 from a year ago. But these two new companies, which are both EV battery makers, attracted our attention. CATL did not make it to ASC100 last year, but this year, thanks to robust growth in revenues, it not only made it to top 100, but went directly to the 49th place. LG energy solution just spun off and went IPO last year, and it immediately become an ASC100 company, ranking no. 66.
And judging from the automotive manufacturing manufacturers which made it to ASC100 also show the same trend. Besides BYD, which is EV producer on day 1, China's Geely, Beiqi Foton, Indian car makers Tata and Mahindra&Mahindra have started producing EVs in 2021 or even earlier. We will see even more in the future, as Hyundai, Nissan, Mazda and Toyota start selling pure EV in 2022, to name just a few. Toyota has announced to transform its supply chains into 100% EV, so is Hyundai, aiming to reach 100% EV by 2030.
DIGITIMES released the 2022 ASC 100 companies ranking on May 25, with Toyota taking the top seat with the highest 2021 revenues, while Chinese companies took the largest share (37), followed by Japan (34), Taiwan (14), South Korea (11), India (3) and Indonesia (1).
Total revenues of the ASC 100 companies in 2021 increased by 18.8% from a year ago, to US$3.498 trillion, while profits surged 77.6% to US$233.471 billion. Taiwan is the country with the highest average profit margin (9.6%).
However, there is no time for self-contentment. Resilience is all the most important in 2022, as uncertainties such as geopolitical tensions, energy price hikes, currency volatility, logistic delays, etc., have disrupted global supply chains.
"The logistic cost is 10x of that two years ago!" said one participant at the "2022 Exclusive Premiere: Asia Supply Chain 100 Findings and Insight Webinar", co-hosted by DIGITIMES and North America Taiwanese Engineering & Science Association (NATEA). Component shortage, including chips, has been a common headache for supply chain companies during the pandemic, but not all components are in short supply. The problem is, lacking just one kind of discrete component, the whole assembly line winds down to a halt. Although WPG, one of the largest electronic component channel vendors in the world, tries to solve the problem by building a comprehensive platform to increase visibility and transparency to deal with information asymmetry problems, it takes time and whether companies are willing to share information would be a challenge. Companies are now building "buffer stocks" and secure supplies through long-term agreement partnerships to mitigate the risks, and their willingness to pay a premium to secure the stock is something that one could not have imagined two years ago.
The Global Supply Chain Pressure Index (GSCPI) updated by the Federal Reserve Bank of New York on March 22 showed that although the index has started to come off from the peak, supply chain pressure remains at a high level. The Manheim Used Vehicle Value Index updated in April also reflected a similar trend, showing how chip shortages have driven up the price of used cars.
Source: Federal Reserve Bank of New York
ASC 100 top-performing companies not only survived the acid test during the supply chain crisis at the height of the COVID-19 outbreak but also managed to accelerate growth with excellent supply chain capabilities. The companies that have posted triple or even quadruple profit jumps are those in the electrical component, electronic component, and machinery manufacturing sectors, making a robust comeback from their pandemic lows in 2020.
Semiconductor companies continued to benefit from the chip price hikes, as semiconductor equipment, materials, and products are all in short supply.
Although there is a growing demand from countries trying to diversify chip production from Taiwan, participants of the "2022 Exclusive Premiere: Asia Supply Chain 100 Findings and Insight Webinar" agreed that it is not as simple as it seems. For example, the procedures of manufacturing semiconductors are highly polluting, and how the US and Europe would deal with the problem remains to be seen. In addition, it would be time-consuming and costly to build up qualified process facilities with satisfactory yields.
But the sustainability of being overly dependent on Taiwan is also in doubt. An executive from a semiconductor company pointed out that besides the shortage of labor, the shortage of green energy available for companies in Taiwan also poses significant operational risks for companies here, as companies are likely to suffer disadvantages in net-zero carbon emission economy. But he remains optimistic, because "when the carbon tax is implemented and all the ESG incentives become monetized, ESG will be standard and will be revalued, and free-market mechanism will sort it out by itself. It's coming soon."
Bullwhip effect on chips
As some of the chip crunch problems may finally ease in the second half of this year, the "bullwhip effect" is likely to be felt down the supply chain, at least in the consumer-electronic sectors, as Work-From-Home (WFH) demands eventually ebbed. The economic slowdown also affected consumers' spending plans on new gadgets. Haijun Zhao, CEO of SMIC, recently also observed smartphone chip orders being canceled and predicted that smartphone shipment (mainly by Chinese manufacturers) is likely to decrease by 200 million units in 2022.
The bullwhip effect (also known as the Forrester effect) is defined as the demand distortion that brand customers keep giving orders but there was no supply, so they double-booked. But when the supply is ready, the demand may not be there anymore or at least is weakened due to tightening wallets.
Since global economic growth is facing a slowdown due to inflation, the pandemic, and geopolitical risks, it will be quite complicated for the bullwhip to normal out. "The question is whether we would get a soft-landing or crash landing," said a multinational company supply chain manager who preferred not to be identified. "That said, if the supply chain professionals act professionally and logically, the effect could be eased to avoid a crash landing."
Tokyo Electron, one the world's top-5 manufacturers of wafer-fab equipment and flat panel display equipment is optimistic about the outlook of its businesses in the course of 2022. In its FY2022 financial report presentation, Toshiki Kawai, representative director, president & CEO of the company, revealed their forecast for growth in the 2022 calendar year. He expects the wafer fab equipment business to enjoy 20% growth this year, predicting the on-year growth rates for logic/foundry, DRAM and non-volatile memory at 25%, 15%, and 10%, respectively.
Kawai cited progressing adoption of SSDs and rising memory contents as reasons for optimism. He also expects FPD business to increase slightly because FPD manufacturers have increased investment accompanying the adoption of new applications in automotive, etc., and new technologies for mobile.
Resilience in the time of pandemics
China's decision to lock down Shanghai and surrounding cities such as Kunshan and Suzhou in March and April further throttled the global supply chain, which was already struggling with a long lead time due to the chip crunch. The lockdown was not only a shock to the residents and companies located in the area but also to the world, because Shanghai is the world's busiest container port, processing at least 43.5 million TEUs a year.
As a result, companies now have to accept higher freight rates. While relocating productions from China to other countries to fulfill orders in other regions helped mitigate risks such as factory shut-downs due to virus infection among employees, automation and closed-loop management also were proven useful. Hon Hai Precision said their factories in China have limited impact from the Omicron, and operations remain business as usual because they have implemented closed-loop management and can produce in lighthouse factories that are fully automated.
"Based on our supply chain management experience and excellent digital production planning capability, and the application of big data analytics, the impact of the pandemic is under control. FII is no longer a manufacturer by traditional definition, but a big data company that can flexibly apply big data and artificial intelligence to enhance its competitive advantage. The record results in 2021 and Q1 2022 are attested to FII's resilience," said Brand Cheng, CEO of FII, a subsidiary of Hon Hai Precision, in a written reply to DIGITIMES.
Cheng said FII's global digital management system can allocate production and supply chain resources in an orderly and dynamic manner to meet customers' needs for regional production or global delivery in an efficient and speedy manner. The company has also invested in chips and industrial software for the purpose of achieving more competitive pricing and a more robust one-stop supply chain to withstand macroeconomic risks.
Where the future lies
Besides risks and uncertainties, there are optimistic signs in the ASC100 that call for attention. Auto component and electrical components manufacturers or electrical vehicle (EV) makers out-performed traditional automobile makers. While EVs are enjoying robust growth in China and the EU markets, sales numbers in the US have also started to climb, as EV registrations in America shot up 60% in the first 3 months of 2022, according to CarandDriver.com.
EVs require more chips than traditional automobiles, and demands from data center high-performance computing (HPC), AI plus Internet of Things (AIoT) applications, and power management in industrial scenarios remain strong. TSMC CEO C.C. Wei said in a recent earnings conference that despite the recent macro-related uncertainties, they continue to observe the structural increase in long-term semiconductor demand, underpinned by the industry's megatrend of 5G and HPC-related applications. Wei sees this as a "multiyear megatrend" that will support modest device unit volume growth while driving substantial semiconductor content enrichment in many end devices across HPC, smartphone, automotive, and IoT applications.
But now all eyes are on China's economic outlook. China's Consumer Confidence Index in March dropped to the lowest level since August 2021, and its adamant attitude to pursue a zero-virus target had produced very negative impacts – the industrial output of Shanghai in April dropped 61.5% from the same period last year.
Quanta's Shanghai subsidiary has already seen production affected by the lockdown and worker riots recently. A Tesla engineer in Shanghai told DIGITIMES that its Shanghai factory production numbers in the second quarter would "look really bad".
"Unless the Chinese consumer sentiment rebounds in the second half of this year, the supply chain downstream inventory pressure will eventually start to affect the foundry manufacturers," said Eric Chen, semiconductor industry analyst at DIGITIMES.
Although many experts are worried that the aggressive ramping up of production capacities by semiconductor companies worldwide is likely to result in an over-supply, Chen said it is unlikely to happen in 2022, because shipments of processing equipment are seriously delayed due to chip and component shortages. "Some chip makers may delay their new capacity ramp-up due to the latest market sentiment," said Chen. A wafer foundry executive told DIGITIMES that they expect the chip supply to peak around 2024-2025.
What other wild card can we expect despite business cycles' ebb and flow?
"The rapid iteration of consumer electronic technology, for example, VR goggles or AR glasses need to be much lighter and ergonomically feasible. Innovations and new designs as such will boost the demand side and drive the supply chain to come up with new solutions for advanced manufacturing," said William Yeh, Taiwan & North Asia regional sales manager of Aerotech, a US company specialized in nano-level motion control technology. "While it is impossible to predict the future, there will always be companies that push the boundaries and drive the growth of the entire supply chain."
That's the spirit. Heroes are made, not born. Time will tell who are the heroes among the Asia supply chain companies as paradigms shift.
About ASC100:
Asia Supply Chain 100 (ASC100) 2022 ranks the top 100 Asian tech companies, focusing on electronics, information & communication technology, machinery, and automobile industries, by their revenue in 2021. The top 100 companies were able to manage uncertainties and succeed. Based on the rankings, DIGITIMES Asia also summed up the findings and insights in a series of articles.
Correction: In the 17th paragraph, in the previous version, ..."Tokyo Electron, the world's 5th largest manufacturer".... is corrected as: "Tokyo Electron, one the world's top-5 manufacturer" of wafer-fab equipment and flat panel display equipment is optimistic about the outlook of its businesses in the course of 2022. We apologize for the remiss.
