The Decisive | Season 6 Ep.2 - How Supply Constraints Are Defining Electronics Pricing

View Full Transcript

Kristen Hallam [00:00:03]:

You're listening to The Decisive Podcast. Insights and analysis to empower confident decision making. Hello and welcome to the Decisive Podcast. I'm your host, Kristen Hallam. In this episode, we'll hear from Yan Hoong, an economist with the Pricing and Purchasing team at S&P Global Market Intelligence. In this excerpt from our March 12 client webinar, Yan takes us through the electronics and semiconductor landscape heading through 2026. We'll start with what's driving the most anxiety across procurement and pricing conversations – ongoing supply constraints in memory. Yan digs into why memory remains structurally tight, how that tension is spilling into downstream products like computing and communications equipment, and why additional price pressure may persist into 2027.

From there, we widen the lens beyond AI. While AI and data centers continue to pull demand and tighten availability for the parts that matter most, this episode also explores the gradual demand recovery outside of AI, including what the latest order and backlog signals suggest about the broader electronic cycle. We also break down the practical implications of the Section 232 tariff announcement, why its pricing impact on US semiconductors may be limited, and why scope and re-export exposure matter when you're planning sourcing strategies. And finally will connect the dots across key end markets automotive, aerospace and defense and consumer electronics, highlighting where momentum is building, where recovery remains softer, and how price divergence across components is reshaping the electronics sector's winners and laggards. And with that, let's hear what Yan has to say.

 

Yan Hoong:

So for the electronics sector in 2026, there are a few key takeaways in terms of its outlook. First of all, supply will remain largely sufficient and this is especially for the mature node semiconductor and also for the legacy components as well. However, we are currently seeing a really tight supply in the AI-related components and also the memory components. So for the memory market we are seeing a constantly supply constraint or tightness going on in the advanced memory market. But not only just the advanced memory market, we are also seeing supply tightness going on in the conventional market as well. And that is mainly because the suppliers are currently reallocating the production capacity from producing conventional memory to producing more advanced memory. So there is a supply constraint going on in the memory market as well. And second key takeaway, there is a gradual demand recovery outside of AI throughout the year.

So there are two key end markets that will experience stronger growth, one of them being the aerospace and defense sector and the other one would be the AI and data centers. However, outside of these two sectors we are seeing a softer recovery, especially for the components used in industrial electronics in the automotive sector and also for the consumer electronics as well. And because of a really strong AI growth in terms of its demand. And we are also seeing a huge price divergence across different components. We are seeing a relatively stable pricing for the legacy components such as the transistors diodes across different regions throughout the year. However, we are seeing a really strong price escalation coming from the AI-related components or the memory market. It’s mainly because the stronger demand growth are continuously to outpace the current supply. And lastly, we also do have the Section 232 tariff announcement that was announced in January 2026 and that will have a limited pricing impact on the US semiconductor sector.

So for the key end market outside of the AI, one of the key end markets would be the automotive sector. If we look into the light vehicle production in 2026, the production level in 2026 will continue to be slower compared to the level that we have seen in 2025. And that also indicates that the soft demand for the components being used in automotive sector will continue to be soft throughout 2026. And on the other hand, if you look into the PMI data on the new orders for the electronic consumer equipment and electronic industrial equipment, more than 50 indicates that there is an expansion or increasing in new orders compared to the previous month. So we are seeing rising new orders for the electronic industrial equipment. Whereas, on the other hand, we are seeing a softer demand or declining new orders in the consumer equipment. So focusing on the AI and data center demand, because of a really strong demand coming from the AI, we are seeing a really massive demand accelerating in the memory market, especially for the high bandwidth memory or the advanced DRAM that are being used in the AI server or using it to train the large language training model. And it is causing a really huge increase in the global exports on the memory integrated circuits, especially coming from the major exporting countries such as South Korea and mainland China. And in December 2025 we are seeing a 66% increase in terms of the global exports value on this memory integrated circuits compared to year ago.

And because of this really strong demand on the AI and it is currently putting pressures on the memory supply and it is causing the memory supply constraint going on throughout 2026. And if you look into the PMI data on the semiconductors price pressure index and also the supply shortage index, we are seeing a constantly increase in terms of the value index for price pressure in supply shortages and that is mainly coming from the memory constraint. That is causing the price pressure to increase along with the supply shortage to increase in the semiconductor market. And even though the price increase or the shortage that is happening right now is not as high as what we have seen during the COVID-19 period, but it is still indicating that the memory supply constraint is intensifying. And looking into the production side, we are seeing a slight increase of the backlogs of work along with the new orders for the electronic equipment. Based on the January data, we are seeing the backlogs of work and new orders increase slightly above 50, meaning that there is a gradual demand recovery on the global electronic component. However, if we are looking into the input prices and output prices on the PMI data, we do see that the input prices is increasing faster than the output prices and this is mainly because the producers are currently absorbing most of the cost pressures. So it has yet to pass through to the output prices. But again in the upcoming quarters we are seeing more and more increase in the output prices because we are foreseeing the input prices will continuously to be passed down to the output prices and to the downstream electronic products, especially coming from the memory cost supply pressure.

And now we are moving forward to discuss about the Section 232 announcement that was announced in January 2026. So based on the announcement, the 25% tariffs will be applied to a specific imported logic chips, but there is a broad exemption. So for example, if you imported the logic chips and it is mainly for domestic use in the US you will not be subjected to the 25% tariff. Therefore, there is a minimal pricing impact on the US semiconductor industry based on this recent announcement. So the broad exemptions for domestic use in the US for example, if you are buying the imported logic chips for US data center construction or for US startups and so on, you will not be paying these 25% tariff. On the other hand, this also means that the imported logic chips is mainly targeting the re-exporting products going out from the US to the other regions. So looking into the export and import value on these Section 232 products from the US, we are seeing the imported value is significantly way higher than the exported value. Which means that when the U.S. imported all these products to the U.S., it's mainly for the domestic use rather than re-exporting out.

So that also means that there will be a minimal tariff pricing impacts on US semiconductor from this recent Section 232 announcement. And because of the memory pressures that is currently going on in terms of the supply, we are currently seeing the elevated cost pressure not just happening in the US but also across all the other regions as well, such as in Asia and also in Europe as well. So, looking into the producer price index for semiconductors, we are seeing a really strong price escalation coming from the South Korea semiconductor industry compared to US and Germany. And that is because in South Korean semiconductor industry, they are heavily concentrated on producing memory-related products. Therefore, when there is a high inflationary cost pressure coming from the memory, we are seeing the South Korea semiconductor prices to increase really strongly as well as compared to the US and Germany.

So for US and Germany, we do see a relatively more stable pricing. And that is mainly because they are mainly not memory heavily focused. It mainly more on, you know, the power, the sensor or the logic chips, which compared to memory, they are experiencing lesser inflationary pressures. And because of the memory supply constraint, we are also assuming that the computer prices will continuously to experience the strong price escalation in 2026 as well. And this is not just mainly coming from the tight memory supply. This is also mainly driven by the strong AI demand growth. So we are seeing a year over year growth across all these regions like South Korea, US, Germany, there is a stronger price escalation, especially coming from South Korea. And this is because the domestic computer industry or server assembly industry in South Korea, they are linked with the semiconductor industry in South Korea, which is from the same country. So any cost passed through from the memory coming from South Korea can easily be passed through to the downstream product within the South Korea region as well.

And compared to the other region like US and Germany, we do see a slower rate of escalation in terms of its pricing. But the prices is still considered as high compared to the escalation that we have seen in the previous years. So a few bottom lines on this electronics presentation. First of all, memory shortages will always remain a major concern throughout this year and going into 2027 as well. And this is expected to pass through to the downstream electronics products such as computer or communication equipment. And on the other side, we do see a relatively stable in terms of the supply capacity for other legacy components. And for demand, we are seeing the demand are mainly driven by the rising AI-related capital expenditures. And on the other hand, the traditional demand segments such as consumer electronics, automotive sector will remain soft in recovery for this year.

And going into prices, it is important to note that input costs are constantly rising, indicating that there is a possibility that additional prices increases are coming to the downstream products as well, especially on the memory-related products. And on the other hand, with the recent Section 232 announcement, we do see that the semiconductors that have been affected by this announcement are more narrow in scope and largely more focused on the re-exporting products. So it is limiting the US pricing impacts from this recent announcement. So the AI demand is still constantly accelerating and we are seeing more and more manufacturers announcing production capacity expansion plans. However, we are not seeing it fully come operational until late 2027 or 2028. So I foresee that, you know, in 2027, around Q4 or going into early 2028, there will be a full relief of the memory supply chain. But in coming two years, in this year and next year, we are not seeing any supply relief until more capacity expansion coming.

 

Kristen Hallam:

Thank you for listening to The Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.