Last year chasing manufacturers for delivery, this year chasing customers for goods, the role reversal within a year has a deep feeling for many friends in the electronics industry, and the changes in the economy are like turning over a book. Having seen this situation of high inventory and low demand, the entire downstream outlet has suddenly changed from extreme optimism to extreme pessimism in the face of the market.
In the first-quarter financial reports of Taiwanese laptop brands ASUS and Acer, inventories were as high as 193.3 billion (154 days) and 63.8 billion (80 days), while a large industrial computer manufacturer had as high as 128 days of inventory. A record high. Last year, an additional order was placed on the chest to ensure that the goods would be pulled. This year, the chest was broken and the supplier was afraid to see it. A domino game from consumer terminal demand to upstream is accelerating the spread. The crash of the stock market made people aware of the seriousness of the situation. When the inventory sluggish occurred, suppliers and customers kicked each other’s balls, and at the same time, they thought deeply about how to avoid it.
What Causes “High Inventory, Low Demand”?
Going back to the source, the optimistic scenario in 2021 starts with the ability to spend money without effort. When consumers are full of cash and stock prices are rising, investment is prevalent and most investors can get it in the optimistic stock market. A piece of the soup makes consumers more confident and brave to consume. The author believes that the main reasons are as follows:
- The epidemic situation has caused cargo congestion in ports, making it more difficult to obtain products.
- The key IC stockpiling problem.
- Out of stock repeat order problem.
- End customers are overly optimistic and place large orders.
- Over-optimistic messages from customers made the company evaluate the market and misjudged its stocking strategy.
When funds are withdrawn from the stock market, the funds in the hands of consumers shrink instantly, and the frozen consumption power makes consumers less confident and tends to be conservative; when the market does not dare to consume, it will attack the rising prices due to inflation, naturally because of Demand is weak and subdued, which is also the purpose of the US Federal Reserve’s interest rate hike and shrinking balance sheet.
- rate hike: A substantial increase in the cost of borrowers leads to a decline in spending power (especially for home loaners).
- abbreviated table: To shrink the balance sheet is to draw money.
These two methods are to force the optimistic market to calm down. Once the stock market is withdrawn, it will cause a collapse. When consumers can only spend their money on necessities of people’s livelihood, there is no demand for electronic products. Detonation, the real problem is that it takes time to prepare materials, produce, and manufacture. Most of them are planned half a year ago, and then the market changes in an instant, and manufacturers have no time to respond, and finally detonated high inventory and low demand.
“Unreasonable demand” detonated the storm of order cutting in the supply chain
The electronic industry is planning the follow-up orders, usually from the Forecast volume (estimated volume) given by the customer and using Email as evidence, even when an abnormally large order occurs, the internal control will require the customer to pay the Down payment (down payment) to reduce material preparation. risk, or to sign a purchase contract to clarify the ratio of responsibilities between the two parties in case the client’s demand does not meet the order, but the electronics industry has long been the client’s power, especially the major customers who hold large market orders, and suppliers who want to win flock to them. , often sign unequal contracts and payment terms for more than 120 days, and even the client only gives Forecast but not actual orders, but it is not uncommon for suppliers to prepare materials.
Under the optimistic atmosphere of last year, from the optimistic estimates of brand factories, they desperately increased orders and urged system foundries to actively stock up. Even everyone was madly rushing for production capacity and production lines. The forecasts given were extremely large orders, even compared to 2020. In the past, the annual growth rate was at least 30% higher, and many even doubled. The unusually large orders made many companies excited about their business and gave the management an extremely optimistic future. They even signed the NCNR contract in order to grab the supply early in the future just to grab the priority supply (rather than guarantee the supply). The unequal agreement finally caused this year’s unequal agreement. Tragedy, the so-called big orders turned into big swords, and this year’s supply chain slashing storm was also detonated from unreasonable demand.
Pyloten’s urgent order to demand avalanche detonated the supply chain inventory storm
Pelton is a company that combines distance-connected fitness coaches to compete with friends. The revolutionary fitness industry has become a beneficiary of the epidemic, which has driven many design and manufacturing companies in Taiwan to benefit, and even some companies have taken this share. Boom profits hit record highs. However, after more than a year of glory, many fitness startups that used to be full of orders from major Taiwanese factories have now evolved into “large sluggish inventors whose orders cannot be fulfilled” in the supply chain. In the past, most of this type of cases Happened to Chinese customers, rarely happened to American companies, what happened?
The reason is the rapid expansion of multiple mergers and acquisitions and accidents. When Pelton expanded its business, it aggressively acquired many companies and spent more than $40 billion to expand at once. Due to the easing of the epidemic, consumers went back to the gym to exercise instead of staying at home to exercise, and the unexpected market caused consumers to use the product. After being injured, he was finally beaten back to his original shape.
The unreasonable large orders made the supply chain happy, but the stock price fell abnormally, causing disaster in the end
At the end of 2021, Pelton suddenly placed an abnormally large order in the supply chain. Many suppliers did not increase their due vigilance due to the doubled profit of Pelton’s growth and revenue in 2020, and even many manufacturers did not cooperate with The client signed a purchase contract that clarified the attribution of responsibility, and did not ask the client to give a Down Payment deposit in response to the sudden large order. Due to the good atmosphere last year, the authenticity of the order and the terminal market conditions were not confirmed. When Pelton places an actual order, the Forecast will be used to place an order to upstream manufacturers. In the end, the supply chain will be full of inventory, and some companies even have more inventory than the annual profit or even higher than the equity. The upstream chased for compensation, but Pelton broke out a suspected information gap with false orders, and the stock price fell and fluctuated unreasonably.
Afterwards, many Taiwanese manufacturers had nowhere to seek compensation, and the client personnel continued to change the window to make it more difficult to handle things. In the end, many of these types of cases were related to internal control and risk awareness, and even had the possibility of moral hazard. Having experienced the baptism of the inventory storm in 2022, the company will be alert to the generation of abnormally large orders in the future and add more risk control mechanisms.
Don’t suppliers in the electronics industry have equal power?
Many readers may be very confused, as long as a reasonable purchase contract is simply executed, or the customer can claim compensation for the loss, the storm can be avoided, and even the customer is required to directly give substantial orders after confirming the demand or bear part of the payment. The amount of material prepared can also make the channel and brand of this storm a co-bearer. Why is this simple logic difficult to implement?
The main reason is that strong customers with large orders will use multiple suppliers to compare prices with each other and let them compete with each other to reduce procurement costs. This is especially true for super-large customers whose brand sales account for a high proportion of global sales. It is also in the past few years that we can see that the reciprocal relationship between Dali Optoelectronics and Kecheng Precision has finally changed from close cooperation with customers to a relationship of alienation or termination of cooperation because of the desire to rationalize it.
Now more brand companies are delaying the demand from 2022 to 2024. In order not to destroy the cooperative relationship, the supply chain can only touch the nose. Even if the demand may have been changed by 2024, many materials may even have expired or expired. If it is not in line with the use of new products, customers can even use the original price of 1 to 2 percent to negotiate shared commitment. Therefore, even if the order demand is only delayed in this storm, in fact, many just delay the problem and allow time to dilute the problem. But the reality of a recession in earnings reports will cause volatility in stock prices.
Predicting the future, in the inventory storm in 2022, the author believes that the dominoes have fallen, and it is difficult to destock in a short period of time, especially for IC design companies. The difficulty is very high. If the customer masters the design side and the demand side, the customer can’t afford to offend, and the top and bottom can’t afford to offend the double-kill situation.
In the end, we can only wait for the market inflation to be reduced, and the consumer demand will come back with a slow pace to destock. Therefore, the destocking is likely to take at least one to two years. The author estimates that there will be no new revolutionary products. Previously, destocking would not have a chance to defuse this inventory storm until at least the second half of 2023.
(First image credit: shutterstock)