September 2023 component distribution supply chain insights – September 2023 from Edgewater Research.
Inventory overhang remains persistent and burn progressing slower than expected, Arrow appears to be losing share NT on TI moving business direct & potential customer disruptions stemming from NCNR enforcement
Key Takeaways:
1. 3Q POS tracking in-line, down mid-single digits Q/Q, with weaker China, seasonal Europe and in-line Americas.
2. TI seen accelerating shift direct from Arrow in 2H, particularly in 4Q. We estimate ~65% of TI sales through Arrow are in Asia.
3. 3Q inventory progress viewed as uneven and slow on STMicro, Infineon and other European semis driving inventory up by enforcing NCNRs.
4. Arrow seen angering tier 1 EMS with aggressive tactics on receivables/NCNRs; Foxconn threatening to cut ties, move to Avnet/others.
Top 4 Channel Comments:
• Over the last month discussions of TI moving away from Arrow have intensified. The Arrow managers in Asia that we met with are particularly concerned about the 2H and specifically 4Q.
• It is too early to tell but some large suppliers are not happy with the Future deal. Arrow and Avnet will be lurking in the background ready to take on more share. STMicro, Infineon, NXP have decent-sized businesses with Future and those could be on the move at some point.
• The semi suppliers are enforcing NCNRs and stuffing distributors with products, particularly in Asia. In turn, Arrow has gotten very aggressive with big EMS customers forcing them to take on products. That has aggravated Foxconn. Foxconn says they are going to move all of their demand to Avnet. Some of it is likely a negotiating tactic but they sound serious. We have a call with Foxconn in 2 weeks to figure out as a supplier what this means. For us, it is key not to leave any product stuck with Arrow.
• Our (a global distributor) inventory in China is worse than in 2Q. We currently have more inventory than revenue in 3Q. STMicro, Infineon and most other European suppliers (ex. NXP) are pushing products to us, enforcing NCNRs while customers refuse delivery.
Other Key Takeaways:
5. Bookings remain weak with B2B<1 globally; semis B2B/orders cont. to decline; IP&E more stable with green shoots in China.
6. 4Q POS projected down LSD-MSD Q/Q with flattish APAC/China and declines in EMEA and Americas.
7. Future Electronics sale seen as having limited industry impact NT as WT planning limited change to Future’s biz model and GTM. MT, the supply chain sees potential Arrow/Avnet gains as some end customers/suppliers seen expressing uneasiness re. the new owner.
8. Distributors seen expressing concern about slow inventory progress. Arrow seen aiming to cut inventory by 30-40%, or ~$2B.
9. NCNR enforcement, ongoing customer pushouts seen limiting disti’s ability to reduce inventory. Receivables collection also noted as incrementally more challenging. Combined those dynamics seen constraining WC improvement and FCF generation near term.
10. Inventory digestion seen through 1Q24 (at least). Feedback suggests inventory progress at catalog disti, including Farnell also slow.
11. High volume SKUs (particularly semis) noted seeing increasing pricing pressure in distis; high end/custom pricing more stable.
12. Distis noted seeking sizable ship and debit support; suppliers largely seen unwilling to meet such requests. Distis in Asia seen as more aggressive discounting without supplier support, in large part due to increased pressure from brokers selling below the market.
13. First cut to official list prices seen in catalog distis from TI/STMicro/Analog Devices. Cuts seen as a potential leading indicator for volume distis.
Conclusion:
Distribution fundamentals remain challenged, and we remain cautious on the pace and the duration of the digestion taking longer than supply chain expectations and likely lasting through at least 1H24. Adding to our near-term caution, we have started to see the 1st signs of pricing aggression from suppliers, which also has the potential to further pressure sales growth near-term.
Full report available from:
Dennis Reed, Sr. Research Analyst, Edgewater Research