Material shortage - bad for EMS dynamics Prices and lead times from Absurdistan?

Dr. Peter Schmitt, CCS

»Prices can no longer be fixed today. And this is not just about currency fluctuations. Even if you have a price guarantee, it may no longer be valid at the time of delivery.«
Dr. Peter Schmitt, CCS: »Prices can no longer be fixed today. And this is not just about currency fluctuations. Even if you have a price guarantee, it may no longer be valid at the time of delivery.«

Delivery times of one year and more, price increases, non-comprehending customers: The material shortage dilemma has many facets and represents challenges for EMS. That at least was the tenor at the Markt&Technik Forum. There was also criticism of unorthodox practices by manufacturers.

The electronics industry is booming. The share of electronics in cars alone, which 10 years ago was between 10 and 20 percent, is forecast to grow to 45 percent by 2025. But this growth is taking its toll: “The allocation situation for components is a constant challenge. The situation has eased considerably for printed circuit boards, whereas with active components the situation has started to ease at least slowly. The current situation with passive components however, can be compared to a lucky dip – every day a new surprise – and difficult to manage, summarizes Johann Weber, chairman of the board of Zollner electronics. At the same time, Weber warns against a “bubble of demand”, especially with regard to passives: The total electronics market in Asia, Europe and the USA is growing by “only” 7 to 8 percent, therefore it is difficult to explain why passives are increasing by 30 to 40 percent, as currently appears to be the case.

Getting the products faster with hot lot surcharges

The focus of the shortage can also vary depending on the size and range of orders of the service provider. According to Andreas Kraus, Managing Director of Kraus Hardware and other forum participants, electromechanical components are also causing problems. Jörg Neukirch, Managing Director of Neways in Germany, has also identified diodes and transistors as problem areas. His main criticism is the fact that manufacturers, for example in the connector sector, in part discontinue complete lines because they need capacity for high-runner products. All components that currently fall under “Low Volume/Low Margin” are at risk of being discontinued or at least temporarily withdrawn from production.

“Or the manufacturer claims to be working to full capacity until 2023,” says Neukirch. However, if the customer is prepared to pay the so-called hot lot costs – i.e. express procurement surcharges – he can get the desired devices faster. According to Neukirch, however, these costs are in the five-figure range. “For connectors, we had to resort to such solutions in consultation with our customer,” explains the Neways manager. Roland Hollstein, Managing Director of Grundig Business Systems, has also experienced something similar: “If we ask what we have to pay on top in order to get the goods faster, the corresponding answers are sometimes already there.” And that can mean a three, five or seven times price hike.

Whether this revenue management – demand determines price, similar to airline bookings – will gain a footing in the components industry of the future will probably depend on how urgently medium-sized customers need their products and are therefore willing to engage in such methods.

Horrendous price increases

The principle of revenue management for pricing is, in itself, legitimate. However, if component manufacturers apply this to obligatory price increases for current and confirmed orders, which is partly the case according to some forum participants, questions about business ethics must be asked. Dr. Peter Schmitt, Business Director of CCS describes the excesses of price policy as follows: “Prices can no longer be fixed today. And this is not just about currency fluctuations. Even if you have a price guarantee, it may no longer be valid at the time of delivery.” Customers of electronics service providers do not always agree that the service provider may pass on to them the price increases for components, which in some cases, according to forum participants, can amount to up to 1400 percent. According to Neukirch, Neways, for example, has written to all customers explaining that prices can no longer be guaranteed over a longer period of time in order to avoid having to bear the additional costs. According to Neukirch, this step is also intended to greatly increase openness and trust between the service provider and customers.

In view of such excesses in pricing policy, it is not surprising that the line between positive stockpiling and “hoarding” is currently becoming narrower and narrower. Schmitt reports from customers who hoard components for their own production and but are also willing to request storage space from their EMS. Volume-related pricing at manufacturers and distributors is also further fueling the precarious delivery situation, says Wolfang Peter, Business Development of Elektron. “Order twice quantity and save 10 percent or more. This, of course, only encourages the formation of order bubbles.”