Another year of price erosion

Electronic News, Jan 5, 1998 by Bernard Levine

Pricing woes will continue to vex passive component makers in the new year, triggering more plant relocations to lower wage areas, new material procurement strategies and other efficiency moves to cut costs.

Many makers of capacitors, resistors and other passive components cite traditional downward pricing pressures as their biggest worry for 1998. Murata Electronics North America executive VP Jack Driscoll recently cited "severe price erosion" as the biggest problem passives makers face.

Often downplaying the possible impact this year of the Asian financial crisis, they point instead to more familiar problems such as wrenching price erosion in the face of material cost increases that have long plagued the mature parts.

The price/cost squeeze recently prompted Kemet to plan a major relocation of operations from the U.S. to Mexico to improve margins. Many other passive makers have made similar moves in the past; more might follow this year, analysts note.

Ceramic and tantalum cap maker Kemet undertook the Mexican relocation, according to its president, David Maguire, "to improve margins and gain some insurance against the continued high price of palladium. With this move, we can maintain excellent margins in spite of the high price of palladium. If palladium comes down, we may exceed expectations." Over the last 18 months, he notes "capacitor prices came back to the traditional learning curve reductions," after a period of component shortages where passive tags had firmed.

Beyond pricing, passive makers also have a number of other key concerns for the new year. Some hope to expand their product lines in '98 to meet the one-stop shopping demands of OEM customers bent on vendor-reductions. Many are looking for ways to accommodate intensifying OEM pressure for just-in-time deliveries almost down to the minute, with distributors possibly playing a key role. Growing interest in new semiconductor-like integrated passives is another key challenge for traditional parts firms in the new year.

Asia Not A High Concern With all these things weighing on their minds, the plight of the Korean won has not yet reached the front burner at most passive producers. The Far East financial situation, according to Kemet's Mr. Maguire, "doesn't change the price of capacitors at all in the U.S." Some troubling Far East predictions may be exaggerated, suggests Vishay Intertechnology chairman/CEO Felix Zandman. "There is a lot of talk, writing, that Asia is now cheaper, more competitive," says Dr. Zandman. "First, we are there in Asia ourselves, and can profit from that as well." Additionally, Dr. Zandman went on, "most of our sales are to people making computers and telecom, being sent back to the U.S. and Europe. The only local consumption problem for us, maybe will be Korea, but this is a small part of our business."

Traditional price issues remain paramount, many contend.

Kemet's Mr. Maguire has been seriously concerned about palladium cost increases affecting his ceramic capacitors, with Kemet recently deciding to shift a large part of its Carolina-based production to Mexico to slash labor costs. About a thousand U.S. workers will be affected. Much of the relocation will take place this year, although Kemet will maintain a large manufacturing base in the U.S. Many U.S., Japanese and other passive houses have been increasingly utilizing low-wage areas such as Mexico, southeast Asia and eastern Europe as they seek to cut costs, with more such moves likely in the New Year, analysts note.

Palladium, Mr. Maguire says, has been $210 or $220 an ounce, compared to a $130 normal price. "It shot up at the beginning of '97. It went from $120 to $220 in August, dropped to $190, and now is at $210. The average has been a little over $200 since August. Yet ceramic capacitor prices are coming down the learning curve."

Still Mr. Maguire's overall outlook for ceramic and tantalum caps in '98 is more positive than negative. "Volume trends continue very strong," he says. The disk drive market is kind of erratic, but now PCs are solid. The less expensive PCs will increase the unit growth of computers, and all computers use capacitors. For '98, all our plans are for continued growth. The economy is still pretty good, and electronics are good."

Meanwhile, Vishay has combated higher tantalum costs by making a tantalum ore mining deal with China, allowing the company "not to be dependent so much on producers of tantalum powder," according to Dr. Zandman.

A Search For Broader Lines

Many passives firms have also been heavily engaged in R&D to more efficiently utilize key materials, thus cutting costs. New types of materials and component manufacturing equipment have also been under scrutiny. Such efforts will likely accelerate in the new year, according to analysts.

The move to broaden product lines may also accelerate. Dr. Zandman is well on his way to achieving his goal of making Vishay a powerhouse in the semiconductor market as well as passives, to offer customers one-stop shopping. Vishay last year bought 65 percent of Taiwan discrete semiconductor maker Lite-On Power Semiconductor Corp.; and at the end of the year, agreed to buy the Temic discrete semiconductor and IC operations, including Siliconix, from German automaker Daimler-Benz A.G.