Representor Winter 2022 - Cover Story


2022 Outlook: Long-Term Growth Drivers Remain Despite Nagging Disruptions

By Dennis Reed

Dennis Reed is a senior research analyst, technology, at Edgewater Research. Reed can be reached at

By all accounts, the electronics industry has bent but not broken in the face of several years of unprecedented challenges and disruptions throughout the supply chain. As the industry enters 2022, it continues to face some of the nagging disruptions, but is also migrating towards a more normal operating environment. Inventory levels have been largely replenished, production output is being boosted by record capital spending, and demand is expected to return to more “normal” patterns after two years of upside. While the long-term growth drivers for the industry remain, the pandemic and resulting disruptions pulled forward demand across several areas, and we expect these demand tailwinds will likely abate in 2022. Our outlook for 2022 is cautiously optimistic, with results expected to be more closely tied to real end demand as the supply side tailwinds fade.

Strong Sales Growth Despite Multiple Supply Chain Disruptions

The entire electronics industry faced an unprecedented number of disruptions in 2021 including the COVID-19 pandemic, multiple natural disasters resulting in factory fires, water and material shortages, and other logistics pressures. As shown in Exhibit 1 below, despite these disruptions, the semiconductor industry once again proved nimble in growing an estimated 18 percent. The industry has grown nearly 30 percent or close to $70 billion, off the pre-pandemic levels, with strong revenue growth across all product subcategories. Discrete and passive semiconductors led growth at an estimated 37 percent year over year (Y/Y). High-performance analog growth of an estimated 21 percent, likely constrained by capacity, with several high-performance analog suppliers remaining the key bottleneck driving continued backlog volatility across the supply chain.


Supply Chain Inventory Levels Appear Largely Restocked

Entering 2022, the industry outlook remains broadly favorable, with lead times extended and capacity still constrained but improving. Pricing also appears firm across the industry with suppliers remaining active in passing through rising material, shipping and logistics costs to distributors and direct customers. Despite the favorable fundamentals entering the year, we see signs of a potential pending slowdown, most notably from the growth in inventory levels across the supply chain. Exiting 3Q21, supply chain inventory levels rebounded sharply on both a days and dollars basis. As shown in Exhibits 2 and 3 below, on a dollar basis inventory grew ~22 percent Y/Y, and are up 32 percent from pre-pandemic levels in 3Q19.


The growth in inventory dollars is likely skewed higher by suppliers actively raising prices throughout 2021 across almost all product categories. However, inventory days shows a similar trend, with days up 8 percent Y/Y and 13 percent over 3Q19.


While demand has undoubtedly surprised the supply chain to the upside throughout the pandemic, warranting increased inventory levels, a larger driver may have been adding stock as a hedge against the continuing shortage of components and supply chain disruptions.

This motivation and the data itself make it difficult to deem inventory levels “lean” exiting 3Q21, and forecasts are for inventory levels to again move higher, the opposite of typical seasonality, in 4Q21. Further complicating the inventory situation is where most of the inventory has been built – in distribution (+26 percent Y/Y), at ODMs/EMS (+18 percent) and at the OEMs (+50 percent). The distribution channel and customer levels appear largely restocked on a dollars and days basis with constraints now narrowed to just a handful of key components.

Despite the data showing inventory levels appearing largely restocked, especially at the customer level, company management commentary across the supply chain in the 3Q earnings cycle pointed to supply chain disruptions and key component shortages continuing to negatively impact demand and driving record backlogs for 4Q21 and into 2022. While aforementioned industry backlogs reported are robust, it is possible that the majority of suppliers and distributors are not sufficiently discounting the potential for double and triple bookings as a key driver. On the supplier side, many suppliers have tried several programs aimed at reducing double and triple bookings, including non-cancelable/non-returnable programs, and price increases on existing backlogs. Thus far these programs appear to have had a limited impact on order backlogs as customers and distributors continue to believe the end demand signals are real. Historically, this bullishness eventually proves overly optimistic, and feedback suggests many in the supply chain remain on the lookout for potential order cancelations.

Record Capital Spending to Drive Increased Capacity

With the supply chain inventories appearing largely restocked, record capital spending in 2021 is likely to lead to a more balanced operating environment with the growing potential for a cyclical correction sometime in 2022. (See Exhibits 4 and 5)


In 2021, capital spending is projected to increase 70 percent Y/Y, with foundries and high-performance analog suppliers growing their spending 70 percent and 76 percent Y/Y, respectively. Passive and discrete spending is estimated to grow 40 percent Y/Y. This level of spending growth is unprecedented. Capital spending had been relatively stable in the four years prior to 2020; the sharp rise in 2020-2021 appears in reaction to the increased bookings and backlog growth as the industry faced significant shortages throughout 2H20 and 2021.


Entering 2022, lead times, while overall still extended, started to show signs of contraction in 2021. Most noticeably lead times have returned to more normalized levels in several more interchangeable products like MLCCs, resistors, interconnects and several other passive and discrete lines as seasonal order decline in consumer products (TVs, gaming, smartphones, etc.) and compute have freed manufacturing capacity to be allocated to other markets. More proprietary categories like microcontrollers and power products have seen some, but less, relative lead time contractions in our research with the supply chain experiencing some pockets of improvement from several suppliers. With aggressive capacity expansion plans expected to continue in 2022, backlogs appearing artificially inflated, and inventory levels restocked, the supply side of the equation appears to present more risk than opportunity in 2022.

Supply Side Less Favorable, End Demand Growth More Muted than 2021

While the supply fundamentals of the industry appear less of a tailwind in 2022 than 2021, industry forecasts still call for 8-9 percent Y/Y growth in 2022 in our research. Growth is expected to be driven largely by pricing actions taken in 2021 rather than material unit/end demand growth.


The overall demand environment has remained surprisingly resilient but is expected to decelerate Y/Y as the pandemic likely pulled ahead spending across multiple product categories, most notably in consumer electronics and compute. With overall 2022 end product demand expected to track closer to flattish and less favorable supply side tailwinds, growth forecasts appear to have more risk than upside potential.

As shown in Exhibit 6 and 7, Wall Street consensus estimates (per FactSet) appear to be reflecting a more muted demand environment and less supply side tailwinds in early 2022. Following four straight quarters of analog suppliers out-shipping their three-year historical averages (3Q20 through 2Q21), the industry peaked with nearly a 19 percent rolling 12-month delta between historical growth rates and actual sales growth rates.


The current outlook for 1H22, is more in line with seasonal patterns and likely reflects the previously discussed supply-side dynamics and risk for a potential cyclical correction. While 2021 was a year marked by disruption, 2022 appears to have less supply side tailwinds entering the year. Barring any significant disruptions or lockdowns, the industry is likely to approach a more balanced state than many companies are currently projecting. Passives and discretes have shown signs of supply side improvements in late 2021, leaving us wary of a potential cyclical correction in late 1H22 followed by a correction in high-performance analog in late 2022. With a cyclical correction expected in 2022, many market participants should feel relief as the day-to-day operations should return to design win focused from managing expedites and shortages across the industry.