High-tech vendors continue to battle supply-chain problems and higher costs brought on by the current semiconductor shortage, according to statements made in the most recent round of earnings calls.
COVID-19 triggered an explosion of the global remote workforce, which created extraordinary demand for new tech gear. It also forced the shutdown of processor plants. Restarting those plants and renewing supply chains to their pre-pandemic state will be a lengthy process, industry leaders warn.
“This is the worst I’ve seen it. And there have been some big ups and downs. And more than the worst I’ve ever seen it, I think it’s also going to be prolonged,” Arista’s CEO and president Jayshree Ullal told analysts at the company’s recent financial call.
Everything from copper shortages and wafers to manpower, logistics, and freight has been impacted, Ullal stated.
Campus, routing, switching, and data center products are all affected. “And they’re at the component level,” Ulall said. “Now, we’re going to try and absorb as much of it and offset as much of it as we can, and not pass it onto our customers if we can help it, except in modest levels.”
Component lead times have roughly doubled from pre-pandemic norms. In particular, semiconductor lead times have extended to the range of 40-60 weeks, according to Arista.
“Things are very constrained, but I think what’s happened is the world supply chain never planned for this big mismatch in supply and demand,” said Anshul Sadana, Arista’s chief operating officer and senior vice president. “And as a result, when you run into a crunch, people try to book ahead and plan to rebuild buffers and so on. But this is not an industry where you can react in one quarter. This will last a long time.”
The semiconductor industry is predicting a possible recovery in 2023. But who knows what demand will be at that time, Sadana said.
Part of the problem is that current semiconductor foundry capacity is not adequate to meet the recent surge in global demand, wrote Baron Fung, industry analyst at Dell’Oro Group, in a recent blog.
“The cost of servers and other data center equipment is projected to rise sharply in the near term partly due to the global semiconductor shortages,” Fung stated. “An increase of server average selling prices could approach the double-digit level that was observed in 2018, which was another period of tight supply and high demand. However, in the longer term, we anticipate that supply and demand dynamics could reach equilibrium and that technology transitions could drive market growth.”
Other vendors are reporting similar issues.
“Similar to others, we are experiencing ongoing supply constraints, which have resulted in extended lead times and elevated costs,” Ken Miller, executive vice president and chief financial officer with Juniper Networks, told analysts. “We continue to work closely with our suppliers to further enhance our resiliency and limit disruptions outside of our control to the best of our ability. Despite these actions, we believe extended lead times and elevated costs will likely persist for at least the next few quarters. While the situation is dynamic, we believe we will have access to sufficient semiconductor supply to meet our full year financial forecast.”
Extreme Networks is battling the same conditions, saying that demand is outstripping supply for certain products, which led to record backlog for products entering fiscal year 2022.
“The supply constraints are leading to further rise in component and freight costs as we enter Q1,” Remi Thomas, Extreme’s CFO, told analysts.
“We continue to proactively manage the supply chain, and our strategic relationship with Broadcom is helping us in this regard. Importantly, we have secured vendor commitments that will allow us to accelerate product delivery and bring down backlog as of Q2 and beyond,” Thomas stated.
Cisco, too, in its May Q3 2021 results call said the company is seeing the strongest demand for its products in nearly a decade, but it’s also seeing similar component shortage supply issues as its competitors.
The good news, CEO Chuck Robbins stated, “is that we are confident we will work through this as we have already put in place revised arrangements with several of our key suppliers. We believe these actions will enable us to optimize our access to critical components, including semiconductors, and take care of our customers by fulfilling their demand as quickly as possible.”
