Tariffs and AI Uncertainty Scramble the Electronics Supply Chain

Conditions have fundamentally shifted for the global electronics supply chain into Q1. In a matter of weeks, certainty has given way to chaos. The electronics supply chain, primarily governed by market forces, has been exposed to unpredictable fluctuations in global trade policies. Long-held norms have crumbled, assumptions have evaporated, and once-unassailable supply and demand approaches are highly vulnerable.

Welcome to 2025, when tariff deployments, trade retaliations, and the continuing transformation wrought by generative AI have made commodity planning extremely challenging and left supply-chain management organizations scrambling to keep pace.

Standard seasonal buying patterns have gone haywire, as tariffs and the threat thereof have spurred an unseasonal purchase surge in Q1. Whereas excess inventories once dominated supply-chain dynamics, new concerns have arisen as the rise in demand has exposed a critical shortfall in stockpiles – the Commodity IQ Inventory Index for all electronic components dove by 29 points between January and December 2024, falling to less than half of the 2020 index baseline, signaling contraction.

Tariffs Disrupt Trade and Economics

The electronics supply chain, primarily governed by market forces, has been exposed to unpredictable fluctuations in global trade actions, worldwide macroeconomic headwinds, and resurfacing U.S. recessionary risks.

Tariff ambiguity is reflected in the U.S. Federal Reserve Bank’s Global Economic Policy Uncertainty Index, which spiked by 63% from October to November 2024 and rose by 3% and 14% month-on-month in January and February, respectively. Moreover, this year began with the index soaring 87% versus January 2024. For the United States, the monthly News-Based Economic Policy Uncertainty Index more than doubled in November 2024, and February data show an annual tripling of the index.

Economists warn the new tariff regime will reignite inflation and slow U.S. economic growth. Following a higher-than-expected December U.S. inflation reading, the University of Michigan surveys showed consumer inflation expectations rose at the highest rate in nearly four years, while its Index of Consumer Sentiment fell by 2 points in January and, compared to January 2024, was down by over 7 points.

All of this points to business expectations for the year ahead, dropping on unease about federal government policies and casting doubt on the health of the U.S. manufacturing sector and the electronics supply chain.

Apart from the United States and the Asian nations, industrial production in the key countries of France, Germany, Italy, the United Kingdom, Canada, and Mexico – only Mexico showed growth, albeit modest, year-over-year for 2024.

Tariffs Trigger Unseasonal Demand Surge in Q1

In February, the purchasing managers index growth of core electronic component consumption nations, including the United States and the Eurozone, is linked to tariff front-running, suggesting that the increase represented only a temporary boost.

The tariff-avoidance demand surge phenomenon is evident in the electronic components market. The Commodity IQ Demand Index rose sequentially by 9% in January and another 5% in February across all components worldwide. In the United States, the index shot up 31% month-over-month in January as buyers rushed to evade additional costs.

For nearly all component commodities, month-over-month demand in the U.S. increased by double-digit percentages, with most climbing by 20% or more. With Mexico as an ever more attractive electronics manufacturing services location facing 25% U.S. import tariffs ahead, its Commodity Demand Index ascended by 68% in January. Additionally, Brazil saw a 13% rise in the month, and across the three nations, sourcing for all electronic component commodities increased in January.

Component demand activity also rose in Europe and the Asia-Pacific region through January. In particular, all key European markets witnessed demand growth, including Germany, which inflated by 22%; France by 26%; Italy by nearly 50%; the United Kingdom by 27%; Spain by 14%; Poland by 39%; and Sweden by a significant 57%.

This demand pattern is unusual. Q1 typically represents the weakest quarter of the year for electronics demand, with activity slowing markedly compared to Q4. The highly unseasonal demand surge is widespread among electronic components, evident in the supply chains for bellwether parts, including capacitors and analog ICs.

Production Pivots and Demand

While some believe applying these tariffs will propel domestic production of electronic goods, it would take many years and billions of dollars in investment for the U.S. tech industry to scale manufacturing sufficiently to satisfy the demand for core products such as PCBs.

This delay would result in a lengthy period of inflated prices and supply constraints for original equipment manufacturers, EMS providers, and sub-system vendors as they pivot from China-Plus-One to China-Zero electronics sourcing. The China-Plus-One manufacturing (of electronic components, subsystems, and end equipment) and sourcing strategies that genuinely took hold in 2022 have increased, as have the implications of China-Zero initiatives that began in earnest in late 2023.

(NEW P) and will be influenced by current U.S. import tariff announcements and potential Chinese retaliatory export tariffs, Mexico remained first for electronic component demand as the de-risking of manufacturing accelerated, and Vietnam and Malaysia rose seven slots due to key nation shifts. Conversely, the electronic component demand ranking for the United States was halved last year compared to 2022.

Low Inventories Magnify Demand Impact

The spike in demand comes when electronics inventories are highly depleted. The Commodity IQ Inventory Index encompassing all commodities tracked by Supplyframe fell to 47 in January, marking a six-year low and showing stockpiles are far below normalized levels.

Notable channel and component manufacturer stock declines include crystals and resonators, down by 8%, inductors by 34%, switches by 12%, power ICs by 10%, and amplifiers by 20%.

Electronics suppliers, particularly purveyors of multi-sourced parts, recently completed a drawdown of massively inflated inventories. To throttle supply and maintain pricing, they have cut capacity. With little inventory slack in the supply chain, the increase in sales is translating directly into new demand for suppliers.

The increasing prevalence of tariff-mitigation sourcing strategies also boosts demand, as implementing such programs inevitably leads to redundant ordering, which, in turn, limits availability and increases lead times.

AI Insanity

The ongoing generative AI boom is adding further uncertainty to the outlook. This year was expected to bring a repeat of conditions in 2024, when soaring demand for AI servers spurred a market bifurcation, with strong sales of AI acceleration chips, memory, and associated devices, while other markets remained weak.

However, the arrival of DeepSeek’s new AI model, which (apparently) requires far less compute horsepower than existing models, has thrown that outlook into doubt – many question whether massive hyperscaler and enterprise expenditures on AI data centers are justified. Even Nvidia’s record revenue of $39.3 billion for its fiscal Q4 2024 and its strong growth outlook was met with some skepticism, as the company’s stock fell following the earnings announcement.

So far, companies’ massive capital spending growth plans for AI remain on track, with Apple joining the party by announcing a $500 billion investment in February. However, some uncertainty has been added to the market, further clouding the growth outlook for electronics and raising some doubt over whether AI will continue to dictate the electronics supply chain as it has in the recent past.

Some suggest that the electronics component market could well experience conditions reminiscent of the dot-com bubble bursting when chipmakers saw extraordinary revenue declines, DRAM pricing collapses, capacity utilization dropped markedly, and passive component manufacturing consolidation occurred due to price erosion, especially with the oversupply of capacitors and resistors.

The generative AI boom may also be claiming a major casualty, with Intel, the once-dominant institution, teetering on the brink. Intel was already facing significant headwinds, with its dominant position in data center CPUs under assault by AMD and others and its foundry business failing to gain traction.

Although, recent news that the company is withdrawing its next-generation AI acceleration chip eliminated it from running in this key market. Rumors have even circulated that Intel could be an acquisition target, with TSMC and Qualcomm potentially buying parts of the company. With Intel having dominated the chip industry for over a generation, this fall from grace represents a milestone development in the semiconductor industry’s history.

The Path Forward for Buyers

With circumstances changing rapidly, buyers face difficulty assessing the situation and developing response strategies. With demand rising and availability low, buyers could face challenges sourcing some parts. However, the demand increase is likely short-lived, particularly if costs rise and economic activity decelerates.

The tariff issue is undoubtedly at the top of buyers’ minds, with a Q4 2024 Commodity IQ snap poll revealing that 67% of respondents are considering how a U.S. tariff of as much as 50% on Chinese semiconductors will impact their commodity strategies.

While buyers may want to eliminate China-produced chips to reduce their exposure to tariffs, the complexity and interconnectedness of the electronics supply may make that impossible. As a result, it is unlikely that companies will be able to avoid the tariffs’ impact on electronic components of Chinese origin altogether.

Under these conditions, buyers need to closely track demand and pricing conditions and be prepared to react quickly to further unexpected developments.