Tide starts to turn for electronics
Supply will tighten and leadtimes will stretch for many components in 2004, but there will be few shortages. Expect small prices declines for passives and connectors, while semiconductor prices will be mostly steady with a few exceptions.
By James Carbone -- Purchasing, 1/15/2004 2:00:00 AM
It won't exactly be a buyers' market for electronics in 2004 as demand increases, supply tightens and leadtimes stretch. However, it won't be a sellers' market either as prices for many components will fall modestly.
Supply conditions will favor buyers in the first half, but will become tighter in the second. Leadtimes for components will stretch as demand increases. Some components, such as NAND flash memory, will likely see price hikes. Buyers can expect 2-3% price erosion for connectors and passives, while most semiconductor pricing will be stable.
Despite expected flat to falling prices, most manufacturers are optimistic about 2004. Inventory levels are low and 2-3% price drops are nothing compared to the 20-30% annual price reductions that suppliers have experienced over the last three years.
Twenty percent or more growth is expected for many semiconductors in 2004 because of strong end-equipment demand from computer, cell phone and consumer electronics equipment manufacturers. PC shipments are expected to grow 14% because many companies will finally upgrade aging computer systems for the first time since 1999. "End equipment demand will be much better in 2004 due to the improvement in IT spending in the U.S. and Europe," says Jean-Philippe Dauvin, chief economist for semiconductor manufacturer STMicroelectronics. "We estimate that IT spending will increase 7-8% in 2004. It was 3% in 2003. The priority will be hardware. There is no inventory in the pipeline of any kind of chips. Cell phone shipments will increase and we could be surprised by wire-line communications, which could grow 5-10%," he says. Growing demand for wireless devices will help drive the building of more wireless infrastructure which will further boost electronic components demand.
Strong end-equipment demand will mean nearly 20% growth for the overall semiconductor market in 2004, according to the Semiconductor Industry Association. Passives revenue will rise about 5-6% while the connector market will increase 6.4%.
Break out the aspirin
Growth in demand will cause some supply headaches for buyers in 2004, although it is unlikely there will be widespread shortages. The biggest challenge may be NAND flash, which is used for data storage in devices such as digital cameras and televisions, MP3 players, digital cable and satellite set-top box players, and new cell phones equipped with cameras.
"Flash will be one of the market drivers for next year," says Brian Matas, an analyst with market researcher IC Insights. "We are looking at 42% growth for flash in 2004." That means the flash market will grow from $11.2 billion to $15.9 billion.
Matas says flash supply will be tight. In fact supply became tight in the second half of 2003. "There are spot shortages in the NAND segment, which is oriented more to consumer devices. The 64 and 128 Mb densities are the sweet spots right now. That is where we are seeing more of an escalation in prices due to greater demand."
Matas says with the growing use of flash in consumer electronics equipment, the flash market is moving more to a balance between NAND and NOR flash. While NAND flash is used for data shortage, NOR is used for code storage in a variety of equipment, including cell phones and computers.
Five years ago, 90% of the flash market was NOR. Today about 65% of the market is NOR and in the next several years it will likely be 50-50. "Every year we see a four to seven percentage point increase. We anticipate that migration for the next several years as well," says Matas.
Tad Keeley, marketing manager, system memory business for Renesas Technology America, says flash demand for data storage is exceeding supply. Renesas makes AND flash, which is similar to NAND flash. It has a somewhat different cell design but is used for data storage. "The upturn for flash started last May and has been on an upward path," says Keeley. "Our expectation is it will continue through the first half of 2004." He says there have been shortages and that leadtimes are long. Buyers without supplier agreements must wait about five months for delivery, according to Keeley. He adds that prices have increased 15-20% for AND flash since May. Prices could rise another 5% or so, but will likely stabilize mid-year as more capacity comes on line.
The good news for buyers: Major flash suppliers will add capacity next year. ST Microelectronics and Hynix will ramp up production of NAND flash, which should ease leadtimes and stabilize prices.
The situation is different for NOR flash, says Klaus Schwegler, marketing manager, NOR flash for Renesas. "There is a broader supply base for NOR flash. There haven't been shortages, but leadtimes are stretching," he says. Leadtimes moved out from about eight weeks in the summer to about 10 weeks in December.
Buyers should keep an eye on the process technology flash suppliers use. Some are transitioning from 0.18-micron process technology to 0.13 micron. By moving to the smaller process technology, suppliers can reduce the line widths of chips and get more parts per wafer, which will increase supply.
DRAM demand rises
While flash will see strong growth in 2004, so too will DRAM. The market will rise 33% from $16.8 billion in 2003 to $22.4 billion in 2004, according to IC Insights.
The DRAM market will benefit from PC shipments growing 14% in 2004, reflecting the first wave of business computer upgrades since 1999. Besides more PCs shipping, the average amount of memory per system will rise from 384 megabytes in 2003 to 512 megabytes in 2004, which will further drive DRAM demand.
Matas of IC Insights says unit shipments for DRAM will rise 12% and average prices will increase 18% in 2004. "Price increases will be due to greater DRAM demand." he says. In addition, higher density parts (including 256 megabit and 512 Mb parts) will ship. These carry higher pricetags than lower density parts.
Matas says DRAM manufacturers will try to hold the line on prices in 2004. "I think a lot of DRAM manufacturers, after having been hammered for three years, are ready to stick to higher prices as much as they can. They're thinking, 'Let's not undercut each other and not make it such a cutthroat environment that we all lose our shirts once again."
However, DRAM suppliers such as Infineon and Samsung are moving from 200 mm to 300 mm wafers and are shrinking die sizes from 0.18 micron to 0.13, which will boost DRAM supply.
Synchronous DRAM buyers may have a tough year. Suppliers have shifted the bulk of their DRAM manufacturing to double data rate (DDR) technology and most DRAMs shipped in 2004 will be DDR parts, meaning that supply will be limited for remaining synchronous DRAM demand. SDRAM tags increased already in the second half of 2003. For example, the spot market price for a128 Mb 8x16 SDRAM increased from $3.20 in September to $4.90 in December. Price increases may continue through 2004. "However, there may be a few companies who will swing their operations more to synchronous to capture that profit margin," says Matas.
Buyers can expect 256 Mb to be the dominant DRAM density in 2004, although a greater number of 512 Mb devices will ship. With architecture, DDR will be the most in demand technology although more DDR 2 parts will ship as well for high-end systems.
Memory ICs won't be the only semiconductors that will see growth in 2004. In fact, demand is expected to increase for almost every type of semiconductor. Thirty-two bit microcontrollers (MCUs) will post 33% revenue growth. Reason: The part is being used more in automobiles and industrial control applications. "In the automotive world we are seeing a lot of implementation of 32-bit microcontrollers, whether it is for engine control, the chassis, or monitoring systems," says Matas.
Digital signal processors (DSPs) will post 29% growth in 2004. "Every cell phone has a DSP," says Matas. "That market is continuing to grow. As you get into further sophistication with camera phones or with some devices that are phone, game machine, MP3 player, radio, everything in one, it requires more sophisticated DSPs, which carry higher price tags," he says.
With demand rising and supply tightening, buyers should lock in contract prices early in the year, according to Matas. "There will be more upward price movement as the year progresses. Display driver circuits, telecom specific analog parts, flash, DSPs, and logic parts related to the mobile, wireless world will be in high demand. If you are buying in that environment, you have to be quick to lock in some prices now," he says.
Passives outlook: Growth with deflation
The same end-equipment demand growth that will drive semiconductor growth in 2004 will bring demand growth to passives as well in 2004. While demand for semiconductors will grow in 2004, so too will demand for passives. The overall passives market is expected to grow around 5.3% in 2004, according to market researcher iSuppli. In fact, most passives suppliers noted a pickup in business in the third and fourth quarters of 2003. "The market was booming in the second half," says Shawn Wood, an analyst for iSuppli. "Orders at suppliers increased 18-20% in Q4 over Q3." He says some of the increase was due to the holiday order season. "Q4is always the biggest quarter while Q1 is usually the weakest," says Wood.
Suppliers' orders increased also because there was very little passives inventory in the supply chain. "Inventory has dropped down to the point where it is lean across all sections of the supply chain. It is lean at the passives suppliers, at contract manufacturers, distributors, and original design manufacturers (ODMs)."With increased orders and no inventory, passives suppliers saw 19-20% growth instead of 5-10% growth in the fourth quarter, according to Wood.
Manufacturers say the increase in demand caused leadtimes to stretch for many parts. Willie King, vice president of marketing for AVX, which makes capacitors, resistors, inductors and other components, says "Leadtimes were 4-6 weeks in the summer and now they are 8-12 weeks if not more. Even popcorn items are in excess of eight weeks right now."
Leadtimes will stabilize in the first quarter, but will stretch in the second half.
Wood of iSuppli says increased demand for components will affect price trends as well in 2004. While price tags for most parts will continue to fall, they will fall at a slower rate than in the last three years.
In the fourth quarter, some prices increased, but it wasn't due to tight supply, according to Wood. Rather, it was due to the fact that some OEMs and EMS providers had been buying parts for less than market value and were being forced to pay full market value. " China is one region that is seeing more aggressive price increases because they have been so far below the curve," says Wood. He says foreign suppliers competing with small indigenous suppliers are increasing prices for some high-runner parts. "They can do that because the local Chinese suppliers who sell parts for less can't handle all the business. The foreign supplier in China says, 'The local guys are full and handle only about 10-15% of the total market. Why should I compete with these guys who need only one big customer to book all their capacity?'" says Wood.
How long price increases last remains to be seen. Local suppliers could add more capacity and more local suppliers could emerge, increasing supply. In addition, the first quarter of the year is usually weak, which means less demand for parts.
In 2004 overall, passives tags will decline, according to Wood. "We will have modest, small price decreases of 1-2% per quarter." That's small compared to some quarters when prices dropped 12-15% for some parts. However, there will be price increases for some parts that have been selling below margin. "If you look at suppliers' revenues, they are all just about breaking even. Some of them are losing money."
Because some suppliers are losing money and others are operating with razor-thin margins, many suppliers believe there will be an effort to boost prices in 2004 if demand remains strong. "It will be a hard thing to do," says John Denslinger, senior vice president of passives manufacturer Murata, because many buyers during the downturn have gotten used to quarterly price declines. "They have become accustomed to availability, to buy parts whenever they want, at prices they want to pay. People in purchasing think they will always get price reductions. In fact, sometimes buyers are incentivized to get price reductions to the point where they will go to brokers to maintain purchase price variance (PPV). It's a tough scenario to overcome." However, without price increases, suppliers won't increase capacity anytime soon. That could pose problems if demand skyrockets.
King of AVX says a trend buyers should watch in 2004 is the movement to lead-free parts. Although the European ban doesn't go into effect until 2006, many suppliers are transitioning to lead-free materials and processes in 2004. "A lot of products will be affected. Aluminum and tantalum capacitors are sensitive to heat. They will have a hard time withstanding solder bath temperatures of 260º Centigrade," says King, adding "It's a challenge to provide solutions."
The connector market, meanwhile, is expected to grow from about $25.5 billion in 2003 to $27.1 billion in 2004, according to connector industry maven Ron Bishop, president of Bishop and Associates. "Everybody is cautiously optimistic about 2004," he says. "The book-to-bill ratio has been around 1.05 to 1.07. But the ratio has to get up to 1.25 for the industry to build a backlog. It needs to happen only a couple months in a row to build a backlog. Right now the industry is shipping out everything within 30 days," Bishop says. Buyers can expect availability to remain high for some time.
NOR chips costing less
09/22/2009NAND gets leg up on NOR
02/02/2005IC industry poised for recovery in 2010
07/15/2009More availability on the horizon
01/24/2001
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