Lead times
Smart-Phone Vendors
Are there still component shortages? Like most things in life, it depends on whom you talk to.
Just about everyone complained about shortages in the spring and summer of 2010, and some (mainly mobile phone makers) blamed their third-quarter performance on parts shortages. Some of Europe’s largest distributors experienced parts shortages into late October, at one point issuing “extreme” component shortfalls in sales channels.
The shortage of chips was even slowing production and raising costs at factories in China. But most consumer electronics vendors managed to play catch-up with their suppliers and reported virtually no shortages as they approached the recent holiday selling season.
Problems continued even beyond third-quarter financial reports when companies like Sony Ericsson said component shortages led to falling handset shipments and sales in that period. Sony Ericsson shipped 10.4 million handsets in the third quarter of 2010, missing all 27 analyst estimates in a Reuters poll. The analysts’ figures ranged from 10.5 million to 13.9 million.
Even television components weren’t in short supply toward the end of the year, according to the Consumer Electronics Association (CEA). But sales were slow globally, and TV manufacturers cut their capacity.
In October, Texas Instruments reported a slowing of demand for chips used in TVs and computers—enough to impact the company’s profits. TI said it even anticipated a slowing of growth in industrial chips after a year of fairly strong growth. This was at about the same time that iSuppli Corp. predicted global PC shipments would continue to rise in the fourth quarter.
“There’s naturally going to be constraints in the supply chain,” Shawn DuBravac, the CEA’s chief economist and director of research, said in mid-November, especially in some component categories. “To see constraints in the supply chain for touch panels when we first saw success in the iPad doesn’t surprise me. That’s not alarming to me. That’s just a function of the supply chain catching up with unrealized demand. Once they catch up, they’re good to go.”
Then there was the buildup of demand for chips by the auto and major appliance industries. (Audi, Ford, GM OnStar, and Toyota were major exhibitors at the International Consumer Electronics Show in Las Vegas earlier this month, as were several major appliance (majap) manufacturers—for the first time.)
DuBravac says the market seems to have returned to its normal supply and demand functionality. But one possible exception was key flash memory chips that could have an impact on MP3 players. Craig McHugh, president of Creative Labs, the U.S. unit of Singapore-based Creative Technology, told a conference of financial analysts in late October that he anticipated an industry-wide shortage of flash chips, at least through the remainder of 2010.
“Industry demand for high-capacity flash memory currently outstrips supply and this will impact availability of our 1-Gbyte flash MP3 players for the holiday quarter,” said McHugh. The shortage, he noted, was primarily due to a special deal that Apple Computer secured from a key supplier for the holiday season. Apple was widely reported to have signed a supply agreement with Samsung Electronics for flash memory for its music players, mainly Apple’s iPod nano.
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Of course, new product introductions were critical to the process. Apple initially produced about a million iPads a month. Most Apple followers thought the company would ramp up to 2 million by the end of 2010. But Apple was producing at least 2 million, possibly 2.5 million iPads, by November.
Meanwhile, iSuppli has increased its forecast of iPad shipments in 2011 to 63.3 million units from 50.4 million with the expectation that Apple is adding part suppliers this year. The market research company says it based its lower forecast on anticipated decreased availability of iPad components, including LCD panels, capacitive touchscreens, and NAND flash.
The distribution picture became even more challenging for iPad with Best Buy, Target, and Walmart jumping on board. “You can’t fill channels like that if you have shortages,” said DuBravac.
International Data Corp. says the leading smart-phone vendors posted double-digit or even triple-digit year-over-year growth in the third quarter of 2010 (see the table). According to IDC, vendors shipped a total of 81.1 million units, up 89.5% from the 42.8 million units shipped during the same period in 2009, which may help explain the component shortage during that period.
IDC also projected that by the end of 2010, more than 20% of all devices shipped to partners worldwide would be converged mobile devices—the first time this has occurred. In comparison, 15% of all devices shipped in 2009 were converged mobile devices. Meanwhile, Parks Associates expects the number of smart-phone users to reach 274 million in North America alone by 2015.
Samsung Electronics expects to sell more than 40 million smart phones worldwide in 2011, essentially doubling what it projected for 2010. Samsung also is projecting sales of a million Galaxy Tab tablet devices by the end of 2010 and 15 million in 2011, which suggested to DuBravac that it was producing about half a million a month in late 2010 and will ramp up to more than a million a month in 2011.
Just as holiday buying was beginning to take off in November, Microsoft reported that it expected sales of 5 million gesture and body controlled Kinect devices for its Xbox game in the fourth quarter. “That’s a huge number,” says DuBravac.
Nevertheless, iSuppli reported that some parts, such as standard logic components, were still in allocation in November as suppliers continued to struggle to fill backlogs and wrestle with potential expansion plans.
Standard logic, including mostly gates, flip-flops, and registers, had been maintaining an average lead time of 10 to 12 weeks in the first quarter of 2010. That changed in April, according to iSuppli, when demand began to outstrip supply. Shortages and price increases on standard commodities such as copper and aluminum contributed to the problem, pushing lead times to 18 to 20 weeks, matching that of other components experiencing similar shortages at about the same time (see the figure).
Furthermore, iSuppli expects standard logic devices to continue to increase in average selling prices (ASPs) and continue to be in short supply into 2011, with some possible supplier adjustments in this segment in the first half of 2011.
The Telecom Factor
The telecom sector has been a different story. The shortage of components for telecom equipment was noted as early as last July. At the time, Rick Pierson, senior semiconductor analyst at iSuppli, said the shortage could impact the market into the second quarter of 2011.
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Availability of analog and memory chips for this sector was tight. Lead times in mid-summer last year were about 20 weeks, or about twice the normal delivery time. Alcatel-Lucent SA has said it expects component shortages to stretch into 2011. Nokia Siemens Networks also has been experiencing parts shortages.
Alcatel Lucent first mentioned the parts shortages in May when it said a component shortage in the first quarter resulted in its inability to fill some orders, leading to a drop in revenue and a wider net loss. Ben Verwaayen, CEO of the Paris-based telecom supplier, said component shortages would likely continue into the second quarter of 2011.
The Rare Earth Debate
One of the hottest supply issues in the industry at the moment is the availability of rare earth metals, used mostly in magnets, smart phones, hard drives, earphones, and LCD screens, as well as in the defense/aerospace sector for precision guided munitions, lasers, detection devices, communications, and radar systems.
Deposits of these materials, including neodymium, terbium, and europium, can be found in various parts of the world, including the United States. Yet China produces about 95% of the world’s supply of these metals. Other countries that had produced these materials have cut back or shut down their production because of environmental concerns about them, as it can result in toxic and even radioactive wastes.
Molycorp Minerals, the owner of the largest rare earth mine in the U.S., shut down its mine in Mountain Pass, Calif., in 2002 because of environmental concerns and competition from China’s low-cost mining operations. Molycorp now plans to reopen the mine following a major modernization program and expects to be producing 20,000 tons of rare earth material by 2012.
“With appropriate federal assistance for research, development, and capital costs, Molycorp Minerals is prepared to move forward to re-establish domestic manufacturing capacity on an expedited basis,” says Mark A. Smith, Molycorp’s CEO.
China, meanwhile, whose own industrial need for rare earths has grown, suspended the export of these minerals to Japan in late September, causing Japanese and U.S. trade officials to file legal action against China with the World Trade Organization. Japan takes an estimated 56% of China’s rare earth exports.
In late October, China ended its informal export embargo of rare earth minerals to the U.S., Europe, and Japan. That was about the same time that Japan announced that it had signed a “strategic partnership” with Vietnam to mine its rare earth minerals to reduce Japan’s dependence on China.
And, Japan has signed a $250 million procurement arrangement with Sojitz, a leading Japanese trading company specializing in rare earths. Sojitz has been working with Lynas, an Australian mining company, which plans to start shipping 3000 tons of rare earth minerals a year from a new mine in Western Australia, beginning late in 2011.