CMs are stuck with oversupply: But at least OEMs have cleared their shelves - Distribution - Brief Article - Statistical Data Included

Electronic News, Feb 25, 2002 by Rob Spiegel

Excess inventory has been managed down and the first signs of new demand are showing up like tiny blades of grass after a rough winter.

Yet tough pockets of oversupply still clog the supply chain, mostly at the large contract manufacturers. Even so, some demand has made inroads into the over-supplied EMS providers, since their inventory glut doesn't provide all of their component they need to meet their customers needs. "It comes down to mix issues," said Phil Gallagher, president of Avnet Electronics Marketing/Americas, part of Phoenix-based Avnet Inc., noting CMs have mostly a glut of commodity parts. He also noted that manufacturing activity has continued even through the downturn. "People have not stopped manufacturing equipment. There is demand."

Gallagher said there is still plenty of inventory hanging around the supply chain, even if the OEMs have managed much of theirs down. "There is still inventory at the contract manufacturers, in the larger ones in particular. The vertical OEM customers have it more under control."

Greg Sheppard, VP of market intelligence at iSuppli in El Segundo, Calif., agreed that pockets of excess inventory still clog the supply chain at EMS providers. "The EMS folks have piles of finished products. Their customers said, 'Why don't you hold that for awhile.' So there is still a lot of inventory running around. They're sitting on inventory on behalf o their OEMs, and there's still an arm wrestle over that."

He noted that some of the oversupply at EMS companies came from their own market speculation. "In a lot of cases they bought the products in speculation for their customers." He said the oversupply stacked up at the EMS providers tends to be in communications components as well as aging memory. "The oversupply is in networking, telecom parts as well as older DRAM technology," said Sheppard.

Even when contract manufacturers do order new parts, it has tended to be at the last moment. "The contract manufacturers have lots of inventory, most everything they need to build older systems," said Dave Bowers, Senior VP of marketing at distributor Nu Horizons Electronics in Melville, N.Y. "They're not buying when they start running low. It seems they're only buying when the are about to run out. This is leading to spot shortages and lots of expedites."

Bowers also noted that newer designs are driving some of the new demand. "Although there is a lot of activecomponentinventory,thenewer designs are not utilizing the same components that are in inventory. Thus there is new demand and it will drive activecomponentdemand,"saidBowers. "I don't think the same is true withpassives. Thereissomenewtechnology, but nothing compared with actives. So,withpassives,newdemand will utilize existing inventory."

Avnet is seeing demand strength on a sector-by-sector basis. "On the OEM side, outside telecom and the networking areas, demand is good. It's also good in industrial controls, medical and aerospace. Those segments haven't been down," said Gallagher.