Despite some bullish reports on the outlook for corporate profitability this year, OEM procurement can be sure of one thing--component prices will continue to be low for at least another three quarters. Don't let your suppliers tell you anything different.
So what if Intel posted higher-than-expected revenue, and its profits met consensus estimates? The company is curtailing its capital spending budget for the year by $1 billion, to approximately $3.7 billion. The revision doesn't mean that Intel is cutting production; in fact, the company's shift to 300mm-wafer production
appears to be under way. Another die shrink, however, means more capacity. And more capacity means lower prices. The same goes for the DRAM industry when manufacturers accelerate the push to 300mm manufacturing, most likely at the end of this year.
Another chip supplier, Linear Technology, also reported higher-than-expected sales, profits, and gross margins. Keep in mind, though, that these reports reflect the seasonality of the business in the final quarter of the year. Linear Technology didn't forget to mention that maintaining that level of growth is unlikely in subsequent quarters.
Business conditions are still poor, folks, and will continue to be that way until end demand picks up. One Wall Street analyst released a report a couple of weeks ago expecting an inventory-replenishment cycle to occur in the distribution industry this quarter. Maybe so, but let's not forget the "recovery" of the first half of 2002. It was short-lived and deceiving. Suppliers served the market with existing inventory and didn't need to boost production to meet the ephemeral rise in demand.
If another inventory-driven "recovery" does happen, suppliers will be competing on price to win that volume business. Component suppliers, especially capacitor, resistor, and connector vendors, will not be able to justify price hikes in response to growing demand. Supply is more than ample and suppliers are still taking painful steps to reduce expenses.
Kemet just cut its workforce and Yageo put construction of its China facility on hold until the second half of the year. And on Jan. 10, Moody's placed Vishay's credit ratings under review for downgrade. Meanwhile gross margins at Nu Horizons got killed; the distributor cited pricing pressures in the passive component sector.
Until capacity utilization rates show a significant improvement and lead times stretch, component prices will still be under pressure. Industrial capacity utilization is only running at about 75%, and for the computer and communications equipment industries those numbers are 62.7% and 49.8%, respectively.
Again, the key is end demand. And the catalyst for market growth will be a rebound in IT spending. That wildcard still seems to be just a wild thought, for this year anyway.
E-mail comments to Ismini Scouras at email@example.com.