Buyers May Not Like the Storyline of 2024’s Latest Electronics Supply Chain Chapter

Over the past four years, electronics procurement teams have become accustomed to extreme shifts in purchasing conditions, from pandemic-inspired supply chain disruptions and monumental demand surges to crushing parts shortages and rocketing prices to massive oversupplies and overwhelming inventory buildups.

Now, in early 2024, buyers are acclimating to a new situation that may seem startlingly alien following the nonstop swings of recent years: the return of so-called supply chain normalcy.

This new chapter of normality is characterized by the end of the once-in-a-lifetime impact of the pandemic and the reassertion of more customary market forces as the drivers of pricing and lead time trends. As a result, 2024 is set to attain more balanced supply and demand conditions than the electronics market has experienced in years, delivering some relief to buyers challenged by the supply chain’s excessive swings.

That said, this new phase is not without its challenges, with logistical disruptions like the Red Sea crisis and the Panama Canal pileup generating new purchasing headaches. At the same time, resurgent demand and declining inventories are set to spur price increases and even shortages for some key components this year. However, these events fall within the confines of familiar and manageable supply chain challenges – representing a major change from the wrenching changes and insurmountable difficulties of recent years.

A New Beginning for End Markets

Economic growth, however tepid and almost in spite of Germany and other large economies, is still increasing. Cyclical demand trends and rising sales of AI-enabled products are underpinning an expected return to growth for key end markets for electronic components in the second half of 2024.

The most notable turnaround will be in the wireless segment, where semiconductor demand growth will total 12% in 2024, compared to a 23% plunge in 2023. This will result in a remarkable 35 percentage point swing to the positive. Worldwide smartphone shipments are forecast to see a low single-digit percentage increase in 2024, according to market watchers. Rising demand in all regions, particularly China, despite its continuing economic malaise, will help propel the rebound.

Consumer electronics will deliver the second-largest shift, with a 13% rise in chip demand expected in 2024, marking a 25-point swing compared to the 12% decline in 2023. U.S. consumer spending on consumer electronics products and services is set to rise by 2.8% in 2024, compared to a 3.1% decline in 2023. Falling prices and rising consumer demand for AI-enabled devices will drive the growth, according to the CEA.

The third biggest shift will occur in the battered compute and data storage segment, where semiconductor demand suffered two consecutive years of decline in 2022 and 2023. Compute-related chip demand is set to rebound to double-digit growth of 14% in 2024, attaining a remarkable 23 percentage point swing compared to the 9% decline in 2023. The onset of the PC replacement cycle, combined with continued massive investments in AI data center equipment, is set to drive renewed growth.

The rise in demand is expected to be broad-based, with all end markets for semiconductors set to experience growth and five out of six segments set for double-digit percentage increases.

Buyer Beware

Although conditions are normalizing, trends indicate that buyers will be finding it more difficult, bringing an end to the optimal conditions seen in 2023. With design activity leading demand trends, sales are set to rise later this year, causing pricing to continue rising and extending lead times.

All components experienced a sequential increase in pricing in January, reflecting a widespread hike in costs. However, some components are undergoing sharper price increases, including HBM DRAM, NAND flash, and graphics processing units (GPUs) used for AI acceleration in data centers.

The decrease in inventory levels will only add fuel to the price inflation as the year progresses.

Buyers’ best move now is to monitor supply as demand increases and inventory shrinks. Buyers may want to consider building inventory for some harder-to-find parts, such as the key memory and GPUs.

While “normalization” is bringing some much-needed stability to the electronics supply chain, the return of normal supply and demand conditions is likely to produce more challenging conditions for buyers this year.