“The global electronics and semiconductor industries are currently suffering the most serious disruptions to supply chain operations in living memory. Supply chain issues have been driven by a series of interrelated trends that have served to complicate, compound, and increase both the scale and impact of the challenge,” reads our latest research study. “These issues have highlighted inherent weaknesses in global supply chain operations and we’ve seen price rises for key components as well as steep increases in vendor lead times for many goods, which together have placed inflationary pressures on all electronics markets.”
Trends impacting the smart building supply chain include the pandemic and lockdowns, labor shortages, the rise of remote work, increasing automotive industry demand, trade tensions, and the war in Ukraine. These pressures influence the supply of cases, cables, lenses, and packaging, as well as other materials and components that are essential to BIoT markets. The pressure on semiconductor production in particular is both unprecedented and pronounced. While all this exacerbates trade barriers between the US and China, with major semiconductor manufacturer HiSilicon, for example, now effectively unable to supply semiconductors to the US market at all, which disrupts the component supply chain for many smart building vendors.
“Recent disruptions have shined a light on one of the downsides of an economy where various aspects of product development, manufacturing, inventory and delivery are dispersed across the globe,” reads the research report. “For decades now, supply chains have been optimized for just-in-time manufacturing, a principle designed to reduce the amount of inventory stored in warehouses, in favor of manufacturing and shipping products as they are ordered. Recent disruptions to the availability of critical components has led many to question this approach and consider whether it might be wiser to manufacture and hold inventory closer to home.”
Chinese manufacturing has become an integral part of the smart building’s supply chain for a wide range of products. However, many in the West are actively fighting their market’s over-dependence on Chinese manufacturing capabilities. In the US, the government launched a US$25 billion ‘reshoring fund’ in May 2020, to enable manufacturers to move their production bases and complete supply chain away from China, and ideally back to the US. Although, other emerging economies in the region, such as Vietnam and Thailand, offer an attractive alternative, with low labor costs and a large captive market. The likes of Intel, Apple, Google, and Microsoft have already announced plans to shift a portion of their production into Southeast Asian nations.
“Investment incentives offered by alternative countries have encouraged some to reassess their global supply chains structure too. However, with years of investment in the supply chain ecosystem, a shift such as this seems easier said than done,” states our in-depth report. “Companies have spent years and sometimes decades building relationships, manufacturing facilities and logistics operations to support their legacy supply chain networks. Many of these supply chains are dependent not only on Chinese manufacturing expertise for the end products but also on raw materials and intermediate components used in their products - so any supply chain changes at scale will need both investment and time to occur.”
Supply issues were expected to stabilize moving into 2021 as both global production resumed and supplies normalized. However, pandemic-induced supply shortages persist. Estimates from logistics and supply chain industry experts for when these supply chain issues may ease off vary wildly. Even the more optimistic projections, such as that of US Federal Reserve chair Jerome Powell, see the crisis continuing until the end of the year. Semiconductor manufacturing and supply is in a similar situation, the chip industry is planning to ramp up production to meet the new levels of demand, but much of the new capacity will not come online until the end of 2022.
“If anybody was still hoping we would be out of the woods by 2022, unfortunately we're not there yet. Current geopolitical conditions, as well as inflation and Covid-19 outbreaks, are making the situation more tense. The electronics supply chain industry is bound to experience difficult months, with several indicators staying or even turning red,” said Richard Barnett, CMO at Supplyframe. “Therefore, companies need to change their approach and see how they can manage and operate with these shortages. Today, new forms of intelligence are arising, and organizations must seize and integrate them to better circumvent hazards and convert them into opportunities.”
Supplyframe, a provider of Market Intelligence for the global electronics value chain, expects growing challenges into next year and through the first quarter of 2023, when they expect more than 70% of lead times to increase. “During that time frame, analog, complex semiconductor (ASICs, MCUs, MPUs, PLDs), flash memory, non-ceramic capacitor, resistor and standard logic devices are forecast to rise in price with very limited exceptions. Most of the same devices will also remain at or exceed already elevated lead times,” Supplyframe stating in a late April 2022 press release.
Despite bleak forecasts, traditional supply chains will recover quicker than new ones can be established across the smart building industry and all affected sectors. This leaves companies with a choice, either to ride out the storm and get back to full operation in a year or two, or to establish new production and supply chains at great cost in order to be more resilient against future pandemics, geopolitical tension, or other crises that may impact their business.
The answer for most large companies will probably be a bit of both, some value chain diversification while holding on to key assets and partners in China. For smaller companies, moving away from Chinese companies presents a greater risk for the long-term but not finding a solution to the ongoing disruption may have critical short-term implications. Across the smart buildings industry, supply chain disruptions are forcing companies into decisions that could shape the future of their firm and the future of the market as a whole.