Today, the parallels between the electronic chips that power just about every type of device today and the global oil market are undeniable, with many news outlets – including the Wall Street Journal, proclaiming in headlines that “Chips Are the New Oil.”
Just as with oil, when demand for electronic chips outstrips supply, prices rise, impacting consumers and manufacturers alike. Oil markets are known for their volatility, influenced by factors such as geopolitical tensions, shortages, and natural disasters. Similarly, the supply of computer chips can be impacted by factors like trade disputes, geopolitical tensions, and disruptions in manufacturing processes. Fluctuations in chip prices can ripple through the economy, affecting the cost of electronics, vehicles, and other high-tech goods.
Now, recent shortages during the pandemic and fears of China’s ambitions to dominate the industry are spurring fears of future shortages. On the brighter side, some experts are suggesting we are on the precipice of the next tech boom, driven by artificial intelligence, mobile internet, cloud, and the Internet of Things (IoT).
Either scenario – boom or bust – raises the specter of potential future shortages or hard to get parts, which has some OEMs and Electronics Manufacturing Services (EMS) working to “bank” a supply of critical chips in preparation for whatever might come.
“Many companies – particularly those that build critical equipment like medical, military, industrial controls, and automotive – are now considering how they can protect themselves from future vulnerability. They experienced serious chip shortages and want to ensure a reliable, ready supply at a reasonable price without tying up capital,” says Mike Thomas, president at Classic Components, an independent stocking distributor of electronic components based in Torrance, Calif.
A strategic “chip bank” to address chip needs
Today, many electronics OEMs are receptive to the idea of access to a vetted supply of quality chips readily available to them. However, few want to commit capital for chips they may not need for years, particularly if owned by equity or publicly traded firms.
In response to the need, premier independent distributors can hold sufficient supplies of quality chips, acting as de facto “chip banks” for companies requiring the service. Independent distributors play a critical role when franchised/authorized distributors are not able to supply the required parts by leveraging their extensive expertise to find alternate sources for chips through regional authorized/franchised distribution, manufacturer direct, or surplus/excess inventories.
To ensure there are no delays when the chips are needed, the independent distributor can be proactive about securing the required inventory without asking for money up front.
In these cases, the independent distributor will invest their own capital to secure the chips and hold them in inventory for the customer until required, however long that takes. They keep a certain amount in buffer stock, ship it when needed, and then get paid. In doing so, manufacturers can get the needed chips when required.
Independent distributors can lock in prices and delivery dates using a vast network of supply chains and partners for many months at a time. The chips are placed in long-term bond or long-term schedule contracts with applicable service or storage fees. The inventory can be shipped to authorized partners, contract manufacturers, sister companies, and subsidiaries on demand.
This is a unique offering within the independent channel that only the largest, most financially stable distributors are willing to offer. A premier independent distributor can usually deliver parts in 2-3 weeks that the OEM or authorized distributors may not have access to for 52 weeks or longer.
Cautioning against a false sense of security over the chip supply
Today, the memory of pandemic related chip shortages and sky-high pricing is beginning to fade. Chip manufacturers successfully ramped up their manufacturing capabilities and eventually caught up on orders. Now that the supply has stabilized, many OEMs and EMS may have a false sense of security.
However, various destabilizing events could tip the global chip supply into a severe shortage, whether a future pandemic, natural disaster, or political tension boiling over into conflict.
Some are even predicting a tech boom in the next decades.
Ideally, OEMs would have access to a strategic reserve of the chips they require that could protect them from unexpected shocks in the market like the U.S.’s Strategic Petroleum Reserve.
The world learned over the period of time through covid just how dependent the world is on chips. It really is a lot like oil. In fact, OEMs may be even more vulnerable to a disruption in the electronic chip supply chain because domestic manufacturers still rely predominantly on the global supply.
As chip demand rises to supply myriad technologies in the latest tech boom, OEMs that work with independent distributors to secure low-cost, quality inventory over the long term will weather the inevitable, unexpected disruptions far better than competitors.
Del Williams is a technical writer based in Torrance, Calif.