According to a report from Economic Daily News, the AI boom has significantly increased the use of passive components, particularly in AI PCs and AI servers. Murata, a Japanese giant in multilayer ceramic capacitors (MLCC), is optimistic about the market outlook, stating that AI is driving waves of MLCC demand.

As per a report from Nikkei, Murata President Norio Nakajima revealed in an interview that the AI trend is unstoppable, leading to an expansion in MLCC applications.

This expansion reportedly starts with smartphones and extends to edge AI in computers equipped with generative AI functions. The end-use of these devices will drive an increase in MLCC consumption, and the demand for components in AI servers is also ramping up.

Murata’s views on the passive component market are referable, as in the first half of this year, Murata was ahead of the industry in announcing a recovery in component shipments for the smartphone market and an increase in capacity utilization at its MLCC plants.

Norio Nakajima pointed out that as demand surges, the capacity utilization rate of Murata’s MLCC plants has been continuously increasing to meet end-user demand. Last quarter, the capacity utilization rate was approximately 80% to 85%, and this quarter it is expected to rise to 85% to 90%.

Following Murata, Taiwanese companies such as Yageo and Walsin Technology also saw a recovery in their operations, marking the beginning of a bullish phase for the passive component market.

Industry sources cited by Economic Daily News further explain that Murata’s optimistic outlook is well-founded. The average MLCC usage per AI PC has surged by about 80% compared to traditional PCs, while the usage in AI servers has more than doubled, with each server requiring an average of 3,000 to 4,000 MLCCs.

In high-speed computing environments, this will further drive the demand for high-capacity and high-voltage MLCCs. Meanwhile, Yageo and Walsin Technology are actively seizing the business opportunities brought by AI.

Yageo Chairman Pierre Chen once stated that at this stage, the group not only provides MLCCs and chip resistors for AI applications but also inductors and magnetic components.

These offerings include both standard and niche products, and the company can also provide customized product combinations according to customers’ requirements for high-temperature and high-current tolerance.

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(Photo credit: Murata)

In the third quarter of 2023, the passive component industry’s inventory has returned to normal levels. However, it continues to deplete due to sluggish end-demand. Nevertheless, downstream customers in the mobile phone and automotive sectors have begun rebuilding their inventories. Ample Electronic Technology, a major manufacturer of conductive paste and thick-film conductor materials, has already seen a recovery in its August 2023 revenue, indicating that the inventory adjustment process in the passive component industry, which began in the fourth quarter of 2021, has gradually bottomed out over nearly two years.

TrendForce Insights:

• Upstream operations in the passive component industry are rebounding, but true demand recovery awaits.

In the second quarter of 2023, the passive component industry’s inventory approached normal levels. However, due to weak end-demand, Chinese smartphone and PC manufacturers significantly reduced their component inventories in the second quarter of 2023, leading to continued poor performance for passive component manufacturers. It is expected that after hitting the bottom in the third quarter of 2023, operations will gradually improve. However, the timing of true demand recovery may need to wait until 2024, given the persistently sluggish consumer electronics market.

• AI servers are on the rise, and inductive components are in demand.

General-purpose servers primarily use molding power inductors, with quantities ranging from 20 to 30, an ASP of approximately $0.07 to $0.1 per unit, and a current rating of only 30 to 40A. In contrast, AI servers have power consumption levels generally exceeding 1000W. To improve transient response performance, each AI server requires an additional 10 TLVR (Trans Inductor Voltage Regulator) inductors, with an ASP of around $0.3 per unit. This significantly increases the revenue of inductance components for AI servers compared to general-purpose servers.

• Promising prospects in the automotive market, but validation takes time.

Conventional internal combustion engine vehicles require approximately 300 to 500 MLCCs (Multilayer Ceramic Capacitors), while Battery Electric Vehicles (BEVs) require between 2,000 and 2,500 MLCCs. Self-driving systems will also drive MLCC demand. For instance, in the case of automotive camera modules, the quantity increases from 2 to 10 to 15. From a holistic perspective, non-self-driving internal combustion engine vehicles require around 3,000 MLCCs, Hybrid Electric Vehicles (HEVs) with Level 2 autonomy need over 6,000 MLCCs, and Level 3 Electric Vehicles (EVs) require more than 10,000 MLCCs. This leads to a significant increase in the revenue of automotive MLCCs.

However, entering the automotive sector is challenging and requires at least 1 to 2 years for certification. Nevertheless, once established, it can secure long-term agreements for at least 5 years. Additionally, compared to the slowing growth of the consumer electronics market, the automotive sector offers substantial opportunities and provides a buffer against the cyclicality of passive component industries.

China’s Automotive Price War Rages On: Some automakers have been gradually reclaiming outsourced orders for the battery, motor, electronic control system since May and June, shifting towards in-house production. Recently, they have asked suppliers to requote for second-half orders, with Samsung, Murata, Taiyo Yuden, PSA and Yageo actively vying for contracts.

Due to the more stringent certifications in the automakers’ supply chain compared to tier 1 suppliers, the majority of battery, motor, electronic control system MLCC suppliers still come from Taiwan, Japan, and Korea. Among them, Korean manufacturer Samsung has made significant progress in the Chinese automotive market this year. They have been actively providing sample for certifications and competitive pricing, securing a large share of orders and displacing Japanese manufacturers Murata and TDK, who had long held the lead.

Ongoing negotiations between automakers are expected to conclude with finalized orders by the end of August. According to the channel check from TrendForce, it appears that Samsung will maintain its leading position with a low-price strategy, while Murata, unwilling to be drawn into a price war reminiscent of consumer electronics, will remain conservative with pricing to secure a substantial market share. Taiyo Yuden, PSA and Yageo, though limited in automotive product offerings, have been proactive in their bidding efforts and have secured several orders.

(Photo credit: Yageo)

As the struggle between China and the United States continues, in order to avoid upcoming geopolitical risks, not only have Taiwanese ODM manufacturers begun to shift some production locations, but market research firm TrendForce has also observed that American OEM companies have started to take action, discussing with partners how to reduce the proportion of Chinese supply chains and components.

TrendForce points out that, at present, American cloud service providers (CSPs) and OEM manufacturers have not yet been able to completely cut ties with Chinese-produced components. Among these, passive components and mechanical assemblies are more difficult to relocate due to factors such as cost and yield. However, other components (such as PCBs and power management control ICs) have plans to move out of China.

But where will these component manufacturers go if they want to move out of China? According to TrendForce’s analysis, PCB manufacturers are currently eyeing shifts to Thailand, Malaysia, Vietnam, and India; power management ICs and control ICs have already moved out of China and relocated to Taiwanese factories; mechanical assemblies and MLCC capacities still mainly come from China, with the former being requested to move but facing challenges due to cost and yield considerations.

TrendForce notes that the aforementioned production line and material shifts are primarily led by American CSPs. The overall server supply chain’s subsequent changes still need to be observed. For example, major players like Google, AWS, and Meta have not only moved most of their L6 production lines to Taiwan but also plan to establish bases in Southeast Asia after 2024 to handle cases within the United States, and reserve flexible production lines along the US-Mexico border, which will significantly increase utilization within this year.

Due to the explosion of the COVID-19 pandemic in China, Shanghai has adopted a rolling lockdown policy since March and Kunshan City, a major production hub for the electronics industry near Shanghai, has also felt the impact. According to TrendForce, limited manpower and logistics and suspended transportation options mean neighboring OEMs and ODMs can only rely on onsite inventory to barely meet the needs of production lines, further exacerbating component mismatches. Concurrently, a short-term surge in finished product shipments and demand for material replenishment after the various lockdowns are lifted may gridlock customs authorities, with delivery delays potentially lasting until the end of April before there is any chance for improvement.

TrendForce further indicates, starting from 4Q21, demand for consumer specification products, which account for the bulk of products sold by MLCC suppliers in Taiwan, Korea and China, weakened as customers continue to adjust their inventories. Although ODMs currently predict the demand for consumer specification MLCC will recover month by month in 2Q22, emergency lockdowns caused by the pandemic are bound to impose delays on logistics. Likewise, OEMs’ supply of key direct buy components will also be interrupted due to the Shanghai lockdown.  Shortages of CPU, battery module, and panel materials will impact production lines because materials cannot be delivered to relevant factory warehouses, exacerbating ODM component mismatch issues. On the other hand, the focus of downstream branded customers remains on low visibility and weak demand in the 2Q22 end market.

MCLL supplier production centers in China including those located in Tianjin, Suzhou, Wuxi, and Guangdong, have yet to be locked down but inter-provincial logistics and transportation have clearly felt the escalation of inspection and supervision since the end of March, resulting in prolonged transportation timetables. However, the biggest problem for MLCC suppliers at this stage is they cannot deliver materials to Shanghai and Kunshan. There are a number of large ODM plants at these two locations, such as Quanta Shanghai Manufacture City in the Songjiang District of Shanghai and the Compal, Wistron, and Pegatron campuses in Kunshan. At present, ODMs’ average inventory level for consumer specification products sits at 3 to 4 weeks, which is sufficient to meet the needs of short-term production. However, stocks of certain high-voltage automotive MLCC of 250V or higher specifications and high-end server MLCC size 0805/1206/1210 items may be in danger of depletion.

Looking to 2Q22, the lockdowns of Shenzhen, Dongguan, and Shanghai that began in March have hobbled China’s manufacturing industry and sent it into a period of contraction. In addition, the Russian-Ukrainian war and rising inflation continue to slow demand growth for mainstream consumer electronics, potentially risking recession. With so many unfavorable factors, ODMs must still observe an easing of component mismatching before further considering MLCC stocking momentum after restrictions are lifted. If the pandemic in China cannot be effectively brought under control in the short term, overall ODM inventories will continue to be maintained at a high level for approximately 1 to 1.5 months to prevent similar sudden lockdowns disrupting operations. However, TrendForce believes that it will be difficult for MLCC suppliers to surmise the visibility of customers’ real demand. Once the purchase order situation reverses, they will be unable to respond quickly with capacity adjustments, thus becoming a primary focus of MLCC manufacturers’ risk management in 2Q22.