Frank Cavallaro: 0:04

And then you've got Volkswagen and some of the other auto makers who were really just starting to understand semiconductor content inside of their vehicles. Historically, five years ago, the average dollar amount of semiconductor content in a vehicle was $1,500 US. In today's perspective, that's between five and $8,000 US. And tomorrow's EVs could be up to $25,000 US

Tom Raftery: 0:29

Good morning, good afternoon, or good evening, wherever you are in the world. This is the digital supply chain podcast the number one podcast focusing on the digitization of supply chain and I'm your host Tom Raftery hi everyone. Welcome to the Digital Supply Chain podcast. My name is Tom Raftery , and with me on the show today, I have my special guest, Frank. Frank. Welcome to the podcast. Would you like to introduce yourself?

Frank Cavallaro: 0:53

Thanks, Tom. Thanks for having me. I am Frank Cavalaro. I am the Chief Executive Officer of A2 global Electronics.

Tom Raftery: 1:00

Okay. What is A2 global electronics?

Frank Cavallaro: 1:05

A two Global Electronics is a global distribution company of ICs and semiconductors, specifically specializing in hard to find components as well as obsolete and long lead time components.

Tom Raftery: 1:18

Okay. And why?.

Frank Cavallaro: 1:20

Well, I mean, the supply chain specifically for electronics, and it's been in the, the news since probably 2019 or so, is that it's an imperfect science and there's a finite number of semiconductor chips being made, and the demand for those chips is not finite. So as a result, there's always an imbalance. These last. 20, 22 months or so. That imbalance has been exacerbated, by a lot of different things. One being covid shutdowns, covid related manufacturing problems in Asia, others being the work from home boom, that led to unforecasted demand while supply was dwindling. And so a third, the ev automotive marketplace coming online with some unforecasted demand. And you put all those things together. Along with some geopolitical tariffs and what have you, and you've got the makings of global supply constraints in the semiconductor space.

Tom Raftery: 2:15

Okay. And why, I mean, can't just the semiconductor companies ramp up production?

Frank Cavallaro: 2:22

They could and they are right, but the. The difference between a semiconductor manufacturing and other types of manufacturing is that semiconductor long tails, depending upon the customer vertical, meaning how long a product's gonna be used can vary. So knowing what type of semiconductor to make or what technology type to make over the long term can be difficult because you have big installed user bases and you have, again, finite amount of semi de fabs churning out these semiconductors. Let me give you an example. You have cell phone manufacturers. That are on a technology life cycle that pretty much changes every 90 days. So they have really good visibility of their demand that they can give to semiconductor manufacturers, and they can match more often than not. Right, it's very short term. You have other long, what I would call long tail customer bases like defense, aerospace, uh, your industrial customers like H V A C, as well as power controls, power grid controls, oil and gas that have the use of the semiconductor product over 5, 10, 15, 20 years. And as that tail gets further out, their demand inputs to the semiconductor manufacturers get less reliable. And so if you have a less reliable input, more often than not, a semiconductor manufacturer is probably gonna be less inclined to make products for you instead of ones that they have really strong visibility of demand. Not to mention a lot of the semiconductor manufacturers have now out outsourced a portion of their manufacturing. For example, companies like tsmc, and others like them, who manufacture just the wafer products themselves for customers like Intel and customers are like Texas Instruments and so on. that moves them further away from the demand. And so the further you get away from the demand input, the less likely you are to be accurate. So as a result, you have supply chain constraints that happen, really all the time. These last constraints over the last 20, 24 months have been really exacerbated by the inputs that I described earlier.

Tom Raftery: 4:35

And as well, I gotta think, I, I read this summer, so maybe you can tell me whether it's accurate or not, but I, I, I read that, For example, let's say someone like Volkswagen or Toyota or one of these big, car manufacturers, they might be manufacturing between seven and 10 million cars a year, whereas someone like Apple or Samsung might be manufacturing seven to 10 million phones. A week or a month. So, you know, the, the kind of orders they can put in to the semiconductor companies would be orders of magnitude different. And consequently, you gotta think the semiconductor companies are gonna pick up the phone a lot faster from one company than another.

Frank Cavallaro: 5:18

A simple answer that is, you're right, but a longer answer to that is a lot more complicated and it really shows the dynamics of what causes these semiconductive constraints. As I mentioned, you get companies like Apple or Google that have really short term technology changes that have excellent demand inputs to the Semiconductive manufacturers. And as you mentioned Tom, their order volumes are enormous. So being economically driven, the semiconductor manufacturers pay attention to those customers really acutely. They really drive a lot of their volume. Not to mention from a overall volume perspective, but also from what technologies they produce. And then you've got Volkswagen and some of the other auto makers who were really just starting to understand semiconductor content inside of their vehicles. Historically, five years ago, the average dollar amount of semiconductor content in a vehicle was $1,500. US In today's perspective, that's between five and $8,000 US. And tomorrow's EVs could be up to$25,000 US And because design for automotives is really a long term investment, meaning the EVs today, were designed five, six years ago. The demand didn't follow through to the semiconductor manufacturers. So the, the automobiles being used today, smaller volume, but those demand inputs didn't even get to the semiconductor manufacturer at some time because the long design cycle of, of automotives versus, mobile phones or handheld devices, you could see there's a, you know, almost a automatic disconnect between supply and demand. They're designing five or six years ago for products that'll come out in five or six years time. So that's an eight to 10 year design cycle that really is difficult for a semiconductor manufacturer to plan output, output for. Whereas in a, in a mobile phone or a handheld device or a tablet of some kind, that demand is readily available. It's easy to put into their manufacturing processes and it's huge volume and drives their economic model. So you can see where a lot of the attention goes to and for what reason.

Tom Raftery: 7:26

And I guess. Another aspect, and again, correct me if I'm wrong here, but another aspect of that would be, first of all, the mobile phone manufacturers would be going for the latest and greatest and fastest chip, versus the car manufacturer who would not need their chips to be as fast, but would want the chips to have a lifetime of 10 to 15 years. Whereas the phone manufacturers are saying, Yeah, as long as it lasts two to three years, I'm good.

Frank Cavallaro: 7:55

Again, I mean, you hit the nail right on the head. If we have a pro, just as consumers, right? If we have a problem with our, our mobile phones or our handheld devices, we are annoyed, but we can also rely on the next generation of phone or the next software download to generally fix those, problems. In the case of an automotive manufacturer, they're requesting semiconductor manufacturers to hold a design spec over the lifetime of an automobile. And so from a combustion engine perspective, that could be 8, 10, 12 years. We don't even really know the lifetime of an ev. That still has to be determined. So when you go to a semiconductor manufacturer say that I'm gonna need this design spec over 10, 15, 20 years, and you can't change it. That's not really a great economic model for the semiconductor manufacturers. If you're a semiconductor manufacturer and you're further outsourcing wafer production to a TSMC or a UMC or something like that, that's even further exacerbating the problem. They would rather go to the mobile phone manufacturer or the handheld or tablet manufacturer that 90 days, I'm going to replace another 3 billion worth of orders with you. That's a economic model that drives technological change and to stay on the cutting edge of the technology actually has economic benefits for both of those parties. Right economic benefits for the tablet or the consumable device because you're getting latest and greatest, and that's what consumers want. Economic benefit for the component manufacturer because as technology changes, they get better yields, i.e. better products at higher prices. Whereas you go to the automotive manufacturer or defense aerospace is even a longer tail that want the same price for the same medium technology device over 20 years. You can see the economic models don't match. And that's where a company like A2 comes in and helps to source those products from really all over the world.

Tom Raftery: 9:57

So that, that was my next question. How does A2 help?

Frank Cavallaro: 10:00

Right. So A two has, global relationships with manufacturers, distributors, Electronic manufacturing service providers, OEMs, all over the world. And as a result, we get a lot of supply and demand inputs from all of these manufacturers, and it's really the too much, uh, and not enough continuum where some folks may have excess inventory or inventory they're not using. Other folks need that inventory. We act as the trusted third party to literally transfer that inventory in a distribution model to the ones who don't need it, to the ones who need it. Of course, in time of global constraint, the market sets the pricing, but typically the pricing is similar to what you get from regular distribution or more typical franchise distribution models.

Tom Raftery: 10:45

And who, who are typical customers?

Frank Cavallaro: 10:48

You know, we operate in a lot of those verticals that have that high mix, low volume long tail. So defense, aerospace, high reliability customers like power, automotive or any kind of locomotion, gas oil industries as well, medical, industrial. Those are our typical, customer types as well as some edge and edge computing.

Tom Raftery: 11:13

Okay, and so, at a time of, as we're seeing now, massive disruption in the semiconductor industry. This must be boom times for A2.

Frank Cavallaro: 11:23

You know, it's interesting, there is a lot of demand and a lot of companies in the semiconductor space overall and semiconductor distribution space, have experienced a rapid growth. So no doubt, A2 is along with that, and we're rising with, the tide, so to speak. But also A2 has been around for over 30 years. So there's a need for these services, whether it's constraint environment or not, because underneath all of the normal, process flows that go into a supply chain, regardless of constraints, there is a need for that supply too much, not enough matching that goes on. And so that's how A2 has carved a niche in the electronic space. But like I said, over 30 years.

Tom Raftery: 12:05

Okay, so it's if, if I am a car manufacturer, I could go direct to TSMC or I could go to you. And the difference is that if I go to the likes of you, you can source from multiple different manufacturers and give me a kind of guaranteed supply. Is that it?

Frank Cavallaro: 12:24

It is, except the final point would be that they would go direct to a, a component brand versus a component way for manufacturer. We would supplement their typical supply chain from an Intel or an on semi or a, someone in that space, Infineon, along with other distributors they use, we would be just another tool in their supply chain toolkit. So when they, when their historical and typical supply chain fails them inevitably because of those supply chain demand, uh, supply imbalances, they would use a company like A2 to supplement those.

Tom Raftery: 12:58

Okay. And is it a question of them using you from time to time in times of disruption, or is it a question of them going to you and you being the premium partner and they know they don't go to anywhere else? Or is it a mixture?

Frank Cavallaro: 13:12

Well, it, it's really a mixture We have seen over these last 24 months, a little bit of a shift in procurement philosophies where historically, the larger manufacturers, a larger automotive, larger medical, any power grid folks of any kind of size or scale, have really outsourced their own manufacturing and supply chain management to, EMS companies, electronic manufac services, companies, uh, contract manufacturers. And as a result, they've gotten dislodged. They're dislocated from their, direct supply chain because they've outsourced it. We have seen over the last 24 months the brands themselves, the automotive brands, the medical brands, so you know those brands I speak about taking more control over their supply chain, over their key components in their supply chain. And so as a result, they'll use an A2 Global more often than not, and a go forward scenario than they have historically. I don't think anybody will get caught again on a go forward basis, not having a trusted third party like A2 to help them in times of constraint. I think a lot of hard lessons were learned. Some of those lessons were forced on all of us, but, these are a lot of smart folks doing a lot of smart things and, we'll learn from that going forward and, they'll use a company like A2 more often than not going forward directly.

Tom Raftery: 14:29

Okay, you're based in the US but is your market global or are you strictly US?

Frank Cavallaro: 14:36

So our headquarters globally is in St. Petersburg, Florida, but we have distribution hubs and European headquarters in, Germany and the Netherlands along with throughout the EU and EMEA and we have, a, Asia hub in Singapore and Japan. And then we cover all, all of those areas from there. So we are truly a global marketplace, with, regional hubs that service the customers in those regions.

Tom Raftery: 15:02

Okay, and, are there any, customer wins that you can speak to. Any examples of how you've helped companies to source when they couldn't, or similar?

Frank Cavallaro: 15:13

Sure. Yeah. I mean, for example, we were speaking about automotive. We were speaking about defense, aerospace. We were speaking about these industries that have historically maybe not relied on a company like A2 companies in those spaces have come to us now for, help in reassembling their supply chains that got disconnected. Couple of reasons why they come to us. Sure, we have availability of product and we have the pricing and delivery they need, but we also have the utmost stringent quality standards. And so when you're dealing in these high reliability environments or these ruggedized environments, price and delivery are surely important and access to inventory, but without that quality piece if you go to a consumer product, again, we're annoyed by our cell phones. You're more than annoyed should something, in a high reliability environment does not work as specified. And so they come, they audit our sites both in the US and in Europe and in Asia. They see that our quality standards are up to or exceed that of their current supply chain. And we've been able to win customers that way over and over again through this environment.

Tom Raftery: 16:18

Okay, Super, super. Where to from here? Is this, shifting demand and this disruption we've seen in the semiconductor supply chain, is this gonna be the new norm? And is this, something that you are, I won't say rubbing your hands in glee cuz it means more work for you, but you know what, what's A2's outlook on all this?

Frank Cavallaro: 16:42

So this is what we expect, through the rest of 2022. We're going to see a gradual reduction in component lead times. So at the peak of the constraints, most components from the most basic to the higher end npu GPU was in excess of 45 to 55 weeks. That means you place an order and you can get it next year, right? 52 weeks in a year, you get it next year. We have seen with the, increase in supply, the decrease in consumer demand based on the economic inputs that we spoke of earlier, we have seen a gradual reduction in those lead times for your basic components to about 18 to 24 weeks, which is more in the normal range and easy to plan around. That said, we still have a good number of technologies such as mos fets and power inputs. You know, the ones that you would think are basic, but because they're basic, they're used across a broad band of customers, and so their, their supply gets sucked up. We have seen them still at the 65, 55 week timeframe, so we expect a gradual decline in most components, where some will still be advanced lean time, but for manufacturers, it's a smaller bundle for them to manage. And we will help them manage that as we go into 23, we believe that there'll be more rolling constraints, meaning that some technologies will be constrained more than others due to the imperfect demand inputs from EV and automotive and what have you. We also believe that some of the. And this is getting a little technical, but some of the trailing edge for today's technology that's being used will be constrained in 23 and 24 because the new fabs that are being built are for cutting edge technology, not mid tier or trailing edge technology. So we see those holes getting bigger and bigger in today's technology, and that only really, applies to the customers that have long tails. Right long tail, big installed user bases, those industrial reliability customers that A2 serves. so that's what we see for the end of 22, going into 23,

Tom Raftery: 18:55

Okay. And even further out.

Frank Cavallaro: 18:58

Well further out, we will have a lot of supply coming online. That supply is fixed at certain outputs from a fab perspective against certain demand. As technology advances and the internet of things becomes the IoT, becomes the, IoE the internet of everything. As we all become connected, the ability to really forecast longer term demand is really tough for semiconductor manufacturers. So up to and until the semiconductor manufacturers themselves can decrease their own manufacturing lead times, we're gonna see a, prolonged period of rolling constraints, where demand and supply will be disconnected at the base level and sometimes at the technology level, depending upon how often that user base is, putting in accurate demand inputs. So it's really supply chains an imperfect science, and it's great to see that a lot of universities around the world are adding it to their kind of core competencies because the Amazon effect is everywhere, Right supply chain now we are seeing is everything. And during the constraints, we talked specifically about semiconductors in the, in the mid, 2020 2021 period. But everything is constrained. Food stops all of the things that go into supply chain and logistics. So I think a lot of lessons we're learned and we're seeing a lot of, smart people doing a lot of smart things in supply chain now.

Tom Raftery: 20:25

Cool. Cool. We're coming towards the end of the podcast now, Frank, is there any question that I haven't asked that you wish I had or any aspect of this that we've not touched on that you think it's important to highlight?

Frank Cavallaro: 20:38

No, I think we've covered it.

Tom Raftery: 20:40

Superb. Superb. So Frank, if people want to know more about yourself or about A2 or any of the things we discussed in the podcast, where would you have me direct them?

Frank Cavallaro: 20:51

I think the best place for them to learn as much as they can about A2 and their own geography is at our website, which is a two global electronics.com.

Tom Raftery: 20:59

Super, super frank. That's been really interesting. Thanks a million for coming on the podcast today.

Frank Cavallaro: 21:04

Thanks, Tom, for having me. Okay, we've come to the end of the show. Thanks everyone for listening. If you'd like to know more about digital supply chains, simply drop me an email to Tom raftery@outlook.com. If you'd like to show, please, don't forget to click follow on it in your podcast. Application of choice, to be sure to get new episodes. As soon as they're published. Also, please don't forget to rate and review the podcast. It really does help new people to find the show. Thanks. Catch you all next time.