Wireless Communications - Assessing the Global Wireless Handset Supply Chain
• Inventory inline with history, but should be lower. Although inventory levels remain roughly inline with the historical average, we believe they should be lower due to lower end-market growth rates and the reduced lead- and cycle-times. Thus, we believe there is the potential for
a contraction in weeks of inventory carried. However, given the market-share focus and expanding ODM channel, we do not see near-term risk of an inventory contraction unless we
see weak 4Q sell through.
• Asia Update: Builds happening. Based on our recent trip through Asia last week, the supply chain suggests the industry continued to build handsets through October into November. Given the combination of short lead/cycle times, hub-inventory management, and a less than robust consumer outlook, we expected a more cautious approach to builds. This makes 4Q consumption even more critical.
• Handset Demand in Line to Date. Supply chain data points have remained positive, and our end-market analysis suggests 3Q02 handset demand was inline to slightly better than expectations (109M). Our analysis indicates we entered 3Q02 with modest carrier channel inventory and we have seen little signs of build during the quarter. We are not concerned about the potential of a major channel inventory build in Q4:02 given the carrier and distributor focus on cash flow.
• Pricing pressure > ‘03 unit growth. We estimate ‘03 component demand to be 465M handsets (assuming no EOY excess inventory), up from 433M in ‘02. However, supply chain datapoints suggest continued price erosion (down 20%+ y/y) will outweigh unit growth (7%). Thus, we would focus on companies with (1) market share gains, (2) new phone ramps and (3) exposure to the growing outsourcing market.
• “Profitless Prosperity” overhangs component stocks. We believe we are seeing a decoupling between inventory fundamentals and stock prices (now 43% vs. 73% in March) due to: (1) increasingly non-existing hardware barriers, (2) component overcapacity, (3) strong balance sheets leading to price competition and product overlap, and (4) weak (5-7% CAGR) unit growth rates. We believe this “profitless prosperity” environment for the wireless component sector will continue into '03. |
