US Tariffs Threaten to Slow Industry Growth
Electronics manufacturing is enjoying the longest expansion in many years with the PHLX Semiconductor Index over doubling in the last two years.
The demand for electronics is growing by application in virtually every sector; increased safety and autonomous vehicles are fueling automotive electronics, improvements in less invasive surgery and drug delivery systems in medical electronics, the impending rollout of 5G in telecommunications and new areas of technology such as wearable tech, cobots and 3D printing are all fueling a steep growth curve.
But, this expansion has not been without its problems. Component shortages have made it increasingly difficult to build boards to order, resulting in board redesigns and in some cases buying components from less than trustworthy sources on the gray market. There has also been a significant rise in counterfeit components finding their way into the supply chain.
The mounting pressure resulted in the US administration slapping 25% tariffs on a wide range of Chinese semiconductors, many of which were originally designed in the United States.
Production equipment makers have also been suffering delays as a result of this elongated supply chain. Shortages in some key components have extended equipment lead times to as much as six months in some cases. There are even stories of companies competing over the same supplier and trying to curry favor, in an effort to expedite delivery of their parts.
Add to this mix, the heightened tension around US-China trade relations and the pressure on prices becomes inevitable. The US administration has been fighting hard to protect intellectual property, both at home with the recent ban on Singapore-based Broadcom acquisition of Qualcom and abroad with negotiators insisting the Chinese demand that companies release copies of their IP to gain market access amounts to unfair trade practices.
The mounting pressure resulted in the US administration slapping 25% tariffs on a wide range of Chinese semiconductors, many of which were originally designed in the United States. The Semiconductor Industries Association (SIA) claim this amounts to a tariff on our own products.
None of this looks likely to halt the demand for electronics assemblies in the foreseeable future, but it will introduce prices increases and slow the rapid pace of growth. Some would argue this is not a bad thing.
However, one note of caution, semiconductor sales and inventory are strongly outpacing those of corresponding PCB sales, which would indicate that manufacturers are stockpiling. When this current cycle eventually does come to an end, we are likely to see a lot of this inventory being dumped at lower prices and much of it ending up on the gray market. Manufacturers would be advised to keep a very close eye on their materials inventory.
– Trevor Galbraith