Edgewater Research: High Performance Analog Supply Chain - June 2023

Component Insights – June 2023

Important Disclosures in the Appendix

Limited Change to Fundamentals M/M, Backlogs Supporting Shipments, Inventory Remains Problematic

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Industry Downticks M/M; Automotive Moderating with Increased Pressure on LTSAs/Pricing 

Key Takeaways

1. 2Q noted as tracking flat/down Q/Q, relatively in-line. B2B <1 broadly with bookings recovery timeline pushing out to 4Q23.
2. 2H demand projected flat to down vs 1H on continued soft macro and inventory rebalancing, with more downside than upside risk.
3. Auto customers noted as increasingly pressuring suppliers to lower prices, requesting revisions to LTSAs, and in some cases lowering 2H shipment commitments as a strategy to put pressure on suppliers.

Top 3 Channel Comments:

• B2B for all suppliers in the channel is between 0.6x and 0.7x. 2Q POS globally looks flat to down Q/Q across markets, POA is worse. Expectations for a broad recovery in bookings are now pushed out to 4Q23/1Q24.
• Auto demand is leveling off. Customers are backing out from 2H orders to exert pressure on suppliers like us. Those who have LTSAs say they will buy only 80% of what they committed for the year saying won’t buy more unless we lower prices for the remaining 20%.
• Bookings have really dropped in the past month; we are only booking small orders. TI has started to enforce NCNR orders and shove parts to customers. This is making our customers push out our orders because they are getting over-inventoried.  It is really pissing off customers that TI is doing this. It may help their short-term numbers, but it is another nail in the coffin for customers.

Other Datapoints of Interest

1. TI continues to see execution/supply challenges, due to lower mfg. yields, order mgmt. system issues and labor challenges.
2. TI still price aggressive in direct deals, turning more competitive on TI.com in China; seen as pivoting enforcing NCNRs in 2Q.
3. Pricing holding largely stable for HPA for 1H23; seeing some concessions in 2H23/2024 and growing pressure from broker pricing.
4. Strongest end markets remain Military/Aero, Medical, Energy, other Industrial showing increasing signs of slowing.
5. Auto turning mixed on inventory rebalancing with weaker Auto Electronics but cont. strength for power ICs for power train/safety.
6. Datacenter still soft for traditional infrastructure but partially offset by material AI upside creating shortages from Infineon, Vishay, TI.
7. CE/PC/Mobile demand still soft with hopes for a 3Q demand uptick but views on the recovery curve are muted on weak end-demand.
8. Europe viewed as having peaked in 1Q and likely down Q/Q through CY23. US down ticking with growing inventory concerns.
9. China 2Q tracking flattish Q/Q with sub-seasonal outlook for 3Q+. Gov pressuring OEMs to procure +65% of BOM from local ICs.
10. EMS noted deliberately delaying payments to distis to slow down product shipments due to challenges managing inventory.
11. Feedback continues to suggest customers working to move away from Microchip long-term due to less friendly price/supply practices.
12. MPS noted continuing to gain share in PCs; still selective in allowing order pushouts/cancellations.

Conclusion

Following several months of stable trends for the High-Performance Analog (HPA) supply chain, our research points to a step down in Fundamentals in late May and into early June. By end market, the consumer facing markets (Smartphone/PC/CE/etc.) remain muted and the overall Compute/Server market is muted with upside from AI only boosting a select number of suppliers/technologies and overall server demand remains muted. While these markets are largely unchanged, we see signs of an inflection in Auto (mainly ICE) and a broader slowing in Industrial (mainly inventory digestion). While fundamentals appear slower, we remain confident the slowing is driven by elevated inventory levels across the supply chain after 2-3 years of above market growth driven by the shortages stemming from Covid and other supply chain disruptions. We remain cautious over the near-term and continue to expect a longer-drawdown of inventory that now appears likely to extend into early 2024. 

HPA Insights; June 20, 2023; Kevin Rottinghaus, Sean Muir, Dennis Reed, Nik Todorov

APPENDIX

We, Kevin Rottinghaus, Sean Muir, Dennis Reed, and Nik Todorov hereby certify that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities referred to in this research report. We certify that no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. The analyst(s) responsible for the preparation of this report have no ownership stake in this company. Edgewater Research Company provides no investment banking services on this or any company. Proprietary research and information contained within which forms the basis for findings or opinions expressed by Edgewater Research Company may be used by Edgewater Research Company for other purposes in the course of compensated consulting and other services rendered to third parties. The information transmitted by this email is intended solely for the person or entity to which it is addressed. If you are not the intended recipient of this message, be aware that any use, review, retransmission, distribution, reproduction or any action taken in reliance upon this message is strictly prohibited. If you received this in error, please contact the sender and remove the material.