In the third quarter of 2023, the passive component industry’s inventory has returned to normal levels. However, it continues to deplete due to sluggish end-demand. Nevertheless, downstream customers in the mobile phone and automotive sectors have begun rebuilding their inventories. Ample Electronic Technology, a major manufacturer of conductive paste and thick-film conductor materials, has already seen a recovery in its August 2023 revenue, indicating that the inventory adjustment process in the passive component industry, which began in the fourth quarter of 2021, has gradually bottomed out over nearly two years.

TrendForce Insights:

• Upstream operations in the passive component industry are rebounding, but true demand recovery awaits.

In the second quarter of 2023, the passive component industry’s inventory approached normal levels. However, due to weak end-demand, Chinese smartphone and PC manufacturers significantly reduced their component inventories in the second quarter of 2023, leading to continued poor performance for passive component manufacturers. It is expected that after hitting the bottom in the third quarter of 2023, operations will gradually improve. However, the timing of true demand recovery may need to wait until 2024, given the persistently sluggish consumer electronics market.

• AI servers are on the rise, and inductive components are in demand.

General-purpose servers primarily use molding power inductors, with quantities ranging from 20 to 30, an ASP of approximately $0.07 to $0.1 per unit, and a current rating of only 30 to 40A. In contrast, AI servers have power consumption levels generally exceeding 1000W. To improve transient response performance, each AI server requires an additional 10 TLVR (Trans Inductor Voltage Regulator) inductors, with an ASP of around $0.3 per unit. This significantly increases the revenue of inductance components for AI servers compared to general-purpose servers.

• Promising prospects in the automotive market, but validation takes time.

Conventional internal combustion engine vehicles require approximately 300 to 500 MLCCs (Multilayer Ceramic Capacitors), while Battery Electric Vehicles (BEVs) require between 2,000 and 2,500 MLCCs. Self-driving systems will also drive MLCC demand. For instance, in the case of automotive camera modules, the quantity increases from 2 to 10 to 15. From a holistic perspective, non-self-driving internal combustion engine vehicles require around 3,000 MLCCs, Hybrid Electric Vehicles (HEVs) with Level 2 autonomy need over 6,000 MLCCs, and Level 3 Electric Vehicles (EVs) require more than 10,000 MLCCs. This leads to a significant increase in the revenue of automotive MLCCs.

However, entering the automotive sector is challenging and requires at least 1 to 2 years for certification. Nevertheless, once established, it can secure long-term agreements for at least 5 years. Additionally, compared to the slowing growth of the consumer electronics market, the automotive sector offers substantial opportunities and provides a buffer against the cyclicality of passive component industries.

China’s Automotive Price War Rages On: Some automakers have been gradually reclaiming outsourced orders for the battery, motor, electronic control system since May and June, shifting towards in-house production. Recently, they have asked suppliers to requote for second-half orders, with Samsung, Murata, Taiyo Yuden, PSA and Yageo actively vying for contracts.

Due to the more stringent certifications in the automakers’ supply chain compared to tier 1 suppliers, the majority of battery, motor, electronic control system MLCC suppliers still come from Taiwan, Japan, and Korea. Among them, Korean manufacturer Samsung has made significant progress in the Chinese automotive market this year. They have been actively providing sample for certifications and competitive pricing, securing a large share of orders and displacing Japanese manufacturers Murata and TDK, who had long held the lead.

Ongoing negotiations between automakers are expected to conclude with finalized orders by the end of August. According to the channel check from TrendForce, it appears that Samsung will maintain its leading position with a low-price strategy, while Murata, unwilling to be drawn into a price war reminiscent of consumer electronics, will remain conservative with pricing to secure a substantial market share. Taiyo Yuden, PSA and Yageo, though limited in automotive product offerings, have been proactive in their bidding efforts and have secured several orders.

(Photo credit: Yageo)

As the struggle between China and the United States continues, in order to avoid upcoming geopolitical risks, not only have Taiwanese ODM manufacturers begun to shift some production locations, but market research firm TrendForce has also observed that American OEM companies have started to take action, discussing with partners how to reduce the proportion of Chinese supply chains and components.

TrendForce points out that, at present, American cloud service providers (CSPs) and OEM manufacturers have not yet been able to completely cut ties with Chinese-produced components. Among these, passive components and mechanical assemblies are more difficult to relocate due to factors such as cost and yield. However, other components (such as PCBs and power management control ICs) have plans to move out of China.

But where will these component manufacturers go if they want to move out of China? According to TrendForce’s analysis, PCB manufacturers are currently eyeing shifts to Thailand, Malaysia, Vietnam, and India; power management ICs and control ICs have already moved out of China and relocated to Taiwanese factories; mechanical assemblies and MLCC capacities still mainly come from China, with the former being requested to move but facing challenges due to cost and yield considerations.

TrendForce notes that the aforementioned production line and material shifts are primarily led by American CSPs. The overall server supply chain’s subsequent changes still need to be observed. For example, major players like Google, AWS, and Meta have not only moved most of their L6 production lines to Taiwan but also plan to establish bases in Southeast Asia after 2024 to handle cases within the United States, and reserve flexible production lines along the US-Mexico border, which will significantly increase utilization within this year.

Due to the explosion of the COVID-19 pandemic in China, Shanghai has adopted a rolling lockdown policy since March and Kunshan City, a major production hub for the electronics industry near Shanghai, has also felt the impact. According to TrendForce, limited manpower and logistics and suspended transportation options mean neighboring OEMs and ODMs can only rely on onsite inventory to barely meet the needs of production lines, further exacerbating component mismatches. Concurrently, a short-term surge in finished product shipments and demand for material replenishment after the various lockdowns are lifted may gridlock customs authorities, with delivery delays potentially lasting until the end of April before there is any chance for improvement.

TrendForce further indicates, starting from 4Q21, demand for consumer specification products, which account for the bulk of products sold by MLCC suppliers in Taiwan, Korea and China, weakened as customers continue to adjust their inventories. Although ODMs currently predict the demand for consumer specification MLCC will recover month by month in 2Q22, emergency lockdowns caused by the pandemic are bound to impose delays on logistics. Likewise, OEMs’ supply of key direct buy components will also be interrupted due to the Shanghai lockdown.  Shortages of CPU, battery module, and panel materials will impact production lines because materials cannot be delivered to relevant factory warehouses, exacerbating ODM component mismatch issues. On the other hand, the focus of downstream branded customers remains on low visibility and weak demand in the 2Q22 end market.

MCLL supplier production centers in China including those located in Tianjin, Suzhou, Wuxi, and Guangdong, have yet to be locked down but inter-provincial logistics and transportation have clearly felt the escalation of inspection and supervision since the end of March, resulting in prolonged transportation timetables. However, the biggest problem for MLCC suppliers at this stage is they cannot deliver materials to Shanghai and Kunshan. There are a number of large ODM plants at these two locations, such as Quanta Shanghai Manufacture City in the Songjiang District of Shanghai and the Compal, Wistron, and Pegatron campuses in Kunshan. At present, ODMs’ average inventory level for consumer specification products sits at 3 to 4 weeks, which is sufficient to meet the needs of short-term production. However, stocks of certain high-voltage automotive MLCC of 250V or higher specifications and high-end server MLCC size 0805/1206/1210 items may be in danger of depletion.

Looking to 2Q22, the lockdowns of Shenzhen, Dongguan, and Shanghai that began in March have hobbled China’s manufacturing industry and sent it into a period of contraction. In addition, the Russian-Ukrainian war and rising inflation continue to slow demand growth for mainstream consumer electronics, potentially risking recession. With so many unfavorable factors, ODMs must still observe an easing of component mismatching before further considering MLCC stocking momentum after restrictions are lifted. If the pandemic in China cannot be effectively brought under control in the short term, overall ODM inventories will continue to be maintained at a high level for approximately 1 to 1.5 months to prevent similar sudden lockdowns disrupting operations. However, TrendForce believes that it will be difficult for MLCC suppliers to surmise the visibility of customers’ real demand. Once the purchase order situation reverses, they will be unable to respond quickly with capacity adjustments, thus becoming a primary focus of MLCC manufacturers’ risk management in 2Q22.

According to TrendForce, the consumer electronics market will feel the brunt of the weakening stay-at-home economy, the pandemic in China, international tensions, and rising inflation in 1H22. Coupled with the traditional off-season, demand for relevant applications such as PCs, laptops, TVs, and smartphones has cooled significantly and downstream customers have successively downgraded their shipment targets for the year, while demand for automotive, Internet of Things, communications, and servers products remain good. At the same time, the supply chain will build higher inventories in general to mitigate the risk of material shortages due to transportation impediments induced by the spread of the pandemic and the ongoing war between Russia and Ukraine.

1. Foundries

Due to the prolonged lead-time of semiconductor equipment and limited new capacity in 1Q22, the overall foundry capacity utilization rate remains fully loaded, in particular, component mismatch issues continue for parts produced at mature nodes (1Xnm~180nm). Looking forward to the second quarter, although growth in global wafer production capacity remains limited, due to weak demand for end products, continuing international tension, and China’s forced lockdowns and supervision due to the recent spread of the pandemic, there is an opportunity for the supply chain to obtain a more adequate supply of wafers that were previously squeezed by production capacity.

2. Servers

The overall supply of key server materials improved slightly in 1Q22. In addition, due to increasing orders from ultra-large data centers, the general supply cycle of NetCom chips such as LAN IC/chip remains as long as approximately 40 weeks but the demand gap can be bridged by instituting urgent order fees, mitigating actual impact. As the aforementioned situation eases, additional orders for ODM motherboard production are moving briskly, prompting continued stocking of FPGAs and PMICs materials. NetCom chips are also overstocked and the overall market has a reached a “rich get richer” mindset. Material shortages at second-tier ODMs still stifle the production of motherboards for a small number of customers but does not affect the overall server market supply. With improvements in material supply, server shipments will increase significantly in 2Q22, growing an estimated 15.8% QoQ to 3.6 million units.

3. Smartphones

Affected by sluggish seasonal demand, the Russian-Ukrainian war, and rising inflation, market demand has cooled. Thus, material delivery issues in the supply chain have eased compared to 2H21. Although there is still a shortage of certain components, most of these shortages are concentrated in mid/low-end smartphone products. The lead time for 4G and low-end 5G SoCs is approximately 30 to 40 weeks, which is limited by production capacity planning. Since last year, the demand of the mid/low-end mobile phone market has not been met. This is followed by A+G sensors with a lead time of approximately 32~36 weeks and OLED DDIC and Touch IC with a lead time of 20~22 weeks. The production volume of smartphones in 2Q22 will be affected by the interaction of the aforementioned factors with a forecast production volume of 323 million units, or only 6% QoQ, which is lower than the performance of previous years.

4. Notebooks

Also affected by weakening end market demand, discounting client SSDs that are no longer oversupplied, Type C IC, WiFi, and PMIC all currently boast long lead times, with Type C IC the lengthiest at 20~25 weeks. However, compared with TrendForce’s assessment at the beginning of this year, the delivery cycle has not grown longer, so the lead time of these three types of products is expected to improve by the end of 2Q22. As supply chain backlog continues to improve, shipments of notebook computers (including Chromebooks) is expected to reach approximately 55.1 million units in 2Q22, down 0.7% QoQ.

5. MLCC Passive Components

From the perspective of other key components, taking MLCC as an example, demand for major consumer electronic products such as mobile phones, laptops, tablets, and TVs declined significantly in 1Q22, resulting in high consumer product specification MLCC inventory levels held by original suppliers and channel agents and this situation may continue into 2Q22. At present, the stocking momentum for automotive and industrial MLCCs has steadily increased, while consumer specification products have yet to escape the pattern of oversupply. In 2Q22, the MLCC market has the opportunity to alleviate its component mismatch issues through gradually increased production capacity and automotive and server ICs supplied by semiconductor IDM companies, driving stocking momentum at automotive power, server, fast charging, and charging/energy storage equipment OEMs. Vehicle and industrial MLCCs have the opportunity to become primary growth drivers in 2Q22 with Murata, TDK, Taiyu and Yageo as the primary beneficiaries. Consumer specification products, which account for the bulk of MLCC production from suppliers in Taiwan, South Korea, and China, may face continued market demand weakness in 2Q22 due to a slowdown in demand for mobile phones and laptops and continuing inventory adjustment by branded companies and ODMs.

Looking forward to 2Q22, not including servers, demand for end products related to the consumer category remains weak. Components that were originally oversupplied will face more severe price tests due to the imbalance between supply and demand. In terms of materials in serious short supply, more output will be transferred to products with strong demand through the deployment of internal production capacity. TrendForce believes that from the changes in PC market conditions, it can be seen in rapid changes in demand, purchasing behavior has quickly switched from the former over-ordering strategy to actively cutting orders, inducing supply chains to buck the seasonal trends of previous years. Due to the accelerated recent spread of Omicron in China and under the country’s dynamic zero-COVID policy, mandatory and sudden lockdown and control measures may cause local manufacturers to face multiple and complex supply chain problems, which will be detrimental to market performance.