Components: Managing Supply To Meet Demand
By Peggy Albright
When wireless companies began releasing their fourth-quarter 1999 and other financial statements this year, it seemed that
many were singing the same song: Component shortages adversely affected 1999 production and the bottom line would
continue to grow again this year.
The reason given was that the wireless handset market is booming, expanding faster than products can be built.
Qualcomm reported several times in 1999 that its struggling handset business, which it has since sold to Kyocera Corp.,
suffered production problems and diminished margins because of device shortages. In January, within days of each other,
Metricom Inc. and Motorola both reported their 1999 business was adversely affected by component shortages.
Ericsson, on the other hand, was one of the few claiming it did not have any supply problems. The company announced a
three-year deal to purchase Intel's flash memory technology. Ericsson said the deal would help position it to deliver advanced
products, such as third-generation handsets and phones that can store data, e-mail, voice and music.
The fight for survival thus gained another level of complexity, as these and other wireless companies continue to compete for the
ever-shrinking component pie. As these firms position themselves to prevail, some trends have begun to emerge in the
production of goods in the context of an under-supplied market.
With finite manufacturing capacity available, for example, wireless operators, handset vendors, distributors and others are using
new management techniques in their planning processes to cope with the lag in supply.
Some are turning to supply chain management firms for help coordinating the planning and procurement process. Handset
vendors, in turn, are increasingly outsourcing the production process to contract manufacturers that can produce the designs to
the vendor's specifications. Electronic component manufacturers are allocating projected supplies to their customers.
The situation appears to favor those companies that are already leaders in the handset market. Dominant companies are likely
to continue to prosper. Lesser players will find it harder to compete and newcomers will find it increasingly difficult to get in.
Why Shortages?
One problem is the industry's sheer size compared with other consumer electronics segments, according to Jordan Roderick,
executive vice president for wireless products at AT&T Wireless Services.
Years ago, the cellular industry was a tiny fish in a sea of consumer electronics businesses. "Now we are the whale," he says.
"There are more core components put in wireless phones every year than into TV sets or computers. We are the big category
in consumer electronics. There's no excess capacity to handle us if we don't adequately forecast all along the supply chain
[exactly] what we're going to need."
"No matter how good you are at forecasting, everybody's forecasts have been under," agrees Jane Zweig, executive vice
president at Herschel Shosteck and Associates Ltd.
In addition to the industry's high growth rate, the product life cycle is short. The combination of those two dynamics make
managing the supply chain more difficult than most sectors of the electronics industry. "It's not like they turn around and build a
part today and use it for six years," says Tom Pitera, president of the Industrial Electronics Division of Pioneer-Standard
Electronics Inc.
New data technologies, Internet access methods and advanced features such as personal digital assistant functions, voice
recognition and text input methodsðto name a few innovationsðare quickly making current digital handsets obsolete, driving a
brisk replacement market. With next-generation technologies, such as general packet radio service and CDMA's 1XRTT
technologies on the horizon, interim technologies rapidly will become dated.
In an illustration of the breakneck pace of growth, Dataquest is predicting the handset market will exceed 410 million units in
2000. That's a 46 percent increase over 1999, when it estimates sales reached about 280 million units. Sales were about 175
million units in 1998.
"I wouldn't call it a disaster," says Dataquest analyst Stan Bruederle. "I would call it impressive. I would expect to see shortages
with that kind of growth."
The Impact On Market Share
That kind of growth will favor current winners at the expense of less-entrenched firms, predicts analyst Herschel Shosteck.
Second- and third-tier manufacturers like Qualcomm, or Kyocera, could get crushed if component shortages continue, he
warns. (Qualcomm decided to sell its handset business to Kyocera in December.)
One reason is that global leaders Ericsson, Nokia, Motorola and Matsushita have the clout and agreements in place to ensure
they receive the first allocation on any components at-risk of shortages. That helps those firms maintain their market share,
Shosteck says. Lesser players that are able to negotiate component supply increases may be able to push sales up somewhat
along with growing demand, yet their market shares overall still will diminish.
Kyocera, for its part, won't be as severely affected by component shortages as other secondary manufacturers, because it
makes a number of its electronic devices, Shosteck says. "We could see Kyocera gaining at the disadvantage of Samsung."
The Components
Companies have discussed various shortages among power amplifiers, audio coders and decoders, liquid crystal displays and
drivers. But a few components are getting attention: those whose uses in a phone are so important or integrated with other
electronic devices that shortages can stop production lines and restrict the number of units produced in a year.
Three components now are in "allocation," meaning that demand far exceeds supply and suppliers and distributors have to
develop a method for allocating the product to their customers. This is where heavy-hitting vendors can gain
advantagesð-manufacturers first will nail down long-term commitments with established customers. They'll evaluate requests
from these primary customers for additional supplies above original, projected needs before committing their components to
new customers. Allocations can shift virtually daily to meet changing market conditions.
Dialing In
Flash memory is one of those products now in allocation. "It's a key piece and when it's in short supply it definitely restricts the
potential size of the market," says Bryan Prohm of Dataquest.
Flash memory is a chip that stores both software code and data and is called the "brain" of the phone. Intel, which says it has
63 percent of the flash memory market, doubled its shipments in 1999 over the previous year, says David Dickstein, Intel
spokesman. Nevertheless, the company still is beefing up capacity to meet new demand projections.
"We to date have met every commitment," Dickstein says, "but the fact remains that we can't make enough chips and the
industry can't make enough chips to keep the boom in the cellular market happy."
In the last few weeks, Intel said it established a couple new factories that it says will help meet demand. It also is converting
from .25 to .18 micron chip size, which will enable the firm to vastly increase output of chips from each silicon plate to satisfy its
customers and retain market share.
Two others components in allocation are surface acoustic wave filters and tantalum capacitors. And for companies that want
these two items, the wait can be long: There's a 35-week lead time in the industry for SAW filters, and a 14- to 20-week lead
time for capacitors, according to Tom Kuhl, director of sales at Murata Electronics North America, a global manufacturer of
electronic components.
Surface acoustic wave filters send and receive signals. A phone that operates at several different frequencies requires one SAW
filter for each frequency. As more phones operate on multiple bands, manufacturers require more of these components in each
phoneð-thus another demand factor causing shortages.
Tantalum is the name given to efficient, low-power consuming capacitors that can fit in the smallest devices. In the most basic
digital phone, individual capacitors would be installed between the digital signal processor and each of the following
components: baseband processor, microcontroller, memory and interface components, as well as between the memory and
microcontroller. Advanced phones can require 200 of these.
"Any time you deal with high frequency designs you use capacitors to keep noise down," explains Ryburn Taylor, director of
engineering at Pioneer-Standard. Again, sophistication leads to shortages.
Design, Procurement and Assembly
Considering the long lead time and complex coordination required to get all the needed parts in the factory door on time to
create phones, it's no wonder handset manufacturers are developing new procurement and manufacturing approaches.
While the major handset manufacturers have their own factories to make their phones, many are starting to use contractors to
provide additional capacity. Contract manufacturers are the fastest-growing segment of the electronic components market,
because it's a quick way for a company to add bricks and mortar without having to build and run the facility.
It also has two critical advantages: flexibility and speed to market.
All of the partnersð-component suppliers, distributors, supply chain management firm and othersð-will work with the phone
manufacturer at the front end of the design process to identify the right products and technologies, to quantify expected
demand, and pinpoint when it will occur. The SCM firm will make sure it all happens.
"If a phone company has a new unit in design today and we're working with them to understand that design proactively early
onð-today or a year from nowð-we can begin to position the supply chain for those products now. It becomes incumbent to be
working in a partnership to do that," Pitera says.
Most agree that the biggest bottleneck in the process is communication and individual companies' willingness to openly share
the needed information so that the contract manufacturer, distributor or component supplier can make plans to meet forecasted
demand.
And that means stepping up communications so the supplier tells the customer what they can supply, and the customer says
exactly what they need and when, Kuhl says. In other words, the supplier must be able to go
"beyond the data" to understand where the customer is headed and what they, the supplier, must do to fill their contractual
commitments.
Kuhl says Murata has decided to add manufacturing capacity for both SAW filters and capacitors. "The industry has been
cautious in adding capacity, but having said that, we're moving full steam ahead and I'm sure our competitors are as well."
This added capacity may not alleviate the shortage problem immediately. Kuhl says it can take six to nine months to bring new
manufacturing capacity on-line once a firm has decided to make that commitment. The decision is not an easy one, because
firms must invest substantial capital and if the competition also adds facilities, the problem could become one of oversupply and
price cutsð-not a good scenario for firms needing to finance new facilities.
A Solution?
A few more manufacturers wouldn't hurt, suggests Data-quest's Prohm. There's a finite number of manufacturers in this market,
he says. And it will take the introduction of additional component manufacturersð-and a willingness among handset makers to
purchase from those new vendorsð-to alleviate kinks in the chain of component supplies. |
