Joel, I was reading thru this yesterday, and thought it interesting. It's from the first of the year, but may still be a good overall discussion of the capacitor/resistor market. Again, the price challenges they face are as dramatic as those faced by DRAM. They also have the added issue of a base metal dependency which is cutting into their profits. I find it interesting that they are also so labor intensive, hence Kemet's moves to Mexico to secure cheaper labor.
Share price really beaten down. I put in an order for 32 3/4 this morning, but missed it. Actually slept in a bit today. I really don't know what to think though. Wisdom would probably say wait, but this seems like a very good price.
Regards,
Mark
From Electronic News: January 5, 1998 Issue
Outlook 1998--Passive Components
Another Year Of Price Erosion
As Prices Drop, Suppliers Seek Cheaper Manufacturing Sites
And Demand Remains Strong
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.
Explaining his strategy, Dr. Zandman said "the industry is bearing down on the purchasing departments. Many companies want less and less purchasing, down to one supplier, with all the components purchased from one manufacturer, a reliable source. We would be the first to offer such a broad product line, and in fact, we have achieved that."
Other passive makers have also spotted the trend and have been trying to broaden their passives lines. AVX chairman/CEO Dick Rosen recently told EN editors in a Breakfast on Park interview that one of the reasons behind his firm's ties to Japan's Kyocera is "to allow us to have a broader product offering. Many customers would like to see as much as they can from a single source."
Another key trend for the new year is growing interest in integrated passive components, pioneered several years ago by California Micro Devices, and featuring IC-like construction allowing size and weight reductions crucial for many portable consumer products. Dow Chemical and contract manufacturer Flextronics International last month formed a joint venture, Intarsia Corp., to produce thin-film integrated passive components. Bourns, which introduced an integrated passives line already, has vowed major new introductions this year, as have others. Most leading traditional passive firms have been offering or developing integrated products to defend their turf.
AVX's Mr. Rosen predicts integrated passives could grow to 10-15 percent of the capacitor market in coming years. "The number is more than doubling every year now, but it's small. A customer has to redesign its board so it has to be part of the evolution of the next device that one of our customers would make. It's not just a drop-in replacement." But some applications may need the miniaturization: "A cell phone or a laptop computer has to be smaller and lighter."
While OEMs who require extreme miniaturization may opt for integrated passives, Mr. Rosen believes many other applications will stick with more traditional passives such as surface mount chips. "I've been in the capacitor business for 40 years and for 40 years people have been saying they will disappear but the numbers keep growing. It basically relates to the cost of real estate. You could put capacitors in the semiconductor devices but if you look at the silicon as real estate, it costs too much to insert a capacitor. Capacitors today sell for pennies; silicon sells for a lot more."
Other major trends facing passive makers in the new year include customer demands for instant deliveries and more logistical support. According to Murata's Mr. Driscoll: "As much as we'd like to be able to support all of our customers with inventory, it's physically impossible to put inventories everywhere and maintain it effectively and still make any money given the prices of the product."
Greater reliance on distributors may be part of the answer, he suggests.
Vishay's Dr. Zandman believes some OEMs are taking the just-in-time deliveries trend too far, leaving no room for unforeseen difficulties. JIT is "the fad," he says. "Product has to be there when its scheduled because the customer will have no inventory. After one or two companies get trapped everybody will have some inventory. You know we go in cycles."
He adds: "An OEM would like to have the product five minutes before he has to use it. But there's a limit. The just-in-time culture is becoming exaggerated. No matter how good you are at just-in-time, if something happens to the airplane and delivery is two days late, what happens? Is the factory not going to work for two days? Eventually companies will realize they have to keep some inventories; they can't have zero inventories."
There are major dollar implications to these decisions, Mr. Driscoll notes. "There are a lot of steps between our manufacturing the part and getting it to their line. Somebody's got to absorb those costs. And the question becomes, how do you most effectively address each of those costs and how can you provide some kind of support to the customer. But he has to understand that you can't give him everything because we're selling these products now for so little money that it's very difficult." |
