Component Supply Challenges From the Catbird Seat.
Feature Interview article with I-Connect007 Editorial Team.
Vexos Senior Vice President for Global Supply Stephanie Martin gives the I-Connect007 editorial team a wide-ranging and insightful overview of the current parts supply situation from the perspective of procurement at a contract manufacturer.
Stephen Las Marias: First, Stephanie, can you please tell us more about Vexos and your role at the company?
Stephanie Martin: Yes. I'm the senior VP of global supply for Vexos.
Vexos is a high tier-three, low tier-two contract manufacturer. It is a combination of two different companies that were purchased by Center Lane Partners, a private equity company; EPM based out of Markham, Canada; and STACI Corporation based out of LaGrange, Ohio.
We have five manufacturing facilities that do contract manufacturing. We have the Markham, Canada facility, which focuses more on high tech, fine pitch. Then, we have the facility in LaGrange, Ohio, is in the Cleveland area that does medical, some automotive, and lower-tech products. We have two facilities in China: one in Shenzhen, which usually matches what Markham does—more fine pitch and higher-tech products—and one in Dongguan, which does automotive, medical, a lot of lower-tech products, and quite a bit of other manufacturing that is not based in electronics, and finally we have Vietnam, which is located in Ho Chi Minh City are newest manufacturing facility which launched in May 2019, this facility offers our customers with an alternative Low-Cost manufacturing solution.
Then, we have another portion of our business we call the “custom material solution.” We are a trading company and represent a number of supplier partners for custom-built products like PCBs, cable assemblies, displays, heat sinks, fabricated metal parts, metal machine parts, and plastic injection molding. We believe we're the only tier-three player in our space that offers not only a global solution but a full spread of components where we can supply everything from the outer housing, whether you do the electronics assembly or not. We can supply the PCBs all the way up to the full box build for you.
Las Marias: From your perspective as an EMS provider, what are the greatest challenges that you face or that you experience when it comes to supply chain?
Martin: Well, we're in the super-cycle for allocation, so we're heavily into the super-cycle that we're dealing with. It started with the memory product, which we're coming up on three years now. And then in the summer of 2017, MLCCs started getting tight. By November, we were in full-board allocation. We struggle like all EMS companies, particularly with MLCCs. The lead times are over 52 weeks with most manufacturers, if they will even take orders.
The second- and third-tier MLCC manufacturers will no longer cross your components, and for distributors, the inventory position is low. So, it's a challenge every time we get an order to find the MLCCs. We're also seeing tantalum shifts. A lot of those are now going on allocation. We have MOFSETs across the board that are running on full-board allocation over 40 weeks. Then, we have IGBTs and TV, Zener, and Schottky diodes, which are all in the 38-week range.
In the resistor arena, we have the Vishay CRCW series at 80 weeks now. The Panasonic ERJ series are at 40+ weeks. Generally, all mainstream resistor manufacturers are now 26–29 weeks. It has become quite a challenge to source electronic components. We spend a lot of time talking and working with our customers trying to get them to approve alternates quickly so that we can find materials and expand their AVL, and we spend a lot of extra time sourcing trying to just find inventory. It has become quite a challenge in this market.
Las Marias: You mentioned super-cycle. Have you experienced this sort of extreme shortages when it comes to electronic component supply before?
Martin: I've been in electronics since 1989, so I've been in it a long time. I've been through a number of cycles. I believe this is the tenth inventory cycle that we're in from what I can tell. The closest that we've ever come, and the last time we went into a shortage situation that affected passive components, was in 1999 right before the dot-com crash. At that point in time, we had problems with resistors and capacitors. That's the last, and in my career, the only time that the passive products have been an issue.
Typically, the market follows some new must-have device, whether it was a pager, cellphone, or laptop computer. This market cycle is very different. This one is not any single device. This market segment is really what we're calling “the electrification of everything.” There's a huge change going on. A lot of pieces of our life that were never electronic are now becoming electronically connected to our phones and smart devices. We even have one customer that we're talking to that wants to make furnace filters smart, so they remind you to replace them.
All of the devices, including IoT, smart devices, automotive content, and cellphones are hitting us at the same time. No one device will fix the market once it's satisfied. The only thing I believe is going to fix the market is when we can get some increased capacity through new manufacturers coming in. There's also a technology shift happening, which appears to be very close to what happened back in the mid-2000s during the RoHS time where we switched from leaded to non-leaded parts; this one is going from larger to smaller case sizes.
If you look at a 1206 capacitor, they can get approximately 80 0402 capacitors in the same space or 300 0201s. As the market is tighter, I believe the OEMs are going to be forced to redesign to smaller and smaller parts, and that will allow the manufacturers to produce more parts in the same footprint that they had before. I think that's more along the line of what's going to happen. All the projections that we get from the manufacturers and the distribution channel tell us that the market will not see a relief until mid-2019 at the earliest, and several of them say it will be towards the end of 2019 for MLCCS in particular For larger case size MLCCs they may never recover.
A number of things are happening. The Chinese are bringing up some new fabrications. Several manufacturers are pulling some of their fabrication back in-house, particularly in the U.S. Some third-tier suppliers are coming in and starting up, particularly in Asia. There are a lot of things happening, but it will take a while for the market to level out.
Dan Feinberg: I have to agree with you on the super-cycle. It's the largest I've seen since 1960–1962 when we switched from point-to-point wiring to circuit boards. The industry was much smaller, and the demands were much smaller and less widespread. Some of the things that I'm seeing, and hearing is that this super-cycle may last considerably longer than 2019 because it's a supply and demand thing.
With such long lead times, and you've answered part of this, are you planning or expecting new facilities to come on board throughout the supply chain, and where? With the tariff issues coming on, it looks like this is going to be more serious than people had thought or hoped, at least in this industry. While the overall U.S. economy will probably benefit from it, this industry may or may not. These could be significant tariffs and could last for quite some time. Has that switched or changed where the expansions that have been planned may happen?
Martin: Let me answer that in two parts. The tariff issue is a whole different issue that we can discuss. When I've met with several manufacturers, I've visited the Vishay and Yageo factories and several others in China and met with the Murata reps directly, so I've had quite a few conversations. The general feeling that I get or what I understand is that the parts that are in the greatest demand are what we would have called popcorn parts—the really low-cost penny parts. Over time since the dot-com crash in 2000, the prices have been depressed to the point where they're very low margins for the manufacturers, making their average selling price not profitable for them.
Feinberg: It's not attractive for expansion.
Martin: Yes, not attractive. So, it's unlikely that manufacturers will come in unless they're third tier, which would likely be in China. We're seeing a few third tier pop up in China, although they will not quote us. They said they're already at capacity. None of the mainstream manufacturers that I've talked to are expanding in the larger case sizes. They are expanding in the 0201 and the 1005 case sizes, but they are not expanding in the 0402 and above. That's where most of the industrial sector is still located—in the larger case sizes. I think the only real relief that's going to come for those part sizes is when the OEMs decide to do a redesign into the smaller sizes.
Now, from what I also understand, these larger case sizes, the 0603 and up sizes, will probably have no more than a three- to five-year lifecycle. When the automotive industry phases them out, I believe most of them will be gone, so that's what's going to drive the technology shift. We've been told that a current automobile has about 3,000 MLCCs in it, and an electric vehicle has 30,000 MLCCs. When they go through with this tight market designed to the smaller 0201 and below, then I think you'll start to see relief and the few players that are left will be able to pick up the demand for the larger size parts. But, in the larger case sizes, I don't see much new capacity coming on in those.
What we're doing in that sector is working with our customers. We're doing BOM analysis for them and giving them options for crossing. I'm meeting with a lot of them personally. We're encouraging them to look at redesigns based on the lifecycle of their products to make sure that they have coverage for their end-of-life parts. Murata put out a notice earlier this year on end-of-life a lot of parts; March of next year is the last buy. When that hits in March, there will be a big shortage surge, and I believe the lead times will move out further than they are today when all the customers that haven't acted realize that they're not going to get these parts. Murata is the biggest player and has somewhere between 30–40% of the global market share. We've already received notice from other manufacturers like Kemet and AVX that they're not pulling out of those parts, but that they can't handle the additional requirements that are going to be coming at them. So, I believe there's a major problem coming the first of the year.
Feinberg: I've had a few very slight indications that there are a few OEMs considering doing what was done back in the '60s and '70s and starting to do their own fabrication and assembly. That's something they went away from totally. Have you heard of any that are considering doing a little of that?
Martin: Yes, we've heard some pulling it on the semiconductor side. Now, that may help the components like MOSFETs, but won’t help MLCCs. We've heard that a couple manufacturers are pulling some back in house in the U.S.
The other problem that we're hearing is that the three main fabrication manufacturers located in Taiwan are experiencing ingot shortages, so they're having some supply problems on their end. I just read a notice on TSMC, the largest, that they brought a new machine online. The machine had a virus, and they lost their whole run of wafers; it delayed the Zilinx parts until the fourth quarter 2018. I think everybody's trying to go through the same type of analysis on the semiconductors so that they can pull those back in-house—probably easier.
Yageo, when I was there, told us the resistors are experiencing raw material issues, which may be driven by the Chinese environmental requirements that they've put in. They've been closing quite a few of their suppliers due to water and air purity requirements. They've had issues with the metal, paper, and substrates that they use. They've had quite a bit of issues just getting raw materials for the resistors. Yageo is your biggest resistor manufacturer, and Murata is your biggest capacitor manufacturer, so there are levels of supply chain issues all the way through. There are raw material and capacity issues. They're moving to support the higher needs of the automotive and handheld sets. They've shifted lines down away from the industrial sector, and there are a lot of different things happening all at the same time.
Feinberg: There's even a tremendous difficulty for getting laminate. There are long lead times for PCB fabrications to have laminate just to make the circuit boards.
Martin: We had that problem last summer where they couldn't get the foil sheets to build the laminates because they were going toward batteries and electric vehicles. We haven't had a lot of fabrication issues recently. Most of our suppliers in China are back to near normal lead times—about six weeks to 8 weeks. They had jumped up to over 10 weeks last summer, and prices escalated. The prices have come back down and stabilized a little bit and the lead times dropped down. Most of those, at least with our suppliers, have been fixed on that end. However, we continue to run into trouble with passives, resistors, capacitors, and discrete items like MOSFETs, diodes, and those types of devices. That's what's giving us a lot of hard work.
Barry Matties: Some companies anticipated the shortage for the capacitors and started stockpiling in early 2017—maybe even before. When you look out, what other shortages should we be looking at that people should consider stockpiling?
Martin: Right now, the resistors and MOSFETs are the next thing, which have just come up as being real problems (other than Vishay and Panasonic, which have been a problem all along). I think you're looking at the discrete items. Their lead times have jumped up a lot, which we’re starting to see. We've had quite a few MOSFET issues pop up. I think those are more short-term problems, though. I don't think those are going to be a long-term issue for this.
The tariff issue has just really made a bad situation even worse. We track the tariffs because we're global and deal with tariffs from all different directions. One of the things we found out was since we're primarily a distribution customer is that all of the distribution inventory is warehoused in the U.S. Even Canadian distributors warehouse all of their goods in the U.S., that makes them subject to tariffs.
In our China facility—because we have U.S.-based customers—there is special manufacturing pricing that can only be obtained if we buy it through the U.S. We have some programs that we still have to buy parts out of the U.S., which are now subject to the tariffs. List 1 caught the electromechanical and the LED—not the diode, but the LED. List 2 has pretty much caught all of the electronic components out there, so it's now affecting all of them. List 3 caught most PCBA’s, raw PCB’s and most other parts used in the electronics products. Through the distribution channel, they are working on mitigation strategies for Canada, Mexico, and China, so they won't have the tariffs pass through. We have three main ways the tariffs are coming at us. Right now, we know of 14 manufacturers who are the importer of record and are embedding the tariff increase as a price increase.
We've seen price increases on some components as much as 80%, so they're putting the price increase and tariff together. We have some parts that the distributors are the importer of record. They are mitigating most of those through doing a free-trade zone, duty drawback process, or utilizing a warehouse in Guadalajara, depending on who the distributor is. The last way the tariffs are coming at us is that the manufacturers are the importer of record. They invoice the distributors, who invoice us. In that case, where it gets complicated is that the manufacturers that are invoicing are invoicing at the book cost—not the debited or final cost.
Where you may have a special price for 75 cents, the book cost is $1.00. You're going to pay the tariff on the dollar—not the 75 cents—so it's a real challenge right now. We are capturing the harmonized tariff and HTS codes on all of the parts. We ask for the country of origin when we place an order. And if we have an option to use a country of origin other than China, that's where we're going, even if the price is a little higher.
We are hearing that the manufacturers who already have sites outside of China are looking at rescheduling their business for goods based in North America to sites outside of China. We haven't seen a lot yet, but we're hearing it's happening. For our U.S. facility, we’ll be very carefully looking at who the manufacturers are and where it's coming from. If we have options to avoid this 25% tariff, that's where we're going.
Andy Shaughnessy: My readers are primarily designers. Let's say you have a product coming out next Christmas in 2019. Other than stockpiling, how do you plan for the future? What should they do to try to get ahead of this?
Martin: When I meet with engineers, I tell them if it's a brand new product, design it in the smallest case size possible; 0201s and 0105s are your best bet. In those cases, if you can approve automotive grade, you have a better shot of getting parts. They tend to be a little higher priced, but you can still get parts in the automotive grade. If you can't design it, you need to offer as many alternatives as possible. The worst thing you can do is come out with one sole-source part because you will ultimately have supply chain problems at some point, whether it's today or later.
What we ask our customers to do before they stabilize and while they're in the process of design is to let us analyze their BOM. We use IHS Connect software as a predictive modeler. What we like to do is work with them while they're still in the beta stage. If you have a partner that you're going to work with to outsource your product, you need to give them the authority to place parts on order as soon as you qualify them, so that you can at least get in the pipeline. It's more successful to pull in parts once you have them pipelined than trying to start from scratch and pull in parts to wait for lead times.
Somebody needs to put those on order. The reality is that unless there are non-cancelable, non-returnable parts, you can cancel or reschedule within 45 days typically without any problems. If they’re some of the really hot parts, you have no liability. There are a lot of strategies that you can go with if you have a design coming, but you have to think ahead on planning the supply chain.
Shaughnessy: It sounds like they just need to stay on the ball.
Martin: There's no magic bullet.
Las Marias: When it comes to supply chain, one of the issues is counterfeit components. Now that the industry is facing this severe shortage, do you expect an increasing number of counterfeit components in the market?
Martin: Absolutely. That's one of the things that we talk to the customers about. The grey market is actually drying up. A number of manufacturers have shut the back door for the grey market suppliers—the independents. Further, some distributors have shut the front door, so they can't order from their sites. The amount of inventory that's still available through the grey market is getting tighter and tighter, which means your risk of counterfeit goes up.
We have a small set of approved independents that we’ve audited. Each of them has independent labs that they work with for quality checking. The distributors are now requiring that they are authorized to do destructive testing because of the high risk of counterfeiting. We haven't seen any counterfeit material yet, but we are very cautious and watchful for it.
Las Marias: What can you advise our readers when it comes to these issues in the supply chain?
Martin: They need to forecast. Even if it's not 100%, you need rolling forecasts for 52 weeks. We understand that customers do not have that much visibility, but they need to give their partners as much visibility as possible. A 52-week lead time is pretty standard. Every BOM has components now that are over 40 weeks long—every one of them. That doesn't mean that we can't still find parts, but when the grey market, available inventory, and distribution channel dries up, there will be no parts. You'll be forced to wait for it. The customers who are in the best position are doing rolling forecasts. They update it monthly out 52 weeks.
When their partner gives them an alternate component, they need to approve it very, very quickly. Usually, if it's in the grey market these days, it's gone within 24–48 hours. If the customer takes a week to approve it, the inventory is gone. The next time we find it, the price may be up. I would suggest that they buffer critical stock components and authorize additional buffer stock on the allocated components. Then, look at a redesign for the smaller case sizes. If the lifecycle of their product has three to five years remaining, they may want to look at putting an additional buffer for the end of life. If their product lifecycle is eight to 10 years or more, then they really should look at redesigning the small case sizes so that they'll have sustainability.
Finally, they need to look at an alternate type of materials. On the MLCC, you can typically replace a four to one placement on the ceramic to tantalum chips. Although there are some lead time issues in tantalum, it isn't nearly as bad as ceramic, and there's the newer technology—the polymer. Polymer is a good choice If they see their product is 35 volts or less. They need to look at potentially a different technology other than ceramic. On the Vishay CRCW series resistor, if they can take the non-automotive temperature range, you can add a C to the end of the part number and those lead times drop to approximately 12 weeks from 80 weeks. There are a lot of things that they can do to help themselves.
Matties: Are there other strategies designers can use? You mentioned the lower-case size, which makes sense, but are there other strategies the designers can employ to combat this?
Martin: Yes, if they generally just look for long-term production, there is a huge technology shift that's happening right now. We're at the beginning stages of it now. I think it's going to accelerate where the industry is going smaller. So, a designer needs to look at using the smallest size parts that they possibly can. Designers tend to use the parts that they're comfortable with. It is not unusual when we see a brand new design that it has obsolete components.
That's one of the reasons we suggest to our customers to let us review their component list before they finalize the design. We can offer suggestions to them on alternative components given the same form, fit, function, and placement. It's designing for the supply chain. There are a lot of things that they need to look at designing for the long-term supply chain. More and more devices are going to become electronic, so the market itself is going to continue to expand, making it increasingly difficult to get larger parts. That's what I would tell designers.
Matties: Do you have designers on your employee list as well, and do you offer that as a service?
Martin: No, we work with outside services if a customer needs design. I have component engineering on my staff. We do a lifecycle analysis on the component using predictive modeling, and it's on a scale of one to five. I tell designers that unless you're in the leading-edge technology, you want to stay away from parts in lifecycle one. Those are brand new parts, and they're not accepted in the market. The prices are very high, and there are very few manufacturers.
If you're putting in a new design, you want to look for a lifecycle two to three and a half on the curve. A two means that it's starting to grow, more manufacturers are coming in, prices are dropping, and supply is higher. Lifecycle three is when the most number of manufacturers are there. It's at its lowest price point, and it gives you the largest supply chain opportunity. Once you start dropping below three and a half or four, the parts decline, manufacturers move out of the market, and prices go up. And, of course, five is obsolete.
If you're doing a new design, in the BOM analysis we do for customers, we show them the lifecycle of the parts and say, "You have to know the lifecycle of your end item. How long and how does it match with the lifecycle of the components?" But if you're in a new design and looking at components that are already headed towards the declining stage, you will have supply chain problems.
Matties: You're right. Designers should be aware of this fact at the beginning.
Martin: In my experience, most of the engineers are somewhat insulated from the supply chain so that they really don't know the lifecycle of those components. However, it's probably the most critical aspect in a new design to make sure you have sustainability on it.
Matties: How many designers contact you with the BOM review before they do their designs?
Martin: We've been pretty aggressive at doing these BOMs. We do two things for our customers including a BOM health analysis, where we do the lifecycle of the parts and show them the MLCC situation. On those MLCCs, I'm crossing Murata’s end-of-life list to all of their components by the voltage, microreference, and dielectrics. We tell them which are going to be their troublesome long-term parts, and we also do an inventory and bumper stock model where we pull in the market lead times.
When I do these with customers, it opens their eyes. With the customers that we've done it with, they push pretty hard on their internal design teams to be very aware of what's happening and get ahead of the curve. It is effective when it's done.
Nolan Johnson: From where you sit, how would you recommend the designers get more of that information? Obviously, once they're doing the analysis with you on what they think is their finished design, any problems may cause them to have to go back and do a complete redesign. Hopefully, it not that serious, but that's sort of the dynamic that's getting set up here. If they can make better decisions in the design tool and give you a better BOM and design with up-to-date parts, where should they go to be effective in that?
Martin: With most of the designers, the distributors call on them. That's where they get their sample parts and that type of thing. They should ask their distributors for the lifecycles because they have that information. They can use a software service. There are two of them: Silicon Experts and IHS Connect. Both are excellent software. The distributors themselves have this information and should work with their supply chain if they don't have it.
What I used to do a lot of was have lunch-and-learn meetings when I was on the OEM side. I'd bring in distributors. But in this world, and the way the technology shift is happening, they have to get ahead of this. It is not design as usual. As I said, there is a huge technology shift that is picking up speed. If they don't know the lifecycle of the components, they will be looking at major problems very shortly.
Feinberg: First of all, let me compliment you. You're extremely knowledgeable about your topics and very well prepared. It's just a delight to have this conversation with you.
Martin: Thank you.
Feinberg: On the design side, are you seeing any movement toward low-temperature solder that might trigger a significant move away from wave soldering at your level of manufacturing?
Martin: That one I can't answer for you. I'd have to ask our engineers. I'm not an engineer—I'm a supply chain person—but I have not heard of that yet here.
Feinberg: If you do hear of anything, please let us know. It's something that I'm following, and I have some interest in.
Martin: We have a great head of engineering I can connect you with. His name is Brian Morrison. I'm sure he could answer that; he's very technical.
Feinberg: We'd love that opportunity. The other comment I have is on the forecasting. One of the things that makes forecasting so difficult is that a lot of the companies, the OEMs, don't and can’t always talk to each other. Therefore, they kind of take each other by surprise, which they should do if they're trying to compete. I think a good example of that is Apple has just announced a set of new iPhones that are truly amazing in design, but they got caught a little bit behind Samsung, who is pushing 5G at a rate much faster than anyone thought would happen. All of a sudden, everything could change in the next 12 months on that end of the spectrum. This makes it difficult to do forecasting because the major pieces of information that would be very helpful with forecasting are being held very close to the vest by the big OEMs, as they should.
Martin: I can see that, particularly on some of your consumer goods. However, most of the types of products we work on are more industrial. They tend to have more forecast visibility. Most of them are not leading-edge technology. The handset industry drives the component market. Wherever they go, that's where the rest of us end up going too. But the rest of the customers—the industrial base customers—tend to have much more visibility or predictability than the latest designs. Most of them are not earth-shattering designs that come out. They're enhancements or improvements to what they've already offered.
Matties: Where are you located?
Martin: I'm physically located in Tampa, Florida. I work remotely and travel.
Matties: Good for you. We're a virtual company as well, so we have people on the call from all parts of the world right now.
Martin: I appreciate all of the attention we're getting, and I hope you find it helpful.
Matties: Very much so. Is there anything we haven't talked about that you feel we should cover?
Martin: As I said, we're fighting tariff issues. We’re mainly waiting for manufacturers to move. I think there's going to be a big move on business out of China to other regions to mitigate the tariffs. It hasn't really had a huge impact yet, but I think it's coming. I think it's going to have a significant impact in a few months. Right now, the distributors have been really good. They're absorbing what they can’t mitigate for us, so it's going to have a huge impact with the manufacturers on what they choose to design and which products we buy. That's coming at us. And then, come 2019, I believe the lead time for the larger case sizes of MLCCs is going to go out further than it is right now. That’s going to be a huge problem.
Matties: It's not just manufacturing capacity alone, it's actually a shortage of the equipment to produce them. There's not enough equipment as well.
Martin: Yes. I was at Vishay in China this June, and they told me they had equipment on order for a year, and they had pushed it out because the manufacturer couldn't get parts.
Matties: It's a deeper supply chain issue beyond just the floor space.
Martin: Exactly. The manufacturers can't get the machines to make more parts because the machine manufacturers can't get the parts.
Matties: Thank you very much, Stephanie. This was very informative.
Martin: Thank you.
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