Recovery slower but broader: lack of investment in fabs and cutbacks in capacity are creating widespread shortages - Smith & Associates' Market Watch report

Electronic News, Sept 23, 2002 by Rob Spiegel

Word from the trenches is that a broad recovery is taking root slower than most expected, but it is starting to spread to more segments within the industry.

With the downturn slowly becoming history, one distributor says the recovery will be punctuated by shortages caused by cutbacks in capacity and capital expenditures. But exactly when that recovery will become firmly rooted is anyone's guess.

Market Watch -- the biweekly e-mail report produced by Smith & Associates LC, a Houston-based independent distributor - says there is a global increase in demand for actives that is too diverse to be attributed to one sector. The company reports a large number of active components are getting difficult to source, including high-cost items from Altera Corp. and Xilinx Inc.

There is a corresponding lengthening in delivery times that is likely to increase. Xilinx is already at two to three months. On the passive component side, capacitor demand is falling in North America, according to the report, while requirements for connectors, diodes and mosfets have doubled.

The report also notes geographic discrepancies, with Athlon XP processors running $10 higher in Asia than in North America. On the memory front, demand for SDRAM is flat, with interest in Rambus Inc.'s RDRAM virtually nonexistent. There has been, however, a sudden surge in Asia in 32Mbit and 64Mbit flash memory products.

Smith & Associates tallies its information by querying its traders and buyers for trends, spikes and drops. "Our 200 traders in eight offices deal in every commodity, from drives on down," said Leland Ackerley, executive VP of Smith & Associates. "We get the information from our offices in Amsterdam, Barcelona, Hong Kong, Seoul, Houston, Guadalajara and Silicon Valley."

Rand Technology, an independent distributor in Irvine, Calif., says the old market is gone and a new one is just now taking shape. And like Market Watch, it says that new market will face shortages. Rand points to cutbacks in fab equipment and reduced engineering resources as the culprits that will produce true shortages. The company warns that a market rife with shortages will produce quality problems, and that beefed-up quality plans will be needed as the shortages kick in.

Analysts at El Segundo, Calif.- based iSuppli Corp. remain hopeful that PC unit sales will increase in 2002. The target now is a 3.9 percent lift over 2001, a prediction the company acknowledges is more bullish than most. The small rise in unit sales likely will come without revenue gains, as lower prices will deliver a sales dip for the year. If the lift arrives, it will come as the year closes.

"It will be the fourth quarter that will make the gain happen," says Jon Cassell, principal analyst for supply chain at iSuppli. "But no matter how you look at it, it's going to be a rough year."