How did the semiconductor marketplace fare in 2023 and what is in store for 2024? Frank Cavallaro, CEO of A2 Global Electronics + Solutions, joins this Executive Perspectives episode to discuss the changes in supply and demand for various semiconductor-reliant industries, as well as the implications of fabricator construction delays and how stakeholders can navigate today’s and tomorrow’s fluctuating market.
This interview was edited and formatted for clarity.
Tyler Fussner, Managing Editor, Supply Chain Connect
Frank, thank you for joining us today.
Frank Cavallaro, CEO, A2 Global
Hey, good morning, Tyler. Thanks for having me.
Fussner
If you could please introduce yourself to our audience and tell us a little bit about A2 Global.
Cavallaro 0:29
I am Frank Cavallaro, the CEO of A2 Global Electronics + Solutions. I have been in and around electronics distribution, logistics and technology for the better part of 35 years. A2 Global is an electronics semiconductor distribution company as well as services around the supply chain.
Fussner 0:56
Frank, I’m very excited to talk to you today about the semiconductor and electronics market. My first question for you is can you tell us a little bit about how the semiconductor market of 2023 panned out?
Cavallaro 1:08
It was really a tale of two industries, Tyler. If I can step back for a second and reflect on, “How did we get into 2023,” and then I can talk about how we got out of 2023.
If you remember, through the pandemic-fueled constraint periods of the electronic supply chain we had a tremendous amount of run up in not only demand but also pricing and price fluctuations, mostly to the upside. With that came a whiplash or a backlash in 2023 of an oversupplied marketplace. We had all expected that oversupplied marketplace, those oversupply products, to be burned off or to go through the system by the end of 2023. For us, we were all saying mid-2023, then Q3 of 2023 and then eventually Q4 2023.
And really, that didn’t happen, and for a couple of reasons. Specifically, we’ve been in a prolonged squishy demand cycle. On the flip side of that, we’ve had supply that has been priced, still, at the higher end of the pricing spectrum. So, without strong demand and with pricing at its peak even through an oversupply marketplace, we saw a minimal burn off of that overall excess inventory, oversupply industry. But the good news is that in 2024, we think it’s going to burn off by mid-year or around mid-year.
That’s how we exited 2023. We entered it with high hopes of a return to a more normal supply and demand, balanced marketplace for semiconductors. But we exited it, really, not there yet.
Fussner 2:53
You touched on 2024 and some of the expectations for that, what can the industry anticipate this year for the chip supply chain?
Cavallaro 3:00
As we look into 2024, we have a couple of dynamics that will help us ease out of the oversupply marketplace and ease into the more balanced supply and demand for semiconductor technology. The first thing is that the pre-purchasing of inventory that happened during the constraint period where users of semiconductors were asked to either invest along with the manufacturers of the technology or even at the fab level, but in return for that investment, they were committed to certain levels of product, those contractual arrangements are wearing off.
With that, we’ll see some price degradation and some price normalcy to today’s demand level. As that happens and as we ease through the second half of 2024, we’re looking for a more normal demand picture. Why? Well, we’ll have better supply and better supply visibility. We’ll have surety of product manufacturing.
The second piece is we’re seeing an overall better economic situation, not only with the ease of interest rates, but along with that the capital and capital investments that go along with better demand dynamics.
We can point to AI as one of those things, or AI-related hyperscaling. We’ll probably see some level of return in the electronic vehicle marketplace, or EVs, but not necessarily EVs themselves but the infrastructure technology, charging technology that goes along with them. That should help spur additional demand.
So, once again we enter the year with high expectations. Also, once again, we’re looking at the second half of the year 2024 for those things to happen.
Fussner 4:41
So, it sounds like the supply is in store. We have the supply. The demand is set to increase. There are definitely some growth opportunities in many certain verticals. Are there going to be any procurement challenges in the upcoming year?
Cavallaro 4:57
We always see in the semiconductor manufacturing, distribution and usage marketplace, we always see a delicate balance of supply and demand. Typically, they’re not as exacerbated as we saw during the post-pandemic run up or the 2023 rundown, but there is always some level of imbalance. I think what we’ll see in 2024 is that continuing into micro-imbalances, micro-shortages and micro-oversupply depending upon the technology type.
We’ll also see another dynamic that’s cresting and maybe a lot of people aren't talking about. Specifically, as the fab companies, the wafer fab manufacturers, key and focus on smaller geometry technologies, low-power, high-compute power that’s used in hyperscaling and power delivery transfer for infrastructure, they’ll be less focused on the larger geometries, which are, say, 25 nanometer to 45 or even above to 60 nanometer.
With that comes a double-edged sword. The users that are focused on the newer technologies will have a good supply chain to work with, and then they’ll just have to work on their own demand and pricing and the usual things procurement folks work on. But the users of the larger geometries, which are still pretty long-tail in aerospace and defense, in infrastructure, power grid, in a lot of the industrial applications that have broad installed user bases that go on for years, not quarters, technology that lasts in the field for years, they’re going to have a hard time finding their key components, quite frankly, because they’re just not manufactured anymore. And so, it’s important for those organizations to partner with a lot of different specialty distribution companies, like A2, that can help them navigate those spikes in their demand with good supply.
Fussner 06:59
Speaking of the wafer fab aspect of this situation, we’re hearing unfortunately all too often stories of the delay in wafer fabrication factory construction. What are the implications of that? It sounds like wafer fabs want to be on the new and exciting and the growth aspects of this technology. Can the market expect some serious impacts?
Cavallaro 7:25
Let’s play that out. And that’s an excellent point, Tyler. As I mentioned, the wafer fab and the higher-end technology manufacturers are really keying in those smaller geometries, which are used in these cutting-edge applications, hyperscaling, AI and anything related to that. We have yet to see what the AI infrastructure looks like. We’ve seen AI and the power of it in and of itself, but there’s going to be a lot of things up and around it that get built in order for it to become ubiquitous in our everyday use. So, if there is a more rapid adoption of those things, which we all expect it to be, the use of AI in everyday both consumer and commercial applications coupled with the delay in the fabs that make those types of technologies, we’re setting ourselves up for a really undersupplied marketplace. So, the delays in those fabs are double edged as well. They’re smart from a ‘managing the balance sheet today’ mentality for those companies and organizations, but for the users on an ongoing basis, because fabs are finite, once you build them, there’s only so much output you can get from it, and they’re also expensive to build, and they take a long time to build, you add all that together and if you’re not on schedule, we’re really setting ourselves up for what could be a pretty prolonged constraint period at full demand in the future. Something absolutely to keep an eye out on and for the industry to take note of in order to get ahead of that impending shortage.
Fussner 9:04
And say that we do run into a situation with constrained supply, we’re reaching peak demand… What are some strategies to help OEMs mitigate that supply chain risk? One strategy I wanted to ask you about would be inventory prepayment. How does that work?
Cavallaro 9:22
I think that is an excellent strategy and we’re already seeing inventory prepayment play out at the high end of the manufacturing spectrum. When I say that we’ve already seen that, companies like Amazon, Google, Apple that have the balance sheet, capital structure and technology know-how to either partner and prepay or in some cases become fab manufacturers themselves at a small level, they’re going to be able to navigate it the best. But they have the balance sheet to support those types of early investments so that they can get a longer-tail visibility into their manufacturing process.
But what does everybody else do? This is the time where the ‘everybody else’ category needs to start to give really clear or as clear as they can demand signals to their technology providers, but also to introduce different channels of supply, whether it be open market distribution like A2 or direct from factory, and have all of these critical conversations now before they become hypercritical because there’s no inventory for them to use in the future. It really is: Be there early. Be there often. And if you have the balance sheet, you may want to do some prepayments for the highest of the technology users. Those are some strategies that can go in place, knowing that not everybody has that type of balance sheet.
Fussner 11:00
Frank, keeping our sights on 2024 and what is beyond, I wanted to ask you: What’s in store for A2 Global this year?
Cavallaro 11:07
We have a lot of things and we’re pretty excited about a few of them. Namely, we’re fully launching a suite of quality assurance, testing and configuration of semiconductors focused at longtail, 25 nanometer to 60 nanometer technology type. Why? It’s because those are the ones that are not only going to be the ‘have nots’ as it relates to supply, but also maybe ‘have never’ on the going forward basis because those products aren’t going to be even available direct from factories. So, they’re going to need key distribution partners with vertically integrated solution environments so they can get their industrial application and aerospace defense applications up and running as quickly as they can.
We’re also doing a lot of partnering with different manufacturing and sourcing opportunities in the higher end or smaller geometry technology so that we can help support the manufacturers of those high-end technology products that aren’t the Googles, the Apples and the Amazons that have the balance sheet in order to support on their own.
We’ve got a lot of big levers we can pull to help technology users and technology manufacturers help mitigate 2024 as what we think will be more of a rougher landing than a smooth landing into supply and demand of semiconductors in the marketplace.
Fussner 12:33
Frank, say I am an organization that is looking to diversify my supply and I want to partner with a distributor like A2 Global, how do I do that? How do I partner with a company like yours and what are some questions I should bring to the table when I’m trying to vet a supplier that works for me?
Cavallaro 12:50
That’s a really good question. And so, the first question first. Partnering with A2 Global is really easy. You can find your local A2 organization or representative from our website, which is a2globalelectronics.com. We are in every major market in every corner of the world with distribution and service facilities in the Netherlands, and the Americas in Florida, and in Singapore to service Asia, along with service organizations in Japan, China, every major market in the U.S. and India as well. Finding us is really easy and doing business with us in the local marketplace is also really easy. What you get with A2 is you get the local interface, but you get the leverage of a global company.
That’s where we get to, “What are the questions you want to ask?” The first question is, “Do they have the quality and know-how and distribution methodologies that are up to snuff with your existing supply chain metrics and methodology?” Those are the first things, and A2 obviously can check that box.
The second piece is, “Do they have a varied suite of services?” As I mentioned before about A2’s vertical integration not only with the distribution of technology products, but the configuration and manipulation of products, whether it be tape and reeling, different testing methodologies, different material preparation methodologies so they can go into aerospace and defense applications, they can go into industrial applications as well as high-end commercial applications. You don’t want to have to diversify your supply chain so much so that you have to add cost and complexity, but you want to be able to have enough diversification so that you have a quality distributor, you have direct supply already from the manufacturer and maybe you have some franchise direct supply as well. And if each of those entities have varied services, then it’s a multiplier effect.
There are other questions you want to be asking your new supply entrant. So, is it global? Can I leverage it local? Do they have more than one type of offering so that I can not only leverage piece parts, but I can also leverage an entire service offering? And can they do it in every major market of the world? Those are the types of things that A2 offers and those are the questions that I would be asking any new partner I was bringing on board.
