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68: Tackling the Chipset Shortage and Other Supply Chain Challenges in Consumer Electronics

Written by Rob Stott

May 4, 2021

Lee McDonald consumer electronics chipset shortage

Nationwide Marketing Group Vice President of Consumer Electronics Lee McDonald addresses a wide range of topics on the latest podcast, including the ongoing chipset shortage, tech trends the pandemic pushed and more.

Rob Stott: All right. We are back on the Independent Thinking Podcast. And I guess, you know it’s going to be a fun or at least somewhat serious podcast when I have a shirt on with more than three buttons. So, Lee, you’re welcome. I guess. Can I say you’re welcome? Is that too modest?

Lee McDonald: I appreciate you, Rob. I appreciate you.

Rob Stott: Mr. Lee McDonald, our VP of consumer electronics here at Nationwide Marketing Group. And we all know I got that soft spot in my heart for CE, so I want to work. That’s why I dress up because this is, don’t tell the other merchants, maybe my favorite category to talk about for one reason or another. So, and I know you too.

Lee McDonald: I’ll keep your secrets.

Rob Stott: Yeah. You and all of our dozens of listeners here for the podcast and then maybe I’m being, even being generous there. So we’ll see. We’ll see how far spread it gets. But no. Mr. McDonald, I appreciate you taking the time and we’ve got a lot of great stuff to talk about today. It’s been a while since we caught up. So plenty has happened in the world since the last time we talked about CE on the Independent Thinking Podcast, but we’re going to dive in on the deep end if you don’t mind.

Lee McDonald: Might as well.

Rob Stott: We’ve talked to … You hear from all the other merchants, even people covering the retail industry. Supply chains have been hampered this past year for a number of reasons and we could get … Obviously the pandemic is still happening, starting to see the light at the end of the tunnel, but what’s the latest on CE? How are things in your category right now? And what’s sort of the outlook for you guys?

Lee McDonald: Yeah. You certainly hit the nail on the head. It is a challenging time and it’s been a challenging time. And it seems like there’s just this compounding and escalating set of factors that continue to drive supply chain shortages. We started, it was truly just a spike in demand, and under you can’t forecast for what happened during the pandemic, and we saw that. So it was a spike in demand. There’s a shortage of containers. And then as the pandemic progressed and, and people start spending more money with stimulus checks, then it was a shortage in containers, increase in container prices.

And then some really interesting things started happening that you really couldn’t predict. You can kind of predict and forecast supply chain allocation and container shipping costs, but there were glass foundries in Japan that had power outages. When that glass cools in those foundries and it freezes, not freezes, but it cools and ruins the foundry. And so that has cascading effects to the supply chain and CF silicon prices and all kinds of different things. So, where we’re at today is different in the set of factors that are causing shortages in the industry.

The good news is the majority of the challenges that are addressable manufacturing shortages, panel, chip sets, which I’m sure we’ll get into those, those are coming to an end. And I don’t want to say an end, they’re easing a little bit. So the short term impact and outlook for the industry is the inventory is going to be tight. It’s going to be really tight. I would expect 20 to maybe 50% fill rates for members and just kind of across the board in the industry, really until the end of July. And then August, I see things picking up a little bit, maybe 70 to 90%, but the good news is that when we returned to the holidays, when we returned to PrimeTime and the real dry times of the year, we should between 90 and a 100% allocation availability. So it’s going to be difficult for the next few months, but it’s going to get better by the end of this year.

Rob Stott: Well, you mentioned it. I mean, it’s crazy. So many compounding factors that don’t necessarily relate to the pandemic. It feels like the pandemic kind of overlays everything, but it’s deep freezes down in Texas that I know also had an impact on the CE supply and supply shortages elsewhere. You mentioned the chip sets and where we’re going next. So if anyone that’s covered the CE space or even followed sort of loosely over the 12 months, you know that there’s been this massive chip set shortage that has impacted everything from automobiles to microwaves, to obviously computers and anyone trying to get their hands on a PS5 knows that it’s impossible because not only is demand high, but they don’t have the chips to make them.

And then recently, if anyone’s been on our NMG blog, you know that we recently detailed the fact that Cisco’s CEO mentions that there was actually a massive underestimation for how demand was going to go during the pandemic. A lot of tech brands thought that it was going to dive and it did not dive. So, they lowered their forecast, which meant lower chip orders and all sorts of stuff. So I know there’s a lot of things going on in the world of chips and semiconductors. So what’s the latest that you’re hearing from that end and its impact on the supply chain in the CE space in general?

Lee McDonald: Yeah. You brought up a good point. There was definitely a period where we didn’t understand the forecast and the chip set manufacturers didn’t understand the forecast. Part of the challenge is there’s not that many, really, really big chip set manufacturers, and they’re not very widely distributed, either based on core competencies or geography. TSMC, which is really the largest chip set producer in the world is the source of the majority of where consumers get their devices from, whether they know it or not.

So they make these, we won’t get into the technical side, but they make these really small either called IO processors or IO chip sets and they fabricate about 80% of the entire world’s allocation. And like you said, it’s in everything. I mean, these are very base level components that are in PS5s, they’re in your car, they’re in your phone, they’re in your video cards, in your computers. Essentially everything that consumers were going out and buying, truckload during COVID is made with these chip sets. So you have massive demand, and then you’ve got challenges with manufactured, so you got forecasting, and all the challenges to go with there, shipping, containers and everything else. But then now what you have going on is some ecological challenges that they’re having producing chip sets.

It’s crazy to think about, but the TSMC actually uses 160,000 metric tons of water a day to make chip sets. And, well, why do they use water to make chip sets? It’s because it’s used to clean a lot of the components that you have to water blast away imperfections, impurities. They use it to cool a lot of their components there. And then so you think about, okay, that’s water. It’s hard to wrap your brain around how much that is, but they also have just come off of a year where first time in almost a decade, they haven’t had any typhoons and hurricanes for us Westerners. And that’s unprecedented.

They’re also in the middle of a hundred year drought. So, their government is looking at, “Okay, we have to supply water to people before we can start making consumer durables.” So that’s complicating too. And that is something, and again, I mentioned there’s things you can control for then there’s things that are really out of your control. So the supply chain issues are largely being addressed. And we know that there’s an end to those coming. It’s the other things, glass foundries freezing and breaking down and ecological disasters in other parts of the world that are going to be really the wild card for the year.

Rob Stott: Unreal. And we know that as things progressed, we say that there’s light at the end of the tunnel, it feels like it, but not only are, we’re getting to the other side of this where things are getting better. But also we saw that a couple of those trips that makers, they’re looking to invest locally as well and bring those manufacturing plants back to the US to help ease that, because I know semiconductors were made over here. They were introduced in the US but since I think you can go back to the ’90s, we were the world’s largest supplier over here, but obviously that’s for reasons that we don’t need to get into the [crosstalk 00:08:17] right. It could be a whole different conversation, but those numbers have greatly shifted offshores.

Now it’s, I think like 85% of the chip sets come from overseas. So looking to bring some of that home, I know there’s a lot of investment going on locally and back domestically, I should say, to bring that manufacturing back. So there’s movement and progress being made to sort of ease that demand over here as well. So lots of factors to consider, but we’re getting there and if there’s ever a sign that things are getting back to normal in CE it’s the fact, we’re talking here the week that was announced, CES is going back in person. So there’s at least that to look forward to. I got to ask, it’s not in our approved questions that I had sent through your whole team and all that sort of stuff, but no, I want to ask it anyway, is what, what are your thoughts on CES going back … Are you excited to get back to Vegas?

Lee McDonald: I am excited to get back and see our members and see our vendor partners, whether that’s at CES or PrimeTime, really doesn’t matter to me as long as we can do CES safely. I’m really curious to see what that looks like. What is the CTA and CES and the Las Vegas tourism council? What are they doing to maintain the safety of that event? What’s it going to look like? I’m fascinated by it. The whole, like you mentioned, putting factories in the US, what is that going to do to the supply chain long-term in this industry? I look at tourism and these large events that happen in Las Vegas and other places around, PrimeTime being one of those. It’s very interesting to watch how that side of the business evolves.

So I’m really excited. I love CES. I obviously wouldn’t be doing this job unless I was a little bit crazy and love that kind of stuff, but I would not say I’m looking forward to it. I want to see exactly how they plan to keep everybody safe and bring us back together. But I’ll be there. I’ll tell you that. If we can do it safely, I’ll be there.

Rob Stott: It’ll be the biggest test for sure. We know it’s the largest event in the country. Globally, it rivals some. Feels like that just getting back to normal is cool for sure. Despite all these challenges that we’ve talked about, what’s going on right now in your business? How is the CE business performing?

Lee McDonald: It’s strong, despite all the challenges that we talked about. The business is up year over year. So depending on where you’re at in the country and what week it is, some retailers are up, some are down and it really just comes down to who can ship product. The industry as a whole is up around 7% right now, year to date, which we really haven’t hit the year over year comps from when the bottom fell out of business. If you think about what was happening a year ago, we were really just starting to enter our national lockdowns. Consumers were very frightened. And you saw that kind of in the market. You saw a market dip. We saw in our industries, in our core competencies, furniture, bedding, consumer electronics and appliances there was a few months where there was really, really low and depressed sales.

We haven’t hit those months yet. So I imagine when we hit those months, our comps are going to go way up. But what’s really important to remember is that our manufacturing partners shift. Some were up 50% in units year over year. I mean, when this happened, they didn’t sit on the sidelines and go, “Sorry, you’re on your own.” They ramped up. I mean, some of our manufacturer partners have been producing goods 24 hours a day, seven days a week since essentially June of last year. So even though it’s difficult to find product and we don’t have the inventory we want to, that’s more of a function of demand and just some other supply chain and ecological challenges we’ve got. So the business is incredibly healthy and I would guess, and my forecast is that we will remain that level of demand and that level of health, at least through the back half of this year.

Rob Stott: That’s awesome. Awesome to hear obviously some good news for this business considering the year they’re coming off of, and also good to hear, you mentioned the things that some of the vendors are doing to work through those issues. A nice follow up to that. What, from the Nationwide side, what is the group doing from as far as those inventory challenges are concerned to help members get access to that product and help improve their share in this space?

Lee McDonald: Yeah. I mean, that’s why we’re here, right? That’s the whole point of why we exist. So we’ve done a lot of things, and I appreciate the question, I think back to PrimeTime, which was only 45 days ago, it’s weird. We’re kind of in this, we’re just getting out of PrimeTime. We’re going to ready to go back to another one, but it’s really exciting because it’s in person. So let’s talk about that later, but what we did coming into PrimeTime is we saw the impending challenges through the middle of the year. We knew that there was going to be a little bit of a short term inventory. We knew there was to be a challenge kind of in this middle phase of the year and then come back end the year we’ll be okay.

So we went into PrimeTime with over $30 million of TV inventory that was exclusively for our members. And that’s, one of the things that I’ve been talking to the membership about a lot, I’ve talked to you about it. I talked in our CE merchandising session at PrimeTime is our members really, really, really need to get hyper-focused on how they buy product this year and they can’t buy it just from one source. They have to have multiple sources. That’s one of the main value points of the group is we don’t force you to buy through one warehouse in order to get the show specials and shows program. We work with a network of seven incredible distribution partners who are willing to hold inventory aside for us, who are willing to give 120 days credit terms was what we had at PrimeTime in order to help members secure inventory, not have to worry about paying for it today, but then to protect their business.

So we’ve got a number of members that have bought inventory. They’re not where they want to be, but they’re, they have sufficient product to drive year over year comps through July. So we did that for PrimeTime. And right now, as you can imagine, everybody who’s anybody is buying every piece of TVs, so we’ve got a lot of our distribution partners, work with some national retailers, whether that’s on like you think of traditional Best Buy or some [inaudible 00:14:45] partners and those organizations are facing unprecedented demand just like our members are, and they’re going and saying, “Hey, I don’t care if you have five pieces of this ,six piece of this, I will take your entire stock of inventory and anything you have coming in for the next two or three months.”

Kudos to our distribution partners, they are protecting and continue to hedge inventory for the independent channel. And again, that’s one of our core competencies and our strengths. So, securing inventory, but also following up with deeper promotions than we’ve ever had before. So there’s a tendency, I think, for some retailers to look at, “Well, I can’t guarantee how much business and inventory I’m going to have, so I need to pull back on digital marketing.” And I got to tell you, that’s the absolute wrong mindset to do. Not only are their national competitors not doing it, they’re leaning in more in the digital and marketing space. And so we have to help the members and we have a responsibility to make it easy for them. So, last year we had a one-to-one match or two-to-one match for advertising campaigns.

This year, we’re doing three-to-one match. we’re paying for members that migrate from their existing website to a Nationwide platform because Google and our top manufacturer partners are giving us incremental dollars to help fund promotions because what we’re doing works. And that’s the point of it, what we’re doing works, what other people are doing isn’t. That’s why we’re getting allocation. That’s why we’re getting incremental marketing dollars. And so it’s really two sides of the same coin. We have to help the members have inventory and you have to help them drive bodies in their store to buy. And so that’s what we’re just hyper focused on, those two things over the next three months. And then as we pivot to the back half of the year, we’ll still have the hyper-focused on inventory, but also having show specials and bringing back PrimeTime and cashbacks to the level that they were three years ago, where there wasn’t a scarcity of inventory. So that’s what we’re focused on right now.

Rob Stott: Now a lot, obviously a lot of great stuff and always cool to hear on the distribution partner side, that they understand the importance of this channel, and they’re not going to let some big names out there and try to bully the space into not having access to the product that they need to be able to sustain their business. Neat to see us working with them and obviously working on behalf of, of members to make sure that everything’s set up for them to succeed. So kudos to you and your team and making sure these guys have their fair shake on the product side and on being able to sell through side. So awesome stuff.

What, pivoting a little bit, this past year was kind of interesting just to follow along. We’ve had chats with Google and other brands just to see how things kind of ebb and flowed from a product perspective throughout the past 12 months. Were there any areas of the business that kind of, not necessarily were boosted by a pandemic, because weird to think that a product line would be boosted by a pandemic, but that had more of an opportunity because people were at home? Was there anything that sort of stood out you from that product perspective over these past months and during this interesting time we’ve been living through?

Lee McDonald: Yeah, it’s fascinating. Like I said, I think we’re going to be studying this period of time in American history for decades to come. Two things that stuck out in my mind. And I think you saw it across, again, all of our core competency categories, people are just spending so much more time in their house and they’re evaluating the quality of their life and how the consumer products in their house, they interact with affect the quality of their life, whether that’s, they start cooking a lot more, so they want a different stove or they wanted a bigger refrigerator because they don’t want to go out so much and potentially expose themselves to viruses or different things.

We saw the same type of behavior in the consumer electronics industry. We just saw it manifest in a little bit different way. So we saw hyper expansion of screen sizes that are, I would say 55, 40, 40 to 55 inches. And when we dug through the data, what we found is homes that had one or two main TVs while everybody’s home, they want to watch TV at the same time, so they want to spread out. Laptops exploded because everybody needed to be online at the same time. We also saw a massive expansion of our AT&T partnership because when there’s six people at home or four people at home trying to use the internet at the same time, that’s one of the most frustrating things in my life when the internet goes down or it’s slow, or you can’t load something. And so we saw a huge demand for that.

One of the categories that surprised me a little bit was home audio, not only because it was one of the most heavily impacted from a manufacturing and supply chain allocation side, but just the crazy demand where really the industry had migrated to these home theater in a box, all in one set ups over the last few years, or even really inexpensive soundbars, think $400 and below, we’ve seen almost a Renaissance return to surrounds and separates, AV receivers, 5.1 channel system. Adobe’s done a lot to do consumer education with Atmos. And some of the other things that consumers may be familiar with, some of our members may be familiar with, but that category has exploded. We’ve seen members returning to multi-channel audio, to separates and surrounds, in a way that I haven’t seen, looking historically at data, at least that we haven’t seen in four or five years. So that was really interesting.

Home automation, not really surprising, but just the level that it grew. Everybody wants security cameras, they want thermostats because the other thing that we noticed too, during the pandemic is just a lot of large focus on budget. And so having smart devices in their home, like a Nest thermostat that is going to help them save potentially hundreds of dollars a year on energy costs. Just a lot of that stuff. So like I said, it’s the whole thing is fascinating. And we’re going to be learning things about this year in American history for a long time to come.

Rob Stott: Yeah, for sure. The audio side, kind of, even on the video side, expanding screen sizes, that’s always been a thing, but the audio thing is interesting because you think people weren’t able to go to movie theaters. So it’s all of a sudden trying to bring that experience home. And you’re not in a movie theater with just, 32.7 surround sound systems around you, so they want to bring it at least a piece of that home. So expanding that experience in turn in your home, obviously, you think about it that way, probably had something to do with it. Wanting to bring that movie theater experience to one’s home. So cool to see that. But what about now kind of pivoting and looking ahead, is there any areas now that are getting more of a focus today, or as we head into the back half of the year, are things sort of, are you still seeing those same trends, in those same categories, is there anything new that retailers need to be focusing on in the CE space?

Lee McDonald: Yeah, I would say the category trends will continue for the time being. Really what the membership and independent retailers should take away from this is that consumers are more willing to have a conversation and be open to discussing things than they may have been in the past. When I go and I secret shop Best Buy or different retailers on the weekends, the interactions have just fundamentally changed. In the past, I grew up on a retail sales floor, it was, audio was kind of the last thing you would talk about depending on how you would qualify a customer. And a lot of times, especially in national stores where they don’t have a commission sales floor, directed sale floor, it’s more clerking than it is a real true sales experience. That’s why you’ve seen ASPs and audio just absolutely crash. So for audio, as an example, I think now is the time for members and retailers to start thinking about that category in a way they haven’t before, because consumers are, they understand they’re spending more time.

They understand that there is a value. Audio is an emotional experience where TV is very visual. Audio is really what drives the emotion. I can do a two channel demo for you right now, but the point is that consumers are just thinking differently about their purchases, thinking about how they’re going to interact with the product. And so they’re more open-minded than they have been in the past.

So if you have a directed sales floor that can sell audio, that can sell other products, especially warranty, warranty is an area that I think every consumer in the United States understands the power of a warranty, because for those who went through warranty repairs during the pandemic, whether it was a shortage of parts or labor, we should be capitalizing on that as independent dealers in the network, talking about different solutions for their life. So for members, it’s just thinking about their business a little bit differently, maybe bringing in some categories that they’ve gotten away from, going a little bit deeper into other categories that they they have in the past. But then also just making sure that the staples of warranty and service are forefront in the minds of their salespeople.

Rob Stott: And also you think massive opportunity too. There’s a lot of pent up demand to get back out into stores. So buttoning up those in-store experiences. I know stores have been open and we’ve seen appointment retailing, and some stores have been able to allow customers and foot traffic and things like that. But there’s still a lot of hesitancy, but as vaccine gets out there and more arms are jabbed, you know people are going to be out and about and wanting to get those in-store demos and get back into that in-person shopping, so got to imagine a lot of opportunity as we head into this, this back half of ’21.

Lee McDonald: Yeah. I saw a really interesting study. And the only thing I’ll add to that is Ad Age, when the pandemic started, they did a study and they said that almost 80% of consumers were not excited about going back and in-store. And so that’s why, if you’ve seen me, watch the group, we’ve been talking about digital, digital, digital for the last, I don’t know, several years, but certainly it’s elevated over the pandemic. We’re not going to stop because that is where retail is at. That’s where consumers go and we’ve got the best solution in the market. But they did that at Ad Age, did that same survey again, and that number has dropped considerably. So now only about 40% of consumers do not want to go back and shop.

And so I think you’re right, consumers are going to be returning to our member stores. Some are still going to shop digitally because that’s where they are. And I think that shift is at a macro level. Never going to, we’re not going to … We’ve shifted so much business online it’s never going to go back to the way it was, but there’s still a subset of customers, me being one of them, that loves going in and touching and feeling and getting that emotional connection to the product. So yeah, I think it’s going to be a great, great fourth quarter for our members.

Rob Stott: Yeah. And one more number to throw out there. And I know mall traffic is a little different than in-store retail traffic, but Wall Street Journal, I know, had a number year over year mall traffic was up 85% at some like 150 major malls they were looking at. I know March and April last year to March in April this year obviously, started the pandemic when things were completely locked down to when things have been eased, but just that percentage of an increase shows that there is certainly a demand to at least get outside of the home in some form or fashion.

Lee McDonald: I’ll raise my hand. I’ve gone to the mall during the pandemic just to go and walk around. In our family, I hate the mall. I never liked going to the mall. I don’t like being around big crowds, but there’s been number of times where I volunteered to take my girls out to go shopping. And my wife’s just kind of listening. I’m like, “I got to go. I got to get out.” Yeah, exactly. So I get it. People want to get out there. They’re tired of being cooped up. They want to do it safely. And I think that we’re fast approaching a time where they can do that. And I know our members are going to be ready to welcome them back in.

Rob Stott: Absolutely. And I look forward to it and of course, look forward to getting back in person here soon at PrimeTime. So I know a lot to look forward to this August and catching up with you guys. And no, I appreciate it. So Mr. Lee McDonald, our VP of CE, appreciate your time. And like I said, I look forward to catching up soon.

Lee McDonald: Yeah, absolutely. See everybody in Tennessee.

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