New Distributors Appear as Chip Inventories and Sales Grow

Created: April 22, 2024
Updated: July 1, 2024
New Distributors Appear as Chip Inventories and Sales Grow

The semiconductor industry is experiencing its most profound growth period, and cementing its importance in the digitized world. Now the industry must leverage this growth to serve development in other industries—namely the AI-driven technology makers and data-center operators—to maintain an upward trajectory.

With revenue growth set to exceed US$1.38 trillion in 2029, it seems that more companies have considered their position in this market and set about acquiring their share of its potential. New distributors are appearing thick and fast, which can be factored into the future success of the market, but companies should be aware that unauthorized distributors will saturate the pool of potential suppliers. 

The market has certainly shifted as the rate of supply trails below the demand for semiconductors and electronics makers will look to either go direct to chip manufacturers or source small quantities from secondary suppliers to meet their inventory requirements. 

Chip Inventories in ‘Severe Surplus’

From the manufacturers’ side, chip inventories are increasing to provide a surplus, which was seen in 2023 and—particularly in Q2 and Q3. In Q4, we saw a general increase in semiconductor surplus with a slight trail-off at the end of the quarter. Despite this, greater numbers are there for the taking, which is where our alternative distributors come into play. 

As a result, the chip industry forecasts continued global growth in the market now that surplus is restored. According to the Gartner survey, revenue will return to above 2022 levels and reach US$654.3bn in 2024 (recorded at US$601.7bn in 2022 but US$562.7bn in 2023). Moreover, the market’s growth will also see further recovery, aiming for 16.3% growth in the same year, bringing the industry back from a negative figure in 2023. 

Nevertheless, as demand continues to grow, parts buyers rely on a consistent flow of chips, which is where unauthorized distributors are finding their way by plugging the gaps in the market. Likewise, secondary markets add to the surplus, securing and recirculating parts into the supply chain from old and existing electronics. 

A secondhand microchip and electronics market
A secondhand microchip and electronics market

Essentially, the chip industry’s recovery in 2023 is a result of continued efforts to build up inventories post-COVID. Semiconductor makers saw major disruption from 2019 onwards as the pandemic first hit the APAC region. Moreover, the growing number of uses for semiconductors put the industry on the back foot. 

It’s safe to say that inventory growth chased chip demand for quite some time as consumer electronics, and even automotive innovation, made headway straight out of the post-lockdown gate. 

This recovery isn’t as unprecedented as the pandemic was. The industry had to re-engage post-pandemic—only now it sees an exponential demand for chips and has had to evolve in order to meet the needs of electronics providers globally. However, this brought with it a shift in the way companies source their parts. As companies race to acquire components for new technologies, the demand exceeds the capabilities of even the most respected players in the semiconductor industry—namely the likes of Intel, Samsung Electronics, Micron Technology, and Taiwan Semiconductor Manufacturing Company (TSMC). 

An influx of new distributors in the market bolstered the needs of a growing digital environment, along with a growing trend in secondary component purchasing—also an attribute of a sustainable supply chain that we’ll likely see more of in years to come. 

New Distributors Tap into Rising Chip Demand

Firstly, it is worth noting the meaning of an “authorized distributor.” In essence, businesses acquire chips directly from the manufacturer, and the agreements and terms of the contract will likely be set by the company that supplies the goods. As the holders of power in this agreement, companies looking to purchase semiconductors in one-off quantities or plug a gap in their inventory have less power to negotiate with manufacturers directly, which sparked the need for small-scale, flexible procurement options. 

Microchips pouring from a gloved hand into a suited hand
Businesses usually acquire chips directly from the manufacturer

Unauthorized distributors often source components from overstocking and, in many cases, are known to supply outdated parts or even counterfeit products—a concern for businesses looking to acquire reputable components and provide solid guarantees of safety, functionality, and longevity with their products. Sometimes, these parts are genuine (they are the parts matching the part number grouping), but they may be any of the following:

  • Parts could be from an old lot (>2 years old)
  • Parts could be recycled (desoldered) from an old build
  • Parts may have been on the factory floor for long periods
  • Parts may have been surplus from a past production run with an EMS
  • Parts may be of a lower grade (usually temperature rating) than claimed by the seller
  • The seller may not know the specific part number, only the part family

This raises procurement challenges as more and more businesses saturate the market, and there becomes a need to qualify suppliers to meet specific needs. 

The Octopart component search engine compiles thousands of parts into an easy-to-use directory. The platform also categorizes both authorized and unauthorized suppliers, enabling sourcing teams full transparency of the products they buy. 

Growth Bolstered by Secondary Equipment Markets

Secondary chip markets also have a role to play in the growth of the overall industry, but also delivering circularity of the electronics sector. The emphasis on reusing and repurposing parts leads to a shift in the sourcing paradigm. Not only do existing chips have a place in future products, but they can also drive up inventories, providing they are suitable for use in new electronics. 

microchip inventory
A microchip and semiconductor inventory

This has proven invaluable, particularly when you account for the recent disruptions to the market, plunging many businesses into the allocation matrix

Generating Parts Inventories Sustainably

The ideal scenario for the technology sector—and, in fact, any industry—is a circular economy. To understand why a component surplus could be an issue for manufacturers in the future, it’s worth noting that industries will inevitably aim for a more circular approach to sourcing and acquiring parts in the future. 

The emergence of secondary markets plays into this, bringing valuable parts back into the supply chain—most likely at lower costs compared to those directly from original equipment manufacturers (OEMs). 

New Industries Create Semiconductor Demand

The turbulence of the semiconductor industry may be a result of multiple factors in the early 2020s, but there are more industries today that draw on authorized chip distributors to deliver more intelligent products at fractional prices and at much faster rates. Such inventory requirements means that the top chip manufacturers have a consistently high demand.

With more streams of semiconductors entering the market—i.e., legacy chips being returned to the supply chain and unauthorized sellers delivering on smaller scales—a growing pool of distributors helps to shift the surplus in parts to keep inventories at suitable levels. 

However, this comes at a potential cost as these suppliers are unapproved by chip makers and could encourage potential quality issues. Buyers of items from unapproved distributors may not receive the proper guarantees, and the risk of purchasing counterfeit parts is much higher.

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