Ukraine War, Zero-COVID Rules Heighten Supply Chain Concerns, HTSA Told

FORT LAUDERDALE -- The supply chain for the custom integrator channel is struggling with a barrage of setbacks from the COVID-19 pandemic, war in Ukraine and several natural disasters, said Keith James, Crestron director-strategic supply chain and manufacturing operations, at the Home Technology Specialists Association spring conference last week. James said “some relief” is likely in 2023.

More than two years after COVID-19 began shutting down plants in Wuhan, China, the virus’ variants are still plaguing the country. Ongoing outbreaks continue to shut production plants throughout China, which is also experiencing government-mandated power cuts due to the high price of coal that's used to power plants, James said. “If a foundry loses power, they’re losing what they had put in their line and having to scrap it, and they’re losing capacity,” he said.

Shanghai is currently going through a staggered shutdown due to the country’s Zero-COVID policy, and tech center Shenzhen remains shut down, including factories and ports, in some areas, said James. If one of China’s 34 ports closes, and cargo doesn’t move from one to another, delays result, he said. When Crestron has had to ship product by air to get it to a production plant, that adds to logistics costs, he said.

In Ukraine, which supplies 75% of the world’s neon gas supply, the war has halted production of the gas, which is critical to semiconductor manufacturing, James said. Cryoin Engineering, based in Odessa, supplies 90% of chip-grade neon gas, including that used to power lasers, and its shutdown has “significant impact on the production of semiconductors," James said.

Most foundries have a buffer of inventory of neon gas that should last at least about three months, James said, “but there will have to be a pivot to a different source for that particular neon component” to continue manufacturing semiconductors. Crestron’s scheduled deliveries will largely stay the way they are through the year, James said.

Russia produces 40% of global palladium, used in the production of most semiconductors, James said. With U.S. and NATO allies not buying Russia’s oil and precious metals in response to the Ukraine invasion, a move to other sources of palladium will mean price increases, he said. Foundries have already raised prices by about 20%, he said.

Crestron is now “vying for components with the military,” James said: The components that the military uses “are the same components that I’m looking for." Under the Defense Priorities and Allocations System program run by the Commerce Department's Bureau of Industry and Security, a DPAS-rated order at a chipmaker or distributor “takes precedence over any commercial orders,” he said.

A 7.4 earthquake in Fukushima, Japan, last month damaged the factory of Crestron’s NAND flash memory supplier, Kioxia, and “anything they had in production was scrapped,” James said. The components are also used in microSD cards and SSD drives, James said. Capacitor supplier Murata has four factories in Fukushima, and it was unclear last week how those shutdowns would affect the supply chain, he said. If automakers ratchet up production, “they’re going to be looking for the same parts that I’m looking for.”

'Not Very Customer-Centric'

Component shortages didn’t begin with the pandemic, said James. Hurricane Laura in Louisiana in August 2020 interrupted production of chemical components in resins used for electronics, he said. Though those shortages didn’t affect tech products already in the channel, they had critical implications for the supply chain up to the current crisis, he said. Crestron soon began receiving letters from suppliers invoking force majeure clauses, meaning any contracts that were in place with penalties and negotiated set pricing "were out the window,” he said. “It’s not very customer-centric from a supply chain perspective if you have a supplier that starts managing the customer, and that’s what we started to experience.”

Freezing temperatures that took down part of the Texas electrical grid in February 2021 affected semiconductor production there, James said, citing disruptions at NXP, Texas Instruments, Samsung and others. Though Samsung products weren’t affected, the components it produced as a contract manufacturer for fabless semiconductor companies were, he said.

Disruptions in 2020 and 2021 led to manufacturing on an allocation basis, which for James meant, “I won’t be able to get any more of what I got the prior year, and it has to be tagged for my business.” James was told then that any new orders were “going out a year.” Today, he said, “It’s a year plus.” His lead times stretched from 52 weeks to 90 weeks.

From the planning side, James said, “How can you manage your business if you’re looking at what you think you’ll be building 52 weeks from now, let alone 90 weeks, and you’re in a high technology market?” That’s what consumer technology companies are facing: “Those are the new rules,” he said. Under the old precepts, vendors weren’t held to forecasts, often adding 20%-50% “upside” because suppliers were happy with the business, and it was worth it for them to take on inventory risk, he said. The process went from a “nonbinding forecast, quickly, to a binding forecast with whatever I told them,” he said: “They were holding my feet to the fire.”

Also a year ago, suppliers began demanding contracts for firm purchase orders that couldn't be canceled, returned or rescheduled, James said. Chipmakers were trying to schedule their foundries to get overall factory utilization close to the 99% limit, he said.

James outlined the “very complex” semiconductor manufacturing process that takes 22 weeks from silicon to shipping. Specific steps occur in that period in two or three different locations, he said. The front-end process, where wafers are sliced, etched, coated and ionized, takes place over 16 weeks in one factory. Another plant does die-bond attaching, measurement and electroplating of circuit boards over a four-week period, and two weeks of testing follow, he said.

The two or three facilities are likely from different corporate entities, often located in different countries, James said. A logistics channel exists between each segment of the 22-week process, with components typically air-freighted from one country to another. In the COVID-19 age, many planes haven’t been flying, adding delays. “Those 22 weeks could go out to 24 weeks, 25, 26 weeks,” he said, which is happening for many chips used in the custom integrator channel.

James commented on the inefficiency of shipping wafers from Texas to China, Japan, Malaysia or Taiwan for back-end processing. “You’re part of a global supply chain with these small devices and you have to move them on a plane and wait for your tracking number in order to continue the process,” he said. Scheduling difficulties are compounded because “we’re not getting enough information back” about where they are in the process, he said. “We’re in a wait state, expecting parts to show up,” he said, due to the war in Ukraine and or Zero-COVID policies.

James noted carmakers are going through “feature deletes” due to parts shortages, eliminating extras originally engineered into new vehicles. He cited USB chargers and touch-screen control, plus rear-seat climate control, park assist and adaptive drive features, HD Radio, hands-free cruise control, premium audio, wireless smartphone charging and seat adjusters as some of the features carmakers have eliminated due to chip shortages.

Lift 'That Much More Difficult'

USB chargers and touch-screen functionality approach the core of the custom installation channel, James said. “We use those chips that control those types of functions,” he said, citing power metal-oxide-silicon transistors as one example. “If the automotive industry can’t get them, with their terms and conditions and penalties for shutting down their lines, then it just means that the lift for our sector is that much more difficult.”

Commodity prices are up 20% after two separate hikes, James said, citing aluminum, “after negotiating pricing.” He sees demand shifting due to inflation, which should help the supply-demand balance. As prices increase for consumer products, “people at the lower economic levels are going to pull back,” James said. “When they pull back, that will relieve some capacity so I can start getting the devices that I need in order to support our products.” Logistics channels are “still plugged up, but certainly not what they were” at the beginning of the year or second half 2021, he said.

The war in Ukraine and Zero-COVID policies remain uncertainties, James said. The longer they continue, “they will further create disruptions within our marketplace” because of the amount of chip manufacturing on the back end in China, he said. If China shuts down, “that back-end assembly of the substrate is going to have an impact” on OEM companies, along with Crestron’s ability to secure critical parts for its products, he said.

James noted companies including Samsung, Global Foundries and United Microelectronics are expecting “some level of relief” late this year or into 2023. He noted Intel signaled in 2018 it was getting out of chip manufacturing but then reversed that decision and is now planning to build a facility in a Columbus, Ohio, semiconductor industrial park. “That’s a start,” he said, noting the facility won’t likely open until 2025. The “bane of my existence has been with TI,” James said, saying the chipmaker is adding facilities in Texas “at a quicker run rate” than other companies and is due to be up and running at a plant in Sherman, Texas, next year. It also is outfitting an old Micron plant in Utah, he said.

Even building out capital infrastructure is dependent on the supply chain, James noted. Whether materials are in Texas or coming from overseas, companies have to get the material to construct the fab, including industrial semiconductor equipment from Applied Materials. Then the equipment has to be calibrated and tested it before it's operational. “It seems like there is a sense of haste” in doing that, he said.

James said manufacturing coming to the U.S. would lead to price increases as a result of inflation trends, but manufacturing costs on the highly automated front end should remain the same, while labor-based cost increases should be "insignificant,” he said.

To stay ahead of the curve in the current situation, a manufacturer has to build an 18-month minimum forecast into the supply chain, up from nine, and more recently 12, pre-pandemic, James said. “You have to expect that of your vendors ... especially if you’re dealing with 52-week lead times.” On the engineering side, product components need to have a longevity assessment, James said. Older components won’t be prioritized by factories because of the higher profit potential possible with newer technology, he said. Manufacturers should keep designs “as fresh as possible.”

On what Crestron is doing to manage its supply chain, James said the company is deploying personnel to focus on key suppliers and raw materials. It’s holding six times more inventory than it would normally, and it’s shrinking transformation time. When necessary, the company is going into the broker market, paying “huge premiums” for critical components and redesigning products where possible.

James' advice for how integrators should navigate supply chains is to assess the risk with purchase order cancellation policies and rescheduling terms. Integrators should negotiate out of non-cancelable, nonreturnable terms. Crestron lets dealers reschedule purchase orders or cancel if they need to, he said. They should start their pipeline "to ensure that you’ll have what you need nine months out.” A forecast will never be accurate, he said: “You just need to put a stake in the ground and work from there.”