Audio Seen Hard Hit From Supply Woes, Bigger Reliance on Scarce Chips

The “perfect storm” of components shortages, strong consumer demand and supply-chain bottlenecks is impeding growth in home audio, said Futuresource analyst Chris Bull on the company’s virtual Audio Collaborative 2021 event Thursday. No relief is in sight before at least 2023, he said.

Despite audio products’ increasing reliance on scarce computer chips, the market is having robust growth, said Futuresource, projecting industry revenue will rise 10% this year. Unit volume is seen growing only 2%, it said. Audio companies are adapting their logistics around the limitations of chip supply, Bull said, by prolonging the lifecycles of popular models and “increasing the specifications and price of simpler models.” Manufacturers are “cautiously bleeding supply to avoid inventory clear-out and discounting of product,” he said. That strategy will combine with general consumer preference for higher-quality replacement product to drive growth in the home audio market over the next few years, he said.

Shipping challenges are starting to “significantly impact” the home audio business, with the potential for the problem to grow more severe before it gets better, said Bull. It costs a shipper about $10,300 to put a single container on the water from China to the Port of Los Angeles, “along one of the world’s largest maritime trade routes,” he said, citing September's Drewry World Container Index. That's a 65% spike from May and significantly higher than the $1,500 pre-COVID-19 pandemic cost, he said. The supply-demand imbalance that began in early 2020 has been exacerbated every month since, affecting a much broader range of products, he said.

Major red flags for the audio industry involve the challenge of having enough product in inventory to keep pace with “skyrocketing” consumer demand, Bull said. Brands are experiencing delivery delays extending up to a year or more to procure products “on these ever-more-valuable shipping pallets,” he said. In a period of increased uncertainty and little visibility, the industry is facing more pressure to forecast and plan for demand further into the future. The stakes of miscalculating the future “are becoming increasingly more severe," he said.

Amid the gloomy outlook, Bull said the audio market is growing in many of its sectors, some even returning to double-digit growth. “But the nature of the game has changed,” he said. Market value will be the new prize. Companies operating at thin profit margins will struggle to justify their positioning among the increasingly expensive shipping channels, he said.

There's “massive” public and private investments taking place globally to build more capacity into the semiconductor supply chain, but “it will take a few years, no earlier than 2023,” to experience the benefits, Bull said. Once the expanded capacity is in place, said Futuresource, the volume-value relationship will re-balance, slowing down price growth,” and enabling “some degree of normalcy to return.”