Component Distribution Supply Chain Component Insights – June 2024 by Edgewater Research shows Mixed Update with Continued Unevenness Especially in Semis.
What’s Changed/What’s New?
1. C2Q POS seen as mixed QTD with pockets of stability (IP&E and Asia) and areas of incremental softness (semis in the West).
2. Semi orders seen as sporadic/uneven in April/May, in some cases reversing after an uptick in March. Semi B2B tracking up Q/Q on lower POS but still at 0.9x range with Asia closer to 1. IP&E orders seen stable with continued green shoots and B2B at or above 1.
3. Lack of sustainable order improvement seen eroding 2H recovery optimism; forecasts projecting flat to modest POS uptick 2H/1H.
4. C3Q POS projected flat to up LSD in Asia on muted Industrial/Auto, down mid-single digit in Europe and flattish in Americas.
5. Analog Devices seen moving Arrow to fulfillment-only starting in May at <5% GM. Analog Devices viewed also taking accounts direct as part of the change.
Top 5 Channel Comments:
• April and May POS were both slower than expected. This is not that surprising as we had to aggressively push product globally at the end of 1Q to meet targets. Meanwhile, end demand is lukewarm at best, so we just pulled forward shipments.
• It is hard to call a bottom in disti POS in the West. It felt like that back in March and early April but since then it has softened again in May and into early June. At best it feels like bouncing around the bottom.
• It is surprising that Arrow took a sub 4% gross margin deal with Analog Devices as there is no coming back from that. Near term it makes sense to offset headcount reduction but longer term it wouldn’t work. TI did the same several years ago before moving more direct.
• Lattice just fired Future Electronics with the plan to consolidate its distribution business with Arrow. It appears that Arrow offered 4-5 points of margin below Future and Lattice took it.
• Inventory in China is about 3 months which is in-line with targets. However, 50% of it is aging inventory at high price and that is a major problem. We are discussing internally whether to write it off. This is a last resort for us. We are still trying to work with customers and suppliers to find a solution.
Other Key Takeaways:
6. Analog Devices’ shift to fulfillment-only seen resembling TI’s 2016 strategy change, which preceded TI’s shift to direct sales.
7. TI displeased by Arrow selling TI SKUs above policy margin, considering engaging other distis or accelerating the shift direct.
8. Distributors seeing increased opportunities for share gains from Future in recent months. Arrow noted consolidating Lattice programs from Future; private distributors seeing opportunities to gain business based on terms.
9. Inventory seen directionally improving in 2Q led by IP&E while challenges remain in semis. Aging high priced semi inventory noted as a growing concern with suppliers offering mixed support. Private distis seen writing off some inventory, Arrow/Avnet not yet.
10. Aging inventory and prolonged weakness seen driving incremental competitive pressure with distis noted flexing price in order to move product and gain share. Competitive dynamics still viewed as normal for this stage of the cycle.
Conclusion:
Component distribution fundamentals are mixed in May and early June, characterized by uneven demand, sporadic bookings, and semi B2B still below 1. While there is some progress, we remain cautious, anticipating a muted recovery in 2H demand due to inventory levels remaining a headwind and limited signs of improvement in end demand. Considering these dynamics, prospects for a real recovery in demand appear to be pushing out again, with significant improvement in 1H25 starting to seem more likely.
Full report available from: Dennis Reed, Sr. Research Analyst, Edgewater Research