In 2023, the world went through a "major shortage" in the semiconductor industry chain. However, though the economic situation quickly corrected, uncertainties such as inflation and interest rate hikes meant that end-user demand for consumer electronics remained sluggish.
The mid-to-long-term trends of the next decade revolve around clear themes such as "future cars" and "application-driven" technologies. Nvidia CEO Jensen Huang's statement about "AI's iPhone moment" has also shown the global tech industry a light at the end of the tunnel.
Despite that, has the inventory issue truly been resolved? What are the industry's long-term strategies? What kind of international perspective is required to go beyond Taiwan? These are the questions DIGITIMES founder Colley Hwang and Avnet global CEO Phil Gallagher hope to answer. This is not just a conversation between the CEO of an IC distributor and the president of a technology news outlet but also a professional exchange between a seasoned semiconductor veteran and an experienced analyst.
Avnet is a Fortune 500 company and a global electronic components distributor that provides electronic components, industrial automation components, testing and measurement products, and more. It serves over 1 million customers across 140 different countries.
The three key factors of industry transformation: semiconductor, ICT supply chain, AIoT
Based on data from DIGITIMES, Hwang stated that he believes the focus of semiconductor industry operations is changing. From 2023-2024, the tech industry will be driven by three key factors: semiconductors, the ICT supply chain, and AI-driven IoT (AIoT). This is a stark difference from the past 20 years, which have been dominated by mobile phones and PCs. The market opportunities driven by applications will be even greater in the future.
One such application is EVs. The Chinese EV market contributes nearly 60% of the global market. Europe has companies like BMW and Volkswagen, while Japan has Toyota and Nissan. Traditional automakers have high market shares in the existing automotive industry, but the future of the automobile industry will be more than just manufacturing.
For example, India is already the world's third-largest automotive market and has policies in place to attract companies to produce EVs locally. India is likely to serve as a balance between China and other emerging markets in the Asia-Pacific region.
As with automotive components, Hwang stated that companies like Infineon, NXP, and STMicroelectronics (STM) are the best at providing components for EVs. They typically have about 25-30% of their wafer fabrication outsourced to Taiwan, so it's essential to understand what they want. Investment in TSMC's German site is set to exceed EUR10 billion (approx. US$10.7 billion). TSMC will be responsible for operations and hold a 70% share while European partners Infineon, Bosch, and NXP will each hold 10%.
When asked about how a distributor like Avnet will approach this new market situation, Gallagher admitted that the current industry situation is unlike anything he has seen from 1990 to the early 2000s. While the company has been severely affected by market fluctuations in the communication and industrial sectors, they have also made good progress in the medical and automotive sectors.
In the automotive sector, for example, Avnet wasn't a major player 25 years ago, but it now has over a thousand different competitors. Every new entrant into this sector makes the situation even more exciting. In particular, he is very optimistic about the prospects in the Asian market.
Globally, the European market has displayed a resilient performance as well. Despite issues like inflation and the energy crisis, Avnet's business in Europe has been consistently strong. While a seasonal slowdown is expected during the summer, the industrial sector remains highly flexible.
As for the US market, they did encounter some challenges in the past, involving the system and management security teams. However, over the past two years, operations have successfully returned to the same performance level as 6-8 years ago. The main feature of the US market is its steady growth. While "growth" may be a slight exaggeration, Gallagher remains optimistic about the US market, especially the aerospace industry.
With the global supply chain reorganization, new opportunities surface for distributors
Gallagher pointed out that previously, the pandemic disrupted global communications and caused significant disruptions in the global supply chain. It wasn't just technology, as there were also shortages of some key components. However, this situation also presented an opportunity for "the role of distributors."
More and more companies have expressed the need for supply chain help. Right now, most companies have progressed too far in terms of core capabilities like Just-In-Time (JIT) production and outsourcing. From a supply chain perspective, these companies often don't even know where their parts are, showing a lack of transparency.
These suppliers, no matter where they are located in the world, need their products to have visibility. Therefore, they need a supply chain, but they often don't know how to connect all of their suppliers. This presents a real opportunity for Avnet.
Over the past two years, many large OEM clients have been inquiring about supply chain solutions. The rules of the game are changing, and more services are emerging during the supply chain transfer process. Avnet is excited about rebuilding a new supply chain, and it now has a deeper understanding of its market value.
Twenty-five years ago, the Asia-Pacific region represented only 5% of Avnet's business. Currently, approximately 40% of Avnet's business comes from the Asia-Pacific region, with 40% of that located in Taiwan. Avnet would be in a very different place today if it hadn't expanded into the Asia-Pacific region back then.
Gallagher pointed out that Avnet has achieved a good strategic balance in the Asia-Pacific region, covering China, Taiwan, and the ASEAN countries. They also have high expectations for the Japanese market. While regional operations in Japan have their challenges from a business perspective, the company still experienced growth and expects more suppliers.
When can the supply chain issue be resolved?
Regarding the supply chain issues, Gallagher stated that Avnet is reevaluating the cycle of supply shortages. He expressed that he is not too concerned about the inventory situation of related companies at the moment. Inventory levels are relatively high right now, but this is only a temporary situation. As for when the inventory adjustment will end, Gallagher believes that it will take "2 to 3 quarters" to address the supply chain inventory issues.
Avnet has high expectations for the performance and growth in various regions. This is based on Avnet's execution capabilities and stability in supply chain relationships. In particular, Avnet is actively making progress in the Asia-Pacific region and is already seeing steady results. (Please refer to the next part for more details.)
