The semiconductor scrap market is insanely competitive now.

 01
The Growing Number of Players in the Chip Surplus Business

Surplus inventory, often referred to as E&O (Excess and Obsolete), encompasses stock that carries risk due to being temporarily unused or having no foreseeable chance of use. Its origins can be traced to both external and internal factors. External factors include clients demanding stricter Date Code and quality standards as inventory grows, along with order changes/cancellations, supplier quality issues, and customer returns. Internally, sources consist of materials leftover from completed or altered projects at contract manufacturers, as well as over-procurement, erroneous purchases, pilot production, and residual materials.

Dead stock, short for sluggish materials, also known as E&O (Excess and Obsolete), refers to inventory that is temporarily unused or will never have the opportunity to be used, and carries certain risks.

The sources of dead stock can be roughly divided into external and internal factors:

External factors mainly include situations where after inventory increases, customers have higher requirements for Date Code (production date code) and quality. They also cover customer order changes or cancellations, quality issues with goods delivered by suppliers, and customer returns.

Internal factors mainly refer to leftover materials from the completion or scheme adjustment of end projects such as contract manufacturing. They also include over-purchasing, incorrect purchasing, experimental production, and remaining materials.

Therefore, many sluggish electronic components recycled from overseas or factories are basically original genuine products. They can be used directly after purchase, and to a certain extent, dead stock can be understood as spot goods that are "in the wrong time".

In the early years, those who handled first-hand factory dead stock were all large-scale traders engaged in overseas end markets. Some goods might be sold directly from End Market A to End Market B, while others might be sold in large batches to bulk buyers and stockpilers in the market. About a decade ago, these stockpilers began to enter overseas end markets on their own and directly purchase dead stock. Later, as China's manufacturing industry grew stronger, the amount of dead stock in domestic factories gradually increased.

There is another group of people in China who were among the earliest to engage in the dead stock business, located in Chendian and Guiyu of Chaoshan region. At the beginning, they actually recycled electronic waste. In the 1990s, electronic waste from around the world began to enter Chaoshan on a large scale through transit points in Shenzhen, Guangzhou and Nanhai. Precious metals such as gold and copper could be extracted from this electronic waste through methods like roasting and acid washing.

Later, this business gradually expanded to include dead stock and refurbished materials. Guiyu was responsible for the rough processing of circuit boards and the disassembly and recycling of chips, while Chendian focused on fine processing and chip refurbishment. With the decline of Chengdian's "Eastern Guangdong Electronic City" and factors such as environmental protection requirements, some operators moved from Chaoshan to Shenzhen. Places like Gaokedex Building and Shenfang Building then became new concentration centers for dead stock handling.

The dead stock business is a type of trade that exists outside traditional component trading. It has its own complete upstream and downstream chain, with clear division of labor and high concentration. Bulk buyers and distributors who recycle dead stock usually purchase entire batches of inventory dead stock from factories at a package price, which is generally 50% or lower than the original cost. Typically, making a profit only requires a few high-value items from the batch to cover the purchase cost, and the rest are pure profits. For brand-new chips of popular models, even if sold at a relatively low discount in Huaqiangbei, there are still buyers willing to purchase them.

In the past, many distributors looked down on this business, thinking it was just recycling "electronic waste". However, the profit margin of dead stock has actually always been quite high.

Things have changed in the past two years.

Starting from 2022, the chip shortage eased, and a large number of chip orders were delivered in a concentrated manner, while end-market demand fell short of expectations. Since the second half of that year, inventory in the market has continued to pile up, prompting end-product factories, agents and traders to start handling their dead stock one after another.

Peter, who is engaged in inventory purchasing, recalled that it was precisely from the second half of 2022 that the number of people entering the dead stock business increased significantly.

Peter stated that he has observed two main groups of new entrants in the dead stock business. First are traders who focus on market stockpiling. Traditionally, they purchased discounted inventory from agents; later, they started buying from bulk buyers. With increasingly transparent information nowadays, they have begun to seek direct purchases from end-product factories.

Second are traders who serve end markets. Starting from 2024, the chip market has been in a slump, making life tough for many traders. End-market demand has dropped, and payment terms have become harder to manage. As a result, they have looked for new opportunities: while serving end clients, they have turned these clients into their suppliers. Moreover, entering the dead stock sector is relatively easy for them. For one thing, they have cash flow; for another, they have rich experience with brands they are familiar with, knowing how to identify counterfeits and which models are popular.

Besides these two groups, some new entrants or distributors in recent years may lack both stable suppliers and steady clients. Facing uncertainty on both ends, these individuals may choose to start with dead stock first. This allows them to secure at least one end (either suppliers or clients) before working on the other, making it easier to run their business.

As a result, what was once an exclusive business for a small group has now become a field with multiple players competing side by side.

In general, there are several reasons why more and more people are trying to do the dead stock business:

The original business is becoming increasingly difficult, so people are transforming to survive.

The capital threshold is low—anyone with some cash on hand can test the waters.

Information is transparent: everyone knows that the inventory in the hands of end-users is "valuable," and the recycling process can also be found immediately.

The result is that the dead stock business has started to "become common everywhere."

Other distributors mainly engaged in factory inventory said that they began to feel the number of people doing dead stock business increased since the beginning of last year; some who previously focused on trade have begun to attach importance to dead stock this year and specially assign people to monitor this business; some purchasers from end-user factories have started to try their hand at the dead stock business themselves...

02
The State of the Surplus Inventory Business？

So, how is the surplus inventory business that everyone wants a piece of the pie?

The answer from most distributors is—it's tough. The majority report that business this year has been poor, with some even calling it "the worst year ever."

The biggest issue remains pricing, as competition in the surplus market has spiraled into intense internal competition.

In recent years, with the rise of platforms like Yunjiage, pricing has become highly transparent. It's now much clearer how much one can buy or sell for, and the information gap has significantly narrowed, which has become a major driver of this fierce competition.

William, a distributor specializing in surplus inventory, noted that while he has observed an increase in end-market demand this year, particularly in the industrial sector, business remains poor due to price transparency. Customers now compare prices and push for lower costs. "It all comes down to either your relationship with the client or your willingness to sell at a lower price," he said.

Furthermore, the chip market remained in a slump throughout 2023 and 2024, and the excess inventory in the market has been largely cleared over these years.

Peter also noted that in the second half of 2022, sharp-eyed distributors had already seized the first wave of dead stock opportunities and made substantial profits. By 2024, when more people flocked into the sector, bulk buyers had already taken most of the dead stock. Up to now, there is barely any dead stock left at the end-user side to trade.

However, some people can still find opportunities in the gaps.

Steven, a distributor who started in the dead stock business this year, said there was a relatively large volume of dead stock to handle around the Spring Festival this year, and business was decent then, but it has been slowing down ever since. Even so, this year is still relatively manageable compared to what may come.

On one hand, the overall market is sluggish now, and some distributors are struggling to hold on. Those who stockpiled materials at high prices in the past are now willing to sell at a loss.

For example, a client purchased a batch of TI components during the market peak in 2023. At the beginning of this year, they quoted 0.65 yuan per unit but were reluctant to sell, hoping to use the stock themselves eventually. Now they realize the stock is truly useless and have accepted a price of 0.6 yuan. Yet, new shipments of this component keep flowing into the market, pushing prices down further, making it difficult to offload the stock.

On the other hand, some end-user projects have been terminated, forcing them to clear all inventory. Some even noticed that there are now 25+-year-old dead stock circulating in the market.

In his view, the price of dead stock has dropped now, and more people are willing to buy when prices become favorable. As long as he can successfully "move the goods" (resell the stock), his business can keep running.

Steven said there is an abundance of dead stock in the market now—supply is not a problem, but much of it cannot be sold. Whether a deal can be made mainly depends on price; a good price helps, but luck also plays a role, as it requires matching with the right buyer.

Overall, there is indeed demand for the dead stock business currently, but competition is extremely fierce. Price undercutting is rampant, making transactions difficult to close.

The first wave of entrants who stockpiled at low prices has already reaped the profits. Now, most players are stuck in a game of low-price competition. However, opportunities still exist for those with stable clients or the ability to operate flexibly in the low-price market.

Entering the dead stock business has a low threshold, but succeeding in the long run is hard. It requires both reliable supply channels and good relationships with factories. Many distributors who entered the sector in recent years mainly treat dead stock as a "side business," while their main business remains in areas they are familiar with.

03
Closing Thoughts

Behind the boom in dead stock lies a broader shift: the number of people entering the chip distribution industry has also increased in recent years.

While insiders generally complain about the sluggish market, outsiders still see it as a promising and profitable sector. For example, in chip distribution clubs, there are people who switched from the real estate industry to sell chips; some "second-generation chip practitioners" have also returned, and their backgrounds and professional capabilities are generally high; some bosses who have worked in the industry for more than 10 years, after making considerable profits, have begun to increase investment and transform their businesses in recent years.

The structure, talent pool, and profit models of the chip distribution market are undergoing tremendous changes. Most distributors have also slowed down during this round of adjustments, quietly accumulating experience and waiting for the arrival of the next real recovery.