Inflation Spirals in the High-Tech Supply Chain

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When judging the cost of electronics, it’s about more than the price of an individual part. Supply chain considerations include the cost of getting parts through the door, and that price is skyrocketing.

Inflation is taking its toll on the electronics industry. The IPC’s June Global Sentiment of the Electronics Supply Chain report found that nine in 10 electronics manufacturers surveyed are currently experiencing rising material costs, while 86 percent of electronics manufacturers are concerned about inflation – for good reason.

IPC’s June Economic Report points to three main forces exerting pressure on the economy: geopolitical uncertainties, inflationary pressure and China’s Covid-related lockdowns.

“The three key themes we laid out last month continue to hold: geopolitical uncertainties remain high in the shadow of Russia’s invasion of Ukraine, inflationary pressures are wreaking havoc on wide swaths of the economy, and China’s Covid lockdowns are exacerbating supply chain disruptions,” said Shawn DuBravac, IPC chief economist.

Of course, these aren’t the only supply chain disruptions increasing both confusion and costs. “The supply chain is a critical component of the inflation we are seeing,” Richard Danderline, CFO of folding container manufacturer Staxxon, told EPSNews, adding that the increasing cost of goods and the movement of those goods translates into higher prices. In June 2022, inflation hit a 40-year record, with consumer prices increasing 9.1 percent over the last 12 months, according to the U.S. Bureau of Labor Statistics.

Inflation’s impact on logistics

Continued congestion in U.S. ports remains an ongoing concern. Although some reports say that issue has peaked, there’s no indication that it will resolve itself any time soon, said Danderline. “Even though it’s no longer in the news, it’s still a big issue and, with the rise of this new Covid variant, there’s talks of lockdowns in China which may make the problem worse that it was initially.”

Prices on shipping containers has risen exponentially in the meantime. Prior to Covid, a 40-foot-high container cube cost about $4,000 to bring into a harbor. By February 2022, that price had gone to $24,000 (six times more). Now, the price is at $14,000, a seemingly large increase that still represents a price more than triple normal levels. “That’s a 40 percent decrease that’s still a 200 percent increase over what they were paying before the problem,” Danderline said. “We are much more likely to see $24,000 before we see $4,000 again.”

From a manufacturer’s perspective, some logistics problems seem to be improving. Ocean and air shipments are spending less time in transit, according to cargo marketplace Freightos. Rates are declining, although they remain high relative to prior year levels. However, these may be indications of softening demand rather than global logistics improvements.

The Shifl Freight Rate Index reports transpacific rates have fallen by more than 50 percent in Q3 2022, retreating to levels not seen since the beginning of last year. “A sharp decline in demand linked to the tightening of monetary policy across the world, a shift in consumer spending from goods to services, bloated retail inventories in the U.S. and Europe coupled with a dramatic decline in production in China has been responsible for the sharp reversal in rates in the first six months of the year,” according to the supply chain software provider.

At the same time, congestion is not abating, Shifl said. “Container dwell times have been climbing steadily over the past three months. While a box was taking an average of four days to leave the port in May 2022, that figure increased to five in June and six in July 2022. Boxes are taking longer to leave the port in New York also with an average container dwell time of four days.” Surcharges are added when containers aren’t moving.

Gas prices have added to the cost equation. Fuel surcharges are appearing at every juncture of the supply chain.  “If you take all of the goods being brought into the United States that all have that freight component that is going much higher, it starts to drive a spiraling effect,” said Danderline. “Now everyone is raising prices to just to cover the freight costs.”

For now, high prices and inflation are an unescapable reality. Several chipmakers – Intel, Qualcomm and Marvell – have announced price hikes related to inflation. Pundits predict that this new reality will be with us for the next 18 months. “The inflation rate is likely to stay close to 9 percent the rest of the year, then decline gradually after that, ending 2023 at about 3 percent,” according to Kiplinger.