Supply conditions for electronic components used in consumer electronics (CE) equipment ranging from digital cameras to satellite TV set-top boxes will favor buyers through this year and probably into 2002.

"Last year, buyers at consumer electronics companies and contract manufacturers were scrambling for parts as much as anyone," says Brian Matas, an analyst with IC Insights. "Flash memory was in tight supply. Digital signal processors (DSPs) were being used in cell phones and other types of home-based appliances. No matter what the end-use application was, there was big demand across the board," he says.

The result was high prices for many chips and passive components. But, a rapid decline in demand for finished electronics goods resulted in a components inventory glut that won't be worked off until third quarter.

"We saw the market downturn like everyone else," says Philippe Quinio, director of marketing for ST Microelectronics, which supplies a variety of semiconductors to CE manufactures. "The consumer market was the first to be hit because it is seasonal and highly sensitive to pricing.

"First quarter was sluggish and second quarter does not look good," Quinio continues. "We think we will be rid of the inventory by third quarter and will need to ship more parts in quarters three and four."

Until that happens buyers will be in the driver's seat. "Buyers are better able to negotiate and call the shots instead of having IC suppliers tell them what prices are going to be," says Matas. "They can apply pressure to IC manufacturers to produce more parts at prices that are more acceptable to equipment manufacturers."

Prices for a variety of parts used by consumer electronics manufacturers have fallen. Both digital signal processors (DSPs) and analog ICs show average price declines between fourth quarter 2000 and first quarter 2001, according to the Semiconductor Industry Association (SIA). Average prices for DSP chips shopped to consumer electronics manufacturers fell from $7.71 to $4.62 in March. Tags for analog ICs dropped from $0.778 in fourth quarter 2000 to $0.75 in March. Buyers can expect tags for many components to fall 5%-10% through the rest of this year due to persistently high parts inventories.

The exception is flash memory because of the transition to higher-density devices. A 16-megabit (Mb) flash chip costs roughly twice what an 8-Mb device costs, so average selling pries for flash are trending higher as buyers purchase more 16-Mb and 32-Mb flash devices. In fact, average selling prices for flash increased slightly from $6.37 in fourth quarter 2000 to $6.43 in March because of this move to higher-priced, higher-density parts.

"Based on the number of suppliers and facilities available, I don't think there will be a real supply issue for awhile," says Mark D'Arcangelo, flash product manager for non-volatile memory for Hitachi Semiconductor. Hitachi supplies flash memory to digital camera manufacturers. "You have Sandisk, Toshiba, Samsung, Hitachi. I foresee other players entering the flash market. I don't think that there is any chance that supply will be an issue this year," he says.

Flash, DSPs and analog ICs were an issue for CE equipment manufacturers in both 1999 and 2000 because booming cell phone sales created huge demand, which was sometimes met at the expense of CE manufacturers. Case in point: DVD players use analog ICs. "There were problems last year with DVD manufacturers getting enough analog ICs because they are similar to the chips that are used in cell phones," says Michelle Abraham, an analyst with Cahners In-Stat. "There are hundreds of millions of cell phones and the DVD market is only in the millions. IC makers went after the cell phone market," she says.

While cell phone shipments remain strong this year, the rate of growth has slipped. What's more, new production capacity was added in 2000 for many electronics parts. So, even if the economy turns bullish in the second half of this year, buyers can expect components availability to remain adequate, the analysts say.

The slow economy and excess inventories notwithstanding, it is far from a doom and gloom scenario for the consumer electronics industry, according to market researchers. The segment is expected to grow this year due in part to the ramping up of new consumer electronics goods. Revenue from system shipments will grow from $203 billion in 2000 to $217 billion in 2001, according to market researcher Gartner Dataquest. By 2004, the consumer electronics equipment market will reach $259 billion.

Consequently, revenues for chips sold to consumer electronics manufacturers will rise from $31 billion in 2000 to $38 billion this year and to $52 billion in 2004, reports Gartner Dataquest. That growth is significant because consumer electronics equipment typically uses lower-priced chips. For instance, says Matas, "When you look at a computer, it has a sophisticated microprocessor from the Pentium family that costs a couple of hundred dollars. The processor in a Sony Playstation may be equally sophisticated, but is a RISC (reduced instruction set computing) processor that sells for $40-$70."

Because of forecasted growth in CE demand for semiconductors, many chip companies will focus more effort on this segment, according to Jay Srivatsa, principal analyst for consumer electronics for Gartner Dataquest.

"The PC market is kind of stalling. Most chip companies think that consumer electronics is where the activity is going to be," says Srivatsa. "You look at all these new products that are ramping up: digital camcorders, digital cameras, digital TVs. All of these products need semiconductor content. That's going to drive the semiconductor market," he says.

Texas Instruments is one chip company that sees CE equipment as a great opportunity. TI last year began supplying DSPs to camera manufacturers, which use DSPs for imaging processing and system control. TI's DSPs are in Hewlett-Packard's Photo Smart 315 camera. Gordon Cook, worldwide business development and marketing manager for TI's digital still camera group, says the company has just started supplying DSPs to the market and sales are strong.

He says DSPs can and will be used in more types of consumer electronics equipment as well. "As the world goes digital, we are finding more places for our DSPs to live: cameras, Internet audio players, electronic toys. We find DSPs are gaining more acceptance in new places," says Cook.

As DSPs are used in more CE equipment, buyers can expect chip speeds to increase and power consumption to decline. There will be more integration, and functionality will expand as well.

"It will be important that we come up with system-level devices that include our DSP core and maybe a microprocessor plus other peripherals on the chip to reduce bill of materials (BOM) costs while improving performance," says Cook.

He says buyers can expect higher-performing DSPs at lower prices in the next several years. For instance, in 1991, TI's TMS 320c25 DSP, which had 25 million instructions per minute (MIPs), sold for $15. Today, a similar DSP with 100 MIPs sells for $7.50. The trend toward more MIPs at a lower cost will continue.

Cook says DSP purchasers are not as concerned with prices as they are with reducing their BOM costs. So, the challenge is to provide more integration while providing system solutions that lower the BOM cost.

Besides DSPs, CE manufacturers will also be generating great demand for microprocessors, flash memory and DRAM . " RISC microprocessors will be in high-end equipment such as video games, set-top boxes and DVD players. Low-end products such as Internet audio players are DSP based," says Srivatsa.

Memory will also be in greater demand among CE manufacturers. "If you look at MP3 players and cameras, they are all flashed based," says Srivatsa. "But there will also be a great need for DRAM . Interactive TVs will use DRAM ."

Other CE products that will drive semiconductor demand include DVD players and recorders, personal video recorders, digital televisions and digital cable and satellite set-top boxes. "Satellite set-top box shipments have been strong, but the cable set-top box market has been growing faster than satellite," says Quinio of ST Microelectronics, which supplies decoder chips and other components to the makers of set-top boxes, digital TVs, VCRs and DVDs including MPEG 2 chips for Web browsers and processors.

Set-top boxes are necessary for television viewers to receive digital cable or satellite TV services. TV viewers who go digital are able to receive more channels and clearer pictures than analog TV allows. Digital set-top boxes are loaded with components including DRAM , flash memory, graphics processors, modulators, demodulators, encoders and connectors. Cahners In-Stat estimates that the average basic digital set-top box has about $167 worth of electronics in it.

Unit shipments of digital cable set-top boxes are expected to grow from about 9.8 million in 2000 to 18 million in 2004. Revenue will rise from $1.9 in 2000 to $3.6 billion in 2004. Digital satellite receivers will also see strong growth with the number of units shipped rising from 30.7 million in 2000 to 49 million in 2004 and revenue increasing from $6.4 billion to $10.6 billion.

DVD and personal video recorders will also drive consumer electronics. DVD player unit shipments will rise from 16 million in 2000 to 60 million in 2004. On average, a DVD player contains about $90 worth of electronics including encoder, decoders, DRAM , microcontrollers, connectors and a power supply module among other components.

However, to achieve that growth, the price of the equipment will have to be cut because consumers tend to wait for price reductions before they buy new pieces of consumer electronics equipment.

Example: In 1999 the average cost of a DVD player was $275 and some models were several hundred dollars more. About four million units shipped in the U.S. In 2004, the average price will be about $125 with many models selling for less than $100, and the number of units is expected to grow to 20.5 billion, according to Abraham of Cahners In-Stat. The BOM cost is expected to drop from $188 in 1999 to $89 in 2004. At the same time the functionality of DVD players will expand. To reduce the bill of materials cost and overall price of the units, CE manufacturers will need to cut components costs and purchasers will turn to suppliers who are best able to help them.