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After Shortages, Prepare for a Price War in 2023

Now that the electronics supply chain is in a state of excess inventory, companies may see lower prices.

The mainstream reporting on the electronics industry and the semiconductor industry throughout the past few years was one of shortages, new production capacity, and onshoring. Now the script has flipped: after a recent slowdown in demand combined with investments in new production, the industry is in a state of component surplus. In addition to manufacturers and distributors holding more inventory, you can expect these companies to start competing with the only leverage they have available: price.

This can be advantageous to buyers large and small, but it takes the right procurement strategy and pricing visibility in order to be successful. In this article, we’ll look at where you can spot pricing advantages in the open market and what buyers can expect from price trends in the near future.

Pricing Trends Over Time

The dynamics of component pricing and semiconductor pricing are very interesting and they are related to advances in manufacturing over the past 30-40 years. Semiconductor components, passive components, and mechanical parts have all dropped in price consistently over time until recently. Although the broad pricing pressures have eased only recently, the pricing dynamics can be seen in the economic data.

The place to start understanding the pricing pressures in the industry is in price index data. According to the St. Louis Fed’s Semiconductor and Other Electronic Component Manufacturing Producer Price Index data, the prices have fallen consistently almost every year since July 1994. That downtrend reversed briefly in October 2020 for obvious reasons, leading to shortages and price hikes across producers. Price hikes ultimately filtered down to EMS customers and consumers.

St. Louis Fed Producer Price Index: Semiconductor and Other Electronic Component Manufacturing data from 2010 to present (April 2023).

As shown in the above graph, only in December 2022 has the price index started to roll over and enter a new downtrend. However, the price index value is still near its recent high: will there be further room for the index to move downwards?

Can We Expect More Price Drops?

I think the answer to the above question is a definitive “yes” for several reasons. In the near term, somewhat weaker demand combined with newer production capacity coming online in the next 1-2 years will continue to drive prices down and inventories up. For companies that need to take new products to market within this time frame, these dynamics heavily favor buyers.

If you look at what’s happening with the big foundries and semiconductor manufacturers, they have invested huge amounts of money in new production capacity. Some of the biggest headlines include:

  • Intel’s $52 billion investment in US capacity following passage of the CHIPS Act
  • Micron building the world’s largest memory fab in New York at a $100 billion price tag
  • Samsung invests $191 billion in a new US fab in Texas
  • Texas Instruments investing up to $30 billion on new capacity in Sherman, Texas

These are huge capacity investments, amounting to multiple billions of dollars per week over the 14-month time period shown above. Once this capacity comes online, we shouldn’t be surprised if the price index starts dropping back to October 2020 levels.

In response, TSMC has started quoting overseas-produced chips at 10%-30% higher prices than chips produced in Taiwan, despite not being produced at the most advanced node. This gives TSMC a buffer against high demand and buyouts of their Taiwan-originated stocks. Prices for chips fabricated at its Arizona plant are likely to be 20-30% higher than prices for the same chips fabbed in Taiwan.

While TSMC might have leverage now, I do not think this advantageous position will last, and it will only apply across the board to other component classes. Therefore, I would continue to expect prices to drop despite manufacturer efforts to negotiate for higher prices for US-fabbed chips.

Unauthorized Distributors

What about the gray market? This segment of distributors typically makes huge profits from smaller buyers during times of extreme shortage. These companies will buy up inventory when it is in shortage, then they will turn around and apply huge markups (4x to 20x) on those same components. If there is suddenly excess inventory with authorized distributors, then gray market brokers will have much less leverage to markup their prices. You might even see surpluses arise within the broker community! If you maintain a broker whitelist, this could create some opportunities to procure at much more reasonable prices.

How to Take Advantage of Favorable Pricing

If all you’re doing to procure components is browsing the biggest distributors, you might miss out on favorable pricing from smaller authorized distributors and direct purchases from manufacturers. Instead of browsing the big distributor sites, find an inventory management platform that integrates ordering with supply chain visibility for electronic components. You’ll be able to see prices across distributors and manufacturers, and you’ll be able to quickly add parts to component orders.

If you want to take advantage of price reductions for electronic components, you need a platform like Cofactr to give you supply chain visibility and order management tools. Electronic design teams and procurement professionals use Cofactr to quote, purchase, manage inventory, and manage logistics for their electronic components. Cofactr also provides warehousing and logistics management services through its online platform.

Zachariah Peterson


Owner, NWES | PCB Design for RF, Mil-Aero, Data Center, AI/ML

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