Buyers can expect to see an attitude adjustment on the part of semiconductor suppliers. In fact, if they look closely, they'll see it now in suppliers' decisions to cut back on capacity expansion despite growing demand.

The lack of investment is indicative of changing priorities by chip suppliers about their business. "It is an indication that profitability comes first as opposed to gaining a few points of market share," says Bill McClean, president of IC Insights in Scottsdale, Ariz. "They feel they need to get higher prices and more revenue per wafer and they don't want to see this continual slide in prices. It is a major shift in attitude," he says.

The attitude adjustment is not good news for buyers because it will mean tighter supply, if not shortages, if chip suppliers stick to their guns and don't add a lot of new capacity.

Buyers may feel the pinch later this year. "We will see accelerated growth in demand later in the second half," says McClean. "The IC industry is so seasonal with cell phone and PC and consumer electronics equipment shipments occurring in the third and fourth quarters. You have the biggest markets showing seasonal increases this year.

Depending on the supplier and product line, there could be delay in shipments although no severe shortages, says McClean. Supply of special purpose logic, analog chips and DRAM could be tighter.

He notes that 300mm foundries are running at 96% utilization and TSMC, the largest chip foundry, is running at 100%. "If there is a surge in demand, there will be some delays in shipments," says McClean.

There is some good news, at least for buyers of NAND flash. Toshiba and Sandisk are still putting in flash capacity and Samsung has not backed off its capital expenditure plans for flash, so supply should be adequate to meet rising demand.

The cutbacks come at a time of increasing demand. Computer and cell phone shipments are expected to grow 10% per year on a global basis although the growth rate will be less in the U.S. "The focus is so much on the U.S., but there are so many other areas in the world that want cell phones and PCs," says McClean.

"The U.S. market may be a little soft, but the U.S. market is not the be-all end-all market it once was in terms of electronics systems demand," he says.

Late last year it was thought that semiconductor suppliers would cut back capital expenditures by 10% in 2008, according to McClean. "Now it looks like it will be 16% or 17%. It's more than we anticipated," he says.

McClean was not surprised by the cutbacks made by DRAM manufacturers because prices had plummeted 70% last year. "We were surprised by the foundries cutting back given the fact they have high utilization rates," he says. Most foundries' utilization rates are in the mid 90s or higher, he says. Rates are high because unit demand overall for semiconductors is strong and more semiconductor suppliers are outsourcing production to foundries.

Growing electronics systems demand will also impact passives and connectors, but suppliers have put in enough capacity to meet demand. If prices rise for those components it won't be because of a lack of capacity, but because of higher materials costs.

For connectors, the strongest demand for 2008 may have occurred in the first half, according to Ron Bishop, president of researcher Bishop and Associates in St. Charles, Ill.

He says orders and sales were up in the first five months of the year. "Year-to-date orders were up 13.9% through May. Sales are up 12.3% from one year ago. It is better than we thought it would be," he says.

But Bishop says there appears to be a slowdown in connector demand. In May, orders were up only 4.2% from May 2007. In April, they were up 16.6%. He says double-digit monthly increases in orders in the second half are unlikely.

While sales were up 12.3% for the first five months of the year, revenue will rise 7%, according to Bishop.

With the rate of demand growth slowing in the second half, there should be ample supply and short leadtimes for most commodity connectors. Prices should also decline a bit.

Supply will likely be adequate in 2009 because of weaker demand, says Bishop. He forecasts that the industry will grow 6% next year.

Connector makers won't add a lot of capacity. "Since the downturn in 2001, the industry has been very cautious about adding bricks and mortar," says Bishop. But it is easier to add connector capacity than semiconductor capacity.

"It doesn't take that long to get a new machine running and you can add capacity gradually in a connector plant," says Bishop.

While connector suppliers are being prudent about adding additional capacity, the high cost of materials is resulting in many of them investing in finding alternate materials as a way of controlling cost.

"We spend much time in corporate labs on materials-plating simulations so we can minimize the use of any type of high-cost metal," says Jean Lamy, CEO and president of connector manufacturer FCI in Versailles, France. "We are developing alternative platings that still meet the specs."

He says with precious metals' prices at an all-time high, it is important to meet customer requirements, "but also to be competitive on cost."

"It's the same thing with resins," he says. "We are spending a lot of time trying to find alterative resins because of the high price of oil. Some resins are more cost effective than others."

While connector suppliers may not increase capacity to build products, some are increasing their value-added services capacity.

"The trend is to provide more value add," says Keith Teichmann, director of marketing and director of product management for connector manufacturer ITT's Interconnect Solutions division in Santa Ana, Calif.

He says ITT's strategy is to have a broad portfolio of products combined with value-added services. "The portfolio gets us a print position and then we take that print position and value-added services so we get differentiation. If we can bring a value add in terms of a fiber optic or cable assembly, we can get a higher margin," he says.

As with connectors, passive component makers have been reluctant to add additional capacity since the 2001 downturn. Nonetheless, there should be plenty of capacity to go around for the rest of this year and next.