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.

Escalating trade tensions between the US and China, rising geopolitical issues, increased tariffs, and uncertainties stemming from the COVID-19 pandemic’s emergence last year have compelled server ODMs to actively shift their operations closer to clients as well as engage in risk mitigation strategies, according to TrendForce’s latest investigations. Taiwanese ODMs, in particular, are shifting their production bases away from domestic China and accelerating the installation of additional overseas production lines. TrendForce expects the share of servers manufactured in domestic China by global server ODMs to undergo a 7% YoY decrease this year as these ODMs shift their production bases mainly to Taiwan. Furthermore, Taiwanese ODMs are expected to account for about 90% of total server production this year.

On the other hand, server assembly operations, which are closely related to motherboard manufacturing operations, are also dynamically reserving their L6 capacities. Server assembly facilities located in New Mexico and the Czech Republic are gradually installing new production lines for server motherboards there. Inventec, Wistron (including Wiwynn), and Foxconn all currently possess sufficient motherboard manufacturing capacities for allocation as needed.

While future changes in the overall server supply chain remains to be seen, it should be pointed out that the migration of production bases pertaining to US companies is of particular importance. For instance, North American CSPs have requested their server ODM partners to migrate L6 assembly lines to locations such as Taiwan and Southeast Asia in response to potential geopolitical factors going forward. However, servers to be shipped to non-US regions will still be manufactured in China in accordance with prior plans. Aside from Google and Facebook, both of which have production lines in Taiwan, AWS and Microsoft have also transitioned their production lines to Taiwan.

Regarding major server ODMs’ current progress, most of them have installed new production lines in Taiwan, with Inventec, Wistron, Quanta, and Foxconn making the most headway. For instance, after installing three additional production lines in Guishan, Taoyuan at the end of 2020, Inventec currently operate a total of eight production lines, while Wistron has not only installed several spare production lines in the Southern Taiwan Science Park, but also planned to expand production bases in Southeast Asia at the end of 2021 for capacity allocation purposes. Quanta is aiming to capitalize on demand from 5G-related applications and data center build-outs by continually adjusting its production capacity for motherboards in Taiwan and Thailand. Finally, by expanding the physical capacity of its Taoyuan facility, Foxconn is able to avoid incurring tariffs for its North American clients’ L6 assembly operations.