For manufacturers that fretted over component shortages in 2021 and 2022, the current inventory glut is reminding them of that unsettling maxim: Be careful what you wish for.

It seems like only yesterday that high-tech producers were panicking over a dearth of semiconductors and other key components and raw materials, to the point of planning new and hugely expensive new facilities to make up for the shortfall.

How quickly things change. Now, tech manufacturers are saddled with an excess of component inventories, which are becoming increasingly expensive with the rise in interest rates, and the growing possibility of obsolescence.

A slump in demand for manufactured goods shows few signs of easing anytime soon. GEP’s Global Supply Chain Volatility Index, based on a monthly survey of 27,000 businesses, was in negative territory in November, at -0.34. (Any number below zero signifies that supply chain capacity is underutilized.) It was the eighth straight month of excess capacity in global supply chains.

“This persistent, month-after-month excess vendor capacity means that the end of the global manufacturing recession is still some ways off,” commented GEP vice president of consulting Todd Bremer. The long-term outlook for Europe looks especially dire, he said.

The shortages of 2021 and 2022 were a result of the COVID-19 pandemic, which spurred a rise in demand among consumers at the height of the lockdown, says Frank Bruno, interim chief executive officer of Sourceability, a global electronics component distributor. Then, when demand slowed, manufacturers were unable to “flip a switch” and adjust quickly to the change. 

In times of shortage, manufacturers tend to overbuy as a means of protection against disruption, Bruno says. Now, many are stuck with extra inventories that will need time to bleed off.

It’s going to take a couple of quarters for supply to come back into rough balance with demand, Bruno says. In the meantime, manufacturers’ balance sheets will continue to be burdened by excess inventories. In some cases, he notes, they paid a premium for products when they were scarce, so the cost of carrying them on the books now is especially high.

The rapid shift in inventory levels doesn’t necessarily provide manufacturers with a lesson on how to better manage them going forward, Bruno says. Decisions on when and how much to buy are a function of multiple factors, including industry sector, cost of goods and money, and expectations of long-term demand. Some forward-looking companies are building up even more surplus inventory now, to make sure they don’t get caught out in the next cycle, Bruno says. But most are simply reacting to market dynamics as they arise.

Figuring out the correct amount of production inventory is more than a matter of reacting to shifts in consumer demand. The coming year will continue to be plagued by uncertainties, chief among them the changing role of China in global high-tech supply chains. Some Sourceability customers are vowing to pull away from China, and turn instead to the Americas, Europe and Asia Pacific, Bruno notes. Countries that stand to benefit include Mexico, India and Vietnam. But major shifts in sourcing take a long term to realize, with new semiconductor fabrication plants requiring years and billions of dollars to reach full production.

That said, manufacturers are hoping to do a better job of predicting demand for finished goods, and the corresponding need for components and raw materials. Technology, especially artificial intelligence, can help. But the impact of such innovations will take time to be felt.

Based on intelligence garnered by its customers, Sourceability believes that excess inventories will burn off in in the first half of 2024, with some degree of stabilization in the second half. 

Bruno is optimistic about the long term. Applications requiring electronic components, especially autonomous driving systems and smart home devices, will drive demand back up within three to five years, he says.