Partial Demand and Pricing Rebound Gives Buyers a Glimpse of Things to Come

For months, buyers have held the upper hand in supplier negotiations, with the vast majority of electronic components in oversupply, resulting in easy availability and more benign pricing conditions. And while electronics remain a buyers’ market, rising demand and the resolution of most inventory issues have brought a change in the wind to specific supply chain segments.

The shift in purchasing conditions for some parts of the market reflects the disparity in the recovery rate for different end markets, as rising demand for PCs and smartphones spurs increased sales and pricing of certain commodities. For buyers, these early signs of change represent a harbinger of things to come in 2024, when demand is expected to normalize for a broader swath of end markets.

The Economic Picture Gets Rosier

Despite the impact of wars and trade disputes, the global economy has gained momentum in late 2023, with the U.S. posting stunning growth and China showing signs of shaking off its doldrums. Worldwide real GDP is forecasted to expand by 2.9 percent in 2023, according to The Conference Board.

As the year comes to an end, not only has the feared U.S. economic recession failed to materialize, but growth is actually exceeding expectations. U.S. GDP expanded by 5.2% in Q3, according to revised Commerce Department figures. This increase represented the fastest pace of growth since the fourth quarter of 2021.

On the inflation front, the U.S. Consumer Price Index rose by just 3.2%, down from 3.7% in September, moving closer to the Federal Reserve’s target of 2% and staving off another potential rate increase. At the same time, the jobless rate remains at rock-bottom levels, with a 3.9% reading in October – a slight rise from September, but still well below the full-employment level of 5%.

Meanwhile, China’s GDP also beat expectations in Q3, with year-on-year growth of 4.9%. While growth decelerated compared to Q2, the country’s efforts to stimulate the economy are catalyzing a stabilization in economic activity and fueling a rise in consumer spending, which surged by 7.6% year-over-year in October.

The resilience of the world’s two largest economies is spurring increasing demand for specific categories of electronic products, such as smartphones and PCs, which are set to experience year-over-year growth in Q4, raising hopes that the long-term demand decline for these products has ended – but also producing more challenging purchasing conditions for certain commodities.

Uneven Recovery Spurs Rising Prices for Specific Components

Overall pricing trends for electronic components show a deceleration in price increases. The Commodity IQ Price Index for ICs (including memory), passives, and interconnect components declined sequentially for four consecutive months from July through October, although the index remained above 100, indicating rising costs. The pricing index declined by 13% in November, illustrating the rapid slowdown in price increases.

However, price increases are accelerating for NAND flash, with a mid-single-digit percentage sequential rise expected in Q4. The increase in NAND flash pricing started in September, when Samsung slashed its NAND flash output by 50%. However, NAND demand and pricing have been further energized in the fourth quarter as new smartphone introductions from major brands boost demand during the holiday sales season. Swelling demand for PCs also is contributing to the increase.

The rising tide of end demand is also impacting sales trends in other components, with MCU, MPU, and ASIC vendors noting improved supplier market conditions. These companies are increasing production at TSMC, allowing the Taiwanese foundry to beat revenue expectations in Q3 and set the stage for robust growth in 2024. Rising demand may boost TSMC’s pricing in 2024, driving up the costs of MCUs, MPUs, and ASICs.

As market demand continues to recover and normalize in 2024, buyers accustomed to the halcyon days of the component surplus may be in for a rude awakening. More parts are likely to experience either slowing price decreases or even increases as changing market conditions spur mismatches in supply and demand.

Buyer Beware

Although buyers continue to hold the upper hand, the resolution of the inventory overhang and the recovery in demand are likely to make for tougher sledding as the new year progresses. Buyers’ best strategy now is to monitor demand trends in their end markets and selectively build inventory of required parts before conditions shift in favor of suppliers.