Our supply chain checks across the technology and cloud sector continue to turn pessimistic during the early days of October. As a result, orders for semiconductors that were thought to be secured and guaranteed are being cut. The implications are clear that most segments we track are in for several bumpy months, with all efforts to bring 2022 back to normal.
Component suppliers are cutting or negotiating back existing commitments – Factory shutdowns, lack of fab capacity, and logistics gridlock continue to hamper the ability of system vendors to get adequate supplies. Vendors continue to burn through their stock, and no vendor can ship a 99% complete product. Vendor resources, which should be on 2022 product launches and securing capacity for future product cycles, are instead spent figuring out what to ship and adjusting components in existing product lines. In general, vendors are shipping fewer varieties of SKUs now than at any point in the past 20 years.
Prices are increasing for components and, in some cases, will never return to the previous price – While some price increases could be classified as temporary or transitionary like rush charges, air freight, and redesigns, many events are leading to more permanent price increases. At the very least, vendors will dual source suppliers, manufacturing across many geographic regions leading to lower volume with each supplier. As a result, we view some semiconductor components as never returning to pre-COVID price levels. So the big question remains when products will return to historic price erosion?
2022 lacks new product designs – In 2021, there were very few new product introductions and downsizing in SKU offerings. In some markets, we track there was minimal impact, but in other areas like 400/800G, the lack of clarity is causing many hyperscalers to reevaluate their speed transitions.
We expect a different tone in earnings season as vendors, component suppliers, and customers adjust to the new normal of not getting every type of product they want over the next several quarters. As a result, some projects will be delayed, others scaled back, and spare capacity at AWS/Azure/GCP will be put to the test as many enterprises embrace capacity to buffer shortfalls in premises-based hardware.
