During the peak of chip crunch, when big automotive manufacturers are securing long-term agreements with chip makers to keep their supply chain humming, those in critical need of parts may turn to open market distributors like Fusion Worldwide to supply the chips they urgently need. US open market distributor Fusion Worldwide shares insights on the chip industry prospects with DIGITIMES Asia.
"The market for semiconductors is much larger than a few main manufacturers producing chips and sending them out to a couple of customers that they build it for," Tobey Gonnerman, president of Fusion Worldwide, told DIGITIMES Asia. "The semiconductor supply chain is a much more complicated three-dimensional network."
When will the shortage end? "Our crystal ball is a little foggy. The further we look out; we don't believe anyone has a perfect answer to that," Gonnerman said. "It won't be a shortage forever. But we do see significant supply constraints and significant headwinds for those that need semiconductors that are currently in shortage. We still see rough waters ahead for at least another quarter."
Although Apple is the classic case study to use long-term agreement to require those that produce chips for them to commit to supplying all the chips they need, there are many automobile companies that choose to do that by building strategic partnerships with chip makers, not all companies can afford that. Chip companies also hire franchise distributors to feed the masses, but there are still gaps that need to be filled by open market distributors.
"Long-term agreements (LTAs) are certainly necessary for the biggest users of product and have been around for a long time," said Gonnerman. But LTAs probably cannot tackle all the supply assurance issues. The companies that enter LTAs with chip makers are also vulnerable to the risk of excess or risk of oversupply when market demand wanes. If they decide to cancel the orders considering excess, they will be liable for liquidated damages and penalties.
"A lot of the overbooking during chip crunch is an overreaction to a supply chain shock that they've been dealing with for a while, and we saw this during the Fukushima incident in 2011, Thailand flooding, the tantalum capacitor shortage of 1999, and the DRAM shortage of 2005."
Gonnerman recalled long lists of experiences saying that when shortages subside, there is significant amnesia that sets in amongst the end users. "And very quickly, they forget their negative experience of supply shortages, they turn their attention back to cost reduction or just-in-time delivery."
Increasing complexity of supply chains
As one of the largest global independent distributors, Fusion Worldwide expects its revenue to exceed US$3 billion in 2022. The 21-year-old company now has a global footprint of 28 offices, logistics, and warehousing in North America, Europe, and the Asia Pacific region, and has just acquired a large-scale electronic component packaging and testing house in Singapore in February 2022 to meet customers' demand for efficient, quality inspection.
"We source from over 9,000 vendors in our database that we have relationships with. And we have over 4,000 customers that we actively support," Gonnerman disclosed that 60% of the products come from Asia, and 40% from Europe and America combined.
There's a lot of outsourcing and specialization and partnerships that end users rely on to help them produce the finished product or the end product. And the level of complexity, the pace of technology change, the path to obsolescence, all those things are continuing to accelerate the usage of semiconductors exponentially.
Automotive is the biggest example. New functions for cars continue to accelerate the demand for chips, especially in electrical vehicles and internet-connected cars. "What that's doing is adding layers and layers of complexity to an already complex supply web," said Gonnerman. "And, in essence, our role as a distributor is to help connect the dots in that complex web and overcome supply chain hiccups."
The fact that there are so many interconnections that must happen for product to move towards final completion, creates opportunities for open-market distributors such as Fusion Worldwide to help match up folks that have parts and folks that need parts. Fusion Worldwide utilizes its proprietary software SCOUT to collect and analyze supply/demand data in order to support its customers' needs.
"Everyone follows commodities pricing, like DRAM. It's the same thing on board-level components; they take on a lot of commodity characteristics and people can follow the pricing up and down, depending on how balanced the supply/demand picture is at a particular moment in time." Gonnerman explains that Fusion Worldwide plays the role of a matchmaker, an open market supplier, focused on the direct support of end users and their needs, when it comes to component shortages, supply assurance, inventory management programs, cost savings initiatives, and the whole arsenal of potential supply chain partnership opportunities that arise.
The OEMs that suffer the most during times of shortage are the ones that lack an understanding of what open market distributors and secondary sources can provide to them in terms of supply assurance, just-in-time delivery, and competitive pricing, said Gonnerman.
Fusion Worldwide is still seeing a hyper-shortage in the automotive space. And their factory automation customers, IoT customers, data center customers, and so forth are still chasing after chips. "With consumer electronics, it's softened a bit – we all hear about the excess amount consumer products like phones with Samsung. But the shortage is very much ongoing and still very much real for those other business verticals," said Gonnerman.
Yet some structural changes in demand and supply in some areas certainly are getting both the suppliers and their customers perplexed. Not only auto OEMs were squeezed when chips were short. Small and medium enterprises such as Internet-of-Things (IoT) startup Blutech used to depend on franchise distributors for MCUs for their industrial IoT devices. "Even so, the lead time is 52 weeks, and we were told recently it will take more than 52 weeks for us to get the chips!" Han Kuo, sales director of Blutech told DIGITIMES Asia since their order was relatively small, they tried their best to get their arms around chips that were available in the open market. "Fortunately, we have previously stocked up enough inventory for one year."
