globe.com
Trouble in toyland
Chip shortage threatens yuletide technology
By Alex Pham, Globe Staff, 10/29/2000
AKLAND, Calif. - This year's toy story may not have a happy ending.
A yearlong shortage of semiconductors worldwide is likely to wreak havoc on the holiday season, and is threatening to make some electronic toys and gadgets as scarce as if stores had been raided by the Grinch.
From robotic puppies to Palm Pilots, a wide array of gift items are expected to be hit this year, causing consumer disappointment and billions of dollars in lost sales for the toy and consumer electronics industries, analysts predict.
''It it moves, makes sounds, or lights up, it could be affected,'' said John G. Taylor, managing director of Arcadia Investment Corp. in Portland, Ore.
The problem is not that manu-
facturers are supplying fewer chips; it's that they can't crank them out quickly enough. The explosion of devices, such as cellular phones, coupled with a trend toward more technically sophisticated toys, has caused unprecedented demand for semiconductors, straining the capacity of chip makers such as Intel Corp., Advanced Micro Devices, and Fujitsu Ltd.
For the toy industry, that has meant delayed shipments, smaller quantities shipped, and products canceled for this holiday season.
''Everybody's dying for chips,'' said Jim Silver, publisher of Toy Wishes, an industry magazine in New York. ''This is an industrywide problem.''
Perhaps the most well-known example is the Sony PlayStation 2 game console, which hit North American stores on Thursday. A components shortage forced the company to cut in half the number of consoles available on launch day. And the launch prompted officials to concede that demand is likely to outstrip supply this year. While Sony would not say which components might be scarce, there has been widespread speculation that the console's chips are to blame.
A case could be made that the dearth of PlayStation 2 consoles is unique to Sony, which has invested more than $2 billion to develop and to make the proprietary chips in house, rather than rely on an outside supplier. But other companies have also reported components shortfalls, including Hasbro Inc., Mattel Inc., and Marvel Enterprises Inc.
This month, Hasbro and Mattel each projected losses of $100 million in sales for this year, largely because of component shortages. While that would be a relatively small portion of Hasbro's and Mattel's annual sales of more than $4.2 billion and $5.5 billion, respectively, it makes a difference in a year unlikely to feature new blockbuster toys, such as Furby or Pokemon, which have fueled sales in past years.
''There won't be a single toy this year that will stand out,'' Silver said. ''As a result, the sold-out situation will spread to 20 or 30 items, as opposed to just one or two toys.''
For Mattel, the chip shortage will affect all divisions, said Lisa Bongiovanni, a spokeswoman for the El Segundo, Calif., toy company. Hit hardest will be its Fisher-Price division, which makes Let's Pretend Elmo and Sing 'n' Giggle Eeyore, and its wheels division, which makes Hot Wheels, Matchbox, and Tyco toys.
''There are a lot of products that talk, sing, or make noise. Those might be in limited supply,'' Bongiovanni said. ''It used to take 30 to 40 days to get the chips after we order them. In the third quarter, we started to see that double to 60 to 90 days. We couldn't fit that into our production schedules. What we've done is take the chips we do have and make sure we allocate them to what we think will be our most popular products.''
As a result, Bongiovanni said some product introductions will be delayed for ''several weeks.''
Marvel Enterprises, based in New York, put off its introduction of a wireless messaging pen, called V-Mail, because of a chip shortage. The pen, one of many ''tween'' gadgets aimed at 8- to 12-year-olds, uses radio frequencies to send voice mail up to 100 feet away. Company officials declined to talk about the product delay.
Hasbro has postponed its introduction of Shelby, the company's sequel to its highly popular Furby, as a result of component shortages, said Taylor of Arcadia Investments. The company's Super Poochie electronic dog isn't expected on store shelves until November, Silver said. And the Pawtucket, R.I., toy company will be able to ship only limited quantities of I-Cybe, a motorized dog that is a low-cost alternative to Sony's Aibo, which is going for $1,500, according to the Associated Press.
Numerous calls to a Hasbro spokesman were not returned.
Some toy industry analysts say the companies themselves are partly to blame for their predicament.
''The situation depends on the planning process,'' said M. Eric Johnson, professor of management at the Tuck School of Business at Dartmouth College. ''It's easy to go to Wall Street and point to a parts shortage when it could be more of a supply-chain management problem.''
Part of the problem is that toys are now reliant on technology, which means their makers are subjected to a feast-or-famine supply cycle. In 1994, only one of the top 10 selling toys had a computer chip, said Diane Cardinale, spokeswoman for the Toy Manufacturers of America in New York. Last year, that figure was 5 in 10.
''Toys are becoming more intelligent,'' said P.J. McNealy, a senior analyst with Gartner Dataquest. ''It's no longer enough that you have a teddy bear. You have to have a talking teddy bear.''
Jay Srivatsa said that as chips get smaller and less expensive, they can be put into toys for far less money. ''Digital technology has really opened up a whole new avenue of possibilities for toys,'' said Srivatsa.
For adults, many popular high-tech gifts also will be affected by a shortfall in components, most notably flash memory cards used to store data. Palm Inc., which makes the Palm Pilot hand-held organizer, shipped 1.5 million units in the three months that ended Sept. 1, but industry analysts estimate that the company could have shipped 40 percent more units if components had not been in short supply.
Prices for memory chips, which generally fall 30 percent a year, increased 8 percent this year from an average of $3.11 per megabyte in 1999 to $3.34 this year, said Jim Handy, senior analyst with Gartner.
''It's extremely rare to see chip prices go up from year to year,'' said Handy, who follows the semiconductor industry.
For consumers, that means prices for MP3 digital music players, cellular phones, and some digital cameras will remain high this year rather than fall, as consumer electronics typically do over time. Handy doesn't expect the situation to improve much until 2002, when several new billion-dollar chip-making plants start operating.
Without an obvious must-have gift this year, shoppers may opt for less expensive ''traditional'' toys, such as the Razor Scooter, Celebration Barbie, or the Harry Potter Trivia Game. Whether that means fewer dollars will be spent this holiday season, or whether the same money is spread over a larger number of items, remains to be seen.
''It's hard to say,'' said Margaret Whitfield, managing director of Tucker Anthony Capital Partners in New York. ''You have to put something under the tree.''
This story ran on page A01 of the Boston Globe on 10/29/2000.
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