Vinh, I believe you know something about the capacitor business. Reading this article I gather a few things; manufacturing is moving to low labor cost countries, some companies pushing new products to maintain profits, consolidation of players through mergers, paladium prices killing profits, and over capacity killing prices.
Some of this could play into ESI's hand for selling machines enabling lower cost production. If a company moves offshore, do they upgrade their equipment? New products like arrays seem to demand new equipment? When a merger takes place, how do they approach capital expenditures? Higher yields could save money lost on wasted palladium? Effeciency seems like the only way to compete in an over capacity situation?
Obviously, you wouldn't be bearish on ESI at these levels if you felt the market demanded continued buying of equipment. What will signal a buy for you?
From Page One of Electronic News: September 14, 1998 Issue
On The Passives Front
Coping With A Soft Market
By Heidi Elliott
Passive component makers had mixed news regarding the state of the industry and how they were coping with the overall softness in the electronics industry.
While some component makers seem to be hard hit by the current situation, not all news is bad. In fact, some passives makers reported improved financial performance over last year's record and others say they've outperformed the market. A few said there is no slump for them.
Among the believers is Felix Zandman, chairman and founder of Vishay Intertechnology. Dr. Zandman believes there is a slump, but notes Vishay's businesses are doing well. In its most recent quarter, announced in July, he noted operating income improved--from $30.4 million to $34.7 million--primarily because of better gross margins.
But that doesn't mean he's sitting still. In fact, Dr. Zandman outlined a number of options to keep a company functional and efficient during a soft demand cycle. "During times of this sort, our approach is to accelerate new product releases and increase our R&D efforts. This is the time to do it," said Dr. Zandman.
Vishay has reversed its research and development policy in response to the market softness. Dr. Zandman said research projects are being approved immediately in the hopes of quickly bringing new products to market. "We've opened the floodgates on that," he said. "Before, there was a priority list, for different projects (about those that got funded). But now, they're getting fast-tracked."
Another measure is to reduce sales and general administrative expenses to increase efficiencies. At Vishay, Dr. Zandman noted, the company has acquired many companies during the last few years, most recently Temic. The company is melding those sales forces, and has sped up its efforts at this time, to get better operating efficiencies sooner. Mergers and acquisitions often take place during a downturn, as the prices of some companies look more attractive to potential buyers and the idea of selling seems attractive to other companies. Dr. Zandman said Vishay will continue to buy up other companies "because it's cheap now."
A third action specific to Vishay, but likely done by other passive component suppliers, is increasing its offshore manufacturing. Dr. Zandman said Vishay is moving production into places like China and Mexico, to lower labor costs.
Another sticking point is the palladium predicament faced by capacitor makers. Prices for palladium, a raw material used to make chip capacitors, continues to rise at a faster rate than prices for finished goods erode. "The cost of palladium is skyrocketing. I don't think it's keeping pace with the pricing pressure on the rest of the industry," said Christopher Dunlap, a spokesman for Murata Electronics.
Kemet Corp. Chairman David Maguire also pointed to the palladium pricing problem in announcing his company's latest quarterly results. Kemet sales for the quarter that ended in June were $142.5 million, down from $161.2 million the year before. "The current supply/demand imbalance has depressed selling prices and the current elevated cost of palladium has further contributed to the quarter's low earnings," he said in releasing the financial results. Kemet, he noted, was also hurt by the Asian situation. In response, Kemet has reduced its workforce and continued its palladium reduction program. Fellow capacitor maker AVX Corp. also took a hit from the Asia crisis, reduced customer orders, and higher raw material costs. It too reduced its workforce.
The Good
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Switch maker Cherry Electric, meanwhile, experienced record sales. Its parent company, Cherry Corp. reported record sales of $122.7 million for the quarter that ended in May. Sales for the quarter that ended in August have not yet been published. Cherry also makes keyboards, sensors and controls. Marketing Manager Michael Schwert, noted that Cherry switch sales increased 7 percent over last year's figures, outpacing the market growth rate of 2-3 percent. However, he noted much of the switches Cherry sells is not standard product. More than half--60 to 70 percent--of Cherry switches are either standard products that have been modified, or custom products; both of which would bring in higher margins and insulate the company somewhat from overall market conditions. Also, Cherry does most of its business for North American manufacturers, so the current crisis in Asia that has hurt so many component makers has not really touched this switch maker. "A lot of our business is not affected by the Far East. We're not tied to that economy," said Mr. Schwert.
And though some companies are not complaining about the current situation, others warn the slump will continue. Overcapacity still seems to be a serious issue. In releasing its last quarterly results in July, AVX Chairman Dick Rosen said the current quarter "does not show signs of improvement." And, Dell Computer CFO Tom Meredith told analysts last week that capacity continues to exceed demand, and Dell does not see "any firming of pricing" of components, according to published reports.
Other executives agree. "What are the signs? What should I look for? I don't like to be a prophet," said Dr. Zandman of Vishay. "Some orders are going up, some are going down. One sign of a recovery is if orders are picking up across the board for three or four months, then things are positive. But that isn't the case." |
