Feb 1, 2022, heralded in the Year of the Water Tiger according to the traditional Chinese calendar. But what will this year bring? Some would like to think that the tiger embodies courage, resilience and strength — all of which would be helpful during a time of struggle and disruption. The model for semiconductor inventory indicates that 2022 will be a year of recovery in which, for the most part, supply will start to catch up to demand.
The reality today is that any organization, regardless of industry, reliant on semiconductor integrated circuits and the related components is now constrained, and has been since the beginning of 2021. A new year is often looked at as a chance for a new start. So, is that the case? Or can we expect more of the same? The answer lies somewhere in between. One key indicator to watch is the Gartner Index of Inventory Semiconductor Supply Chain Tracking (GIISST). It may not exactly be an easy acronym to remember, but the GIIST provides an aggregate level, or inventory position, as an indication of what is to come.
However, before we dive in to look at how the indicator is trending, let’s look at how it’s defined and derived. The indicator considers the total value of inventory, i.e., raw materials, work in progress and finished goods. This inventory is derived from a list of about 200 publicly traded companies consisting of foundries, chip vendors, distributors, EMS/CEMs and OEMs. From this, actual forward days of inventory are calculated, as well as ideal forward days of inventory. The formula to calculate the GIISST index is below.
Getting the GIIST
If the index is at 1.0 to 1.1, then the inventory is considered in balance and in a normal range. The farther the GIISST index is below 1.0, the more acute the shortage of inventory will be. The farther above 1.0, the more surplus of inventory you can expect.
Below is the latest update based on Q4 2021 data. There are some additional pieces of data on the chart, as well. First, there is a dark blue bar which shows the projection run with Q3 2021 data. The light blue bar is using Q4 2021 data, and the green bar is a worst-case scenario — that is, if omicron (or other variants) continues to spike and drives disruptions to production as well as the movement of goods and people.
Based on the aggregated projection recovery, a return to normal inventory levels doesn’t occur until Q3/Q4 2022. To be clear, this is an aggregated view and must be tempered with some nuances. First, there is the pessimistic scenario, i.e., omicron (and other variants), which could cause disruptions in manufacturing, movement of goods, installation of equipment or people movement. While less likely, it’s a scenario that cannot be dismissed.
Secondly, we must look at the recovery of mature semiconductor process technologies separate from advance technologies. The majority of the mature semiconductor technology nodes that are constrained are between 28nm to 90nm. The constraint here is semiconductor manufacturing capacity worldwide and that is expected to recover by the end of 2022.
The advanced nodes that are 10nm and smaller, however, are constrained by advanced packaging, specifically ABF (Ajinomoto Buildup-Film) Substrates. With current lead times of anywhere from 52 weeks to 70 weeks, that means that recovery doesn’t occur until Q1 or Q2 2023.
What should companies do?
There are a limited number of levers in this situation. In the short term, the main tactics are, for example, paying a premium or using distributors and brokers to help obtain supply. Beyond short-term tactics, companies should seek to understand where their exposure is in the high-tech ecosystem, several tiers down if possible. The goal is to get better visibility and potentially establish more binding relationships for the future. For the longer term, strategies we see used include redesigning the products to use more common components, reducing the number of components used and potentially moving to programmable logic ICs so software can be used to differentiate. Ultimately, building strategic long-term relationships — whether based on scale or innovation (e.g., co-engineering) — is a strategy worth considering.
I’ll leave you with this final thought. While 2021 was highly constrained, 2002 looks to be the beginnings of a recovery. And 2023 will see demand and supply come into balance. The models show that 2024 will bring a surplus of capacity, where supply will exceed demand.
Bring on the Year of the Tiger, so we can all roar into a recovery year.
Senior Director Analyst
Gartner Supply Chain
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