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In 2020, the stay-at-home economy spawned by the COVID-19 pandemic drove a sharp rise in the demand for consumer electronics. In 2021, the chip shortage in the semiconductor industry brought about domino effects such as panic stockpiling and production expansion. In 2022, amid the outbreak of the Russia-Ukraine War, prices of commodities (e.g., oil and natural gas) surged. The rise of upstream material costs aggravated global inflation, leading to a rapid decline in demand for consumer electronics, a backlog of inventory in the chip industry, and a serious structured short supply. To sum up, the development of the global economy in the post-pandemic era undulated, and the semiconductor market in the business cycle also underwent a roller coaster of demand-supply tension.
Cytech Systems Limited（www.cytechsystems.com）is an industry-leading independent distributor of electronic components. While being interviewed about supply and demand in the semiconductor market of 2023, Alice, General manager of Cytech Systems, made a forecast, saying, “The market downtrend of 2022 will remain in 2023, implying the structured short supply will continue, which should be attributed to the industrial periodicity and sluggish macroeconomic environment.”
Alice’s forecast on the trend coincides with the up-to-date forecast of WSTS (World Semiconductor Trade Statistics). According to statistical data of WSTS, the global semiconductor market achieved robust growth of 26.2% in 2021, and the growth rate is estimated to decline to 4.4% in 2022, with market size hitting $580bn. It is predicted that the global semiconductor market in 2023 will shrink by 4.1%, with market size falling to $557bn, implying the market will shrink for the first time after achieving three consecutive years of growth. Such a slowdown might forebode more extensive economic plight.
Industrial periodicity helps reshape the value of independent distributor, and “Agility” and “Adjustment of redundancy and shortage” are viewed as the core of value
“Short supply” are still the keywords in the semiconductor market, but prefix to “short supply” has varied in recent years, and it changes from previous “all-around” to current “structured.” On the whole, downstream end customers are still faced with incomplete BOM materials, a backlog of inventory, and high pressure in cash flow that existed in 2021.
After experiencing nearly two years of continuous short supply, many end-customers are re-examining their supply chain’s safety and sustainability. Due to this, customers are also reassessing the value of the independent distributor. “Presently, a host of global premium customers, be it EMS customers or OEM customers, successively increase the proportion of independent distributors in their supplier systems. Meanwhile, Cytech Systems make unceasing efforts to keep seeping into premium customers’ supply chains, ” Alice added.
With the increase of independent distributors’ operating revenue, massive customer demands pose higher requirements about the companies’ service ability and operation ability. “For the independent distributor, its value in a big ecosystem is the adjustment of redundancy and shortage, so your team needs to be agile,” Alice said. “For Cytech Systems, it needs to coordinate an array of resources, such as channel, procurement, customer service, IT platform system, and quality management”.
For example, before 2020, Cytech Systems provided customers with the value mainly relating to PPV. Due to upstream uncertainties of the supply chain, Cytech Systems was unable to provide customers with sustainable PPV service in 2020, so it swiftly changed the business model and transformed from 80% of PPV proportion to more than 95% shortage. Amid three years of undulation of the semiconductor market, Cytech Systems has sharpened its ability to survive in complicated market and periodic fluctuations. It will resolutely adopt an “Independent distributor” mode, focus on the “provision of value for customers”, stress low inventory, and persist in concurrent development of PPV and shortage. In the future, it will keep internationalizing its investment, and live up to the integration of global sourcing and local support.
Optimistic about automobile, industry, and medical sectors, Cytech Systems goes all out to build its own “New Infrastructure” system
Looking ahead to 2023, Cytech Systems noted that it would take time for the consumer electronics market to recover from the slump, thus Cytech Systems is more optimistic about high value-added industries such as automotive electronics, industrial control, and medical service. During the course of growing together with its customers, Cytech Systems stresses fast iteration and improvement of its operation and service abilities.
“In 2023, we will shore up our own ‘new Infrastructure’ system from three domains, in order to keep improving our competitive edge, ”Alice said. “First, we will create a dynamic modular database and build high-standard premium laboratory and intelligent warehousing IT platform system, etc., with a view to enhancing our hard power; second, we will pass more certifications, for example, Cytech Systems is estimated to pass AS9120 and ESD20.20 system certifications in 2023Q1, which will help further upgrade the company’s quality management system; third, we will foster brand effect, and bring together more talents: the company will transform from recruitment of people to recruitment of talents, in order to improve its soft power.
Dynamic modular database is a de facto database based on material code, and Cytech Systems will update and maintain the database based on supply and demand information collected by its teams. “For example, we are optimistic about high value-added industries such as automotive electronics, industrial control and medical service. We will split every application field into multiple modules, refine every module, and sift out mainstream and competitive original factory and specific material code,” Alice said.
By virtue of a dynamic modular database, Cytech Systems can help both the supply side and the demand side, for example, it focuses on the most valuable brands and models on the channel side, and assists customers in seeking material code across the globe, in addition to reversely recommending customers on the strength of the channel’s existing goods resources. On the customer side, Cytech Systems can seize customer demands efficiently and agilely.
For independent distributors, a perfect quality control system is the core foundation to ensure its sustainable development. In August 2022, Cytech Systems established its Shenzhen Laboratory with a floor space of 260 square meters, dozens of testing equipment, and more than 10 senior QC engineers, making it one of few independent distributors with testing laboratories and a perfect quality control system in China.
In 2023, Cytech Systems will continue building premium laboratories of high standards. According to Alice, the company will build a premium laboratory according to large-scale international independent distributor’s laboratory standards, and the laboratory will have such testing features as EVI, X-ray, and decapsulation. The establishment of such premium laboratory marks the completion of one of a handful of quality management systems by domestic independent distributors.
“As a matter of fact, a great many domestic distributors are doing this work, but most of them only complete half the work, because this process is too complicated and long and must be subjected to review and certification by a lot of governmental organs, ”Alice said. “Later, most players prefer basic testing (e.g., EVI and X-ray testing) only based on capital strength. In other words, they prefer the mode of little investment but quick result. However, Cytech Systems with farsighted view hopes to build the quality management system as new infrastructure, and it prefers long-term development route and moves ahead steadily.”
Focus on both “Little Investment but Quick Results” and long-term development, with a keen insight to “Semiconductor Market Transmission Chain”
Speaking of long-term talent strategy, Alice, aside from stressing continuous training of independent distributor’s conventional sales and purchase teams, noted that Cytech Systems planned to build a supply chain trend forecast team.
“Supply chain trend is the spotlight of the distributor industry,” Alice said. “We will ‘dispel the clouds and see the sun’ from a series of target listed companies’ financial reports in the industry, in order to keep abreast of the entire supply chain, because we know that the capital market always runs ahead of the industry, and it usually outpaces the trend for nearly half a year many a time”.
Besides, to correctly forecast the market trend, we need to learn about the semiconductor market’s transmission process from the perspective of macroeconomy and niche market, for example, the semiconductor market transmission chain roughly falls into five main nodes (including macroeconomy, consumer electronics terminal, chip, wafer OEM/closed testing, and equipment/materials), and the transmission cycle between two nodes is roughly 1 to 2 quarters.
To seize market opportunities in the semiconductor supply chain, we need to correctly follow the semiconductor market transmission chain, and draw on implicit information in the capital market. For mid/long-term development, we need to analyze macroeconomic trends and regional policies; for short-term development, we need to keep a close eye on the consumer electronics terminal market’s trend and upstream supply-demand relationship. Only by collecting information from multiple channels can we make reasonable market decisions.
Adjustment of redundancy and shortage is regarded as the core of the distributor industry. “In fact, be it in adjustment of redundancy and shortage or in forecast of trend, we should focus on term,” Alice added. “For example, when will this round of market slump recover? When will it be corrected?”
Players in the distribution industry must temper their ability to seize the term for little investment but quick results. However, this ability is based on long-term efforts, “I always stress that this industry is the combination of little investment but quick results and long-termism. To win long-term trust and cooperation from customers and maximize your proceeds, you must have a keen insight and cling to long-termism”.
About Cytech Systems
Founded in 2010, Cytech Systems Limited（www.cytechsystems.com）is a leading independent distributor of electronic components, and it provides electronics ODM/OEM/EMS across the globe with electronic component supply chain services such as PPV service and shortage service. So far, the Company has established cooperative relationships with dozens of renowned brands including TI, ADI, Broadcom, SL, Microchip, Maxim, Infineon, ST, NXP, ON, Allegro, DIODES, INTEL, Cypress, and GD, etc., and it is committed to providing customers with instant, reliable and high-value supply chain solutions.