The Impact of Global Chip Shortages on ProAV

The Impact of Global Chip Shortages on ProAV

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Over the past 14 months, the global chip shortage has been a headline. “Texas Winter Storm Shuts Down Chipmakers,” made the headlines in February this year. With two of its factories located in Austin, Texas, Samsung Electronics Co., one of the world’s biggest chipmakers, was forced to temporarily shut down operations. The storm that left millions of Texans without power also led to notable production interruptions for semiconductor manufacturers NXP Semiconductors NV and Infineon Technologies AG.

Supply chain vulnerabilities can be exposed and exacerbated by natural disasters, cyberattacks, import tariffs, manufacturing problems, and transportation failures, to name a few. These disturbances often affect specific segments of a supply chain, such as delayed shipping or smartphone production. If risks are managed and the interferences are remedied, a supply-chain process can bounce back in a few months.

2020 had its share of rare events, however. In October, a fire broke out at the Asahi Kasei Microsystems (AKM) semiconductor Plant “Fab2” located in Nobuoka, Japan. “They are the de facto standard in high-end digital analog converters (DACs),” said Avi Rosental, managing partner of Bluesalve Partners, a firm that helps companies bring products to market which can include sourcing components. “Every high-end audio brand uses AKM DACs in their equipment, and there wasn’t a really effective or efficient replacement for an AKM chip on the market.” To substitute a DAC from another manufacturer means a redesign of the system. “It’s not just ‘take out the AKM part, put in the Cirrus Logic or TI part,’ it’s a complete redesign, and you have to go back through the testing.” As a result, product delays can be exponentially compounded.

During an average financial quarter, a winter storm or a plant fire would be recognized as significant rare events that temporarily delayed chip production and product assembly. But instead, the incidents of 2020 were relative blips compared to the global chip shortage caused mostly by the once in a hundred years event—the COVID-19 pandemic.

Impact on Displays

We reached out to numerous display manufacturers for comment, but they declined to discuss the fluid and volatile supply chain issue.

Sanju Khatri, director of consulting for displays, ProAV, and consumer devices at Omdia, a research and consultancy firm, provided context and insight on the disruptions in the display supply chain due to component shortage and high demand.

The impact will be felt across CE/IT/AV/Compute devices. “Within the ProAV industry, the biggest impact will be felt on all types of displays, including ProAV displays and consumer TVs,” Khatri said. “We think the impact on ProAV displays could be more pronounced simply because the buying power of the ProAV displays is smaller, compared to the big TV brands.” This may lead to either (1) increased prices of the ProAV displays; (2) reduced profit margins of ProAV set vendors; or (3) lower availability and longer lead time in production. “However, some high-margin products, such as video wall panels, high brightness, and very large panels (>=90-inches) get priority in production, even though the volume may be small,” she added.

ProAV/IT vendors will not be able to maintain the same level of YoY price declines. “They may in fact pass on the price hikes to the end-users or negotiate on margins with the distribution channel members,” Khatri said. “Display set vendors may reassess their product portfolio and curb the production of less profitable products.”

ProAV end users (corporate, retail, hospitality, etc.) will adjust: End users with fixed budgets may opt for lower-cost/lower-end products. “This may also give rise to lower-end prosumer products—if the solutions can handle it,” Khatri concluded.

Mitigating the Impact

The current and near-future supply chain issues are not limited to semiconductors. The manufacturing of nearly every sourced component comprising AV products has been affected by plant shutdowns. Pandemic-related changes, such as staff occupancy restrictions, have also disrupted operations.

Lack of supply and increased demand are not new problems to seasoned veterans like Dan Brady, Crestron’s executive VP of Manufacturing & Supply Chain. “What we’re seeing now is a by-product of that global shutdown, where everything came to a halt for three to four months,” Brady explained. Once China and Southeast Asia “got back online,” it took weeks, if not months, for them to regain momentum with operations, generally speaking. “When everybody [returned], the shipping and air freight industries were completely overbooked and overwhelmed, making it very hard to get product to the end points where [they were] needed.”

When there is not a major disruption in the supply chain, many companies employ the just-in-time inventory and manufacturing methodology. This is an efficient approach because every part has a different lead time. But when the supply chain is in disarray, and one piece of equipment might have more than a hundred parts, those rules get broken. “If you’re only missing one part, you want to be sure to obtain all the other parts because you don’t know what other parts could have a problem,” Brady said. “Until you have your hands on that [raw] material and it’s sitting in your warehouse, you’re not 100 percent guaranteed you’re going to have it ready in time. We have definitely increased our raw material on hand so that when we get the one missing part, we can quickly bring it to the production line and get the product out as quickly as possible.”

Strong Partnerships

Crestron is mindful of being good industry stewards. “We’re being as flexible as we can to make sure that we only ask for what we really need to keep the production lines going in a given week, and not hoard material or parts,” Brady said. “That would be dangerous for everybody. To keep the supply moving to the right places at the right time, Brady hopes that all companies are honest about their minimum requirements. “We want to be good partners to everyone who is trying to build product right now,” he said.

Plan Ahead

There’s not a product manufacturer in the world today that isn’t experiencing some kind of delay in shipping goods to the customer. For 20 years, Crestron has prided itself in offering 24 to 48 hours lead time from when a product was ordered to delivery. For now, those days are gone. Brady recommends that people should start planning out eight to 12 weeks for their needs. “We still have two months of supply on many of our core products,” Brady said. “The shortages that we’re seeing are fairly short-lived and resolved in a matter of weeks, it’s not an across the board situation.”

The chip shortage and supply chain crisis has caused many companies to alter product roadmaps, but not at Crestron. “It has forced us to think more carefully about our strategy for when products are going to be released,” Brady said. To mitigate delays, Brady has recently implemented supply chain tools that allow a bill of materials to be sent to suppliers during the design phase, significantly reducing the time it takes to receive the necessary components.

Other tools pre-populate the critical components, run different scenarios, and check with different databases for the latest lead times. “It tells us when we need to start placing those orders and sending that forecast out to our supply base,” Brady said. “The tools help predict what we can get in early for a successful launch.”

Four Companies Set Expectations

Valens, the inventor of HDBaseT technology, does not expect to have a specific product that will be greatly impacted. “We took all measures necessary to be able to continue meeting demand. We do expect lead times to vary between products,” said Gabi Shriki, senior vice president and head of AV Business at Valens.

Valens is working closely with its supply chain partners, Shriki added. “We are placing an increased emphasis on planning and are purchasing material with limited availability in advance—sometime 12 months in advance, or more.”

The supply shortage is leading to higher end-product pricing, as some vendors pass price increases up the supply chain. “Even so, Valens has not raised prices,” Shriki stated.

“Barco is a global company which is why we ensure there are systems in place to mitigate disruptions like the one we are facing now, in chip shortage,” said John Steinhauer, vice president of sales at Barco. The company follows the principle of dual sourcing whenever possible to ensure they have a constant inflow of parts needed for our products. “Unfortunately, what we are seeing now is on a much larger scale, impacting businesses across the globe, in multiple industries,” Steinhauer said. “Barco will not be immune to supply chain disruptions, but we are well-placed to manage through these hurdles, through clear communications and accurate expectation setting with our customers.”

The chip shortage is having some impact on Legrand AV’s connected products. “In most cases, we are currently able to manage it to minimize any disruption. However, we are having to proactively update and notify customers of extended lead-times in certain areas, such as our Luxul wireless networking products,” Steve Durkee, president of Legrand AV. “It’s beyond an industry challenge, as we’re hearing about it on the news and in our feeds daily right now from automotive and other industries. We remain optimistic but latest industry forecasts suggest it could last into late 2021 or early 2022.”MXL Microphones has been making adjustments the past 12-14 months to operate with longer lead times, said Trevor Fedele, company director at MXL. “We are also forecasting much further into the future to get ahead of the issue, so we can buy smaller quantities of the components we need.” Every element of the business is taken under consideration.

The chip shortage is kind of like the panic buying of toilet paper as the pandemic took hold in 2020, Fedele quipped. “The news talks about chips, everyone panics and buys them, but soon enough we will all have plenty of chips—or even a surplus,” Fedele said. “Moving forward, it’s crucial for manufacturers and customers to be realistic with expectations and timelines and make adjustments where needed.”

Flexibility is Crucial

Even before the pandemic, Sean Wargo, senior director of Market Intelligence for AVIXA has stressed the idea of flexibility and diversity in our industry. “As we look at supply chain, because our industry cuts across solutions, markets, and different products,” he said, “the important concept is one of substitutions. [So], at any given time, a solution, [e.g.,] digital signage or a conference and collaboration, or across those, can pull from a lot of different technology options.”

With shortages in specific areas, prioritizing flexibility and the needs to specify early and stay creative in a specification will help mitigate supply challenges. “While there are specific areas that are being particularly hard hit, it’s that ability of our industry to adapt and flex-in the solution offering that will help us long term,” Wargo added.

Companies have been navigating pandemic critical needs since March 2020 which has given manufacturers, distributors, integrators, and end users time to create a supply chain plan to address current challenges. “That means distributors creating extra stocks. Integrators are working very closely with end users to say, ‘What are your plans? We need to speak now for those digital signs, control systems, or whatever the technology may be,” said Peter Hansen, economic analyst at AVIXA. “There’s a lot of knowledge and anticipation today that’s really going to help the industry figure out how to manage the coming months and meeting supply needs.”

Wargo is expecting that vendors will reassess product portfolios. “You may see a shift to where it’s higher end, where there’s better margin,” he said. “In other cases, you may see manufacturers come in and start to just focus on that lower end of the market. We expect adaptation. We expect that that disrupts the product landscape. And that means an integrator is going to have to broaden their portfolio in a lot of ways.”

Price Pass Through

Again, the question remains: who will pay for the increases driven by chip shortage and supply chain issues? Hansen referenced a past example of tariffs contributing to an increase in product prices. “Very clearly our data was showing that the distributors and integrators had made promises to their buyers about the prices of goods,” Hansen said, “and then when it rolled around to the time for those prices, a big new tariff had popped up and the supply prices were very different.” This is unsettling for everyone involved.

Price agreements often happen well in advance of project development. “That really disrupts that process of price pass through,” Hansen explained. Integrators and distributors will most likely refrain from promising prices. “They’re not going to do that with the assumption that things are going to be normal in four months—they know better,” Hansen said.

Distribution Diversity?

Today with the chip shortage and other supply chain issues, there is an increased importance of having a distributor in the mix. “A distributor is going to have the broadest array of options to support an integrator,” Wargo said. “So you could expect perhaps the marketplace to be relying even more so on distribution to help navigate the waters of how a vendor is reassessing and reallocating its product portfolio.” This means that an integrator may have to go beyond what they would normally have considered for a vendor solution.

“There’s a renewed importance of that middle layer to help navigate through these waters,” Wargo added. “And of course, plan in advance as much as possible, which is challenging in an environment where demand is expected to surge back.”