Watch out, folks. While industry pundits have been predicting it for two years, the pendulum is finally about to swing the other way. As I've warned before, deep cuts in capital spending could lead to some component shortages at the end of 1999. In 1998 alone, semiconductor capital-equipment expenditures in South Korea dropped 54%, followed by a 35% drop in Japan, and 15% declines in Europe, Taiwan, and the United States.
With that said, the first must-do on your checklist for the new year is to re-evaluate your build-to-order strategies. The oversupplied environment in the past two years has made the BTO business model work-successfully. But what will happen to BTO strategies when the semiconductor industry shifts into recovery?
Recovery seems distant, especially since semiconductor vendors have continued to close old production facilities and reduce their workforces. And data points such as a 30% rise in component capacity vs. an 18% gain in production don't make forecasting the future any easier. In fact, those numbers imply that a recovery could be delayed at least another year.
The business climate, though, will turn. As OEM managers put pressure on purchasers to keep inventories low, this could cause problems for their BTO programs. As one analyst put it, "the typical buyer will go through hell."
Already, the DRAM, microprocessor, and PLD markets are starting to recover. Worldwide semiconductor sales are expected to climb 20.4% in 1999, after an 8.4% decline in 1998, according to EBN's forecast. And shipments of electronic components are expected to increase 11.2%, compared with 6.5% last year.
With that kind of demand, current inventory levels are dangerously low. Be assured that your management will have a change of heart when the corporate accounts tally up missed revenue opportunities because of component shortages. If corporate earnings start disappointing investors, healthy consumer spending that has been fueled by the the stock market boom could slow and ultimately affect electronics end markets.
What purchasers should be doing is taking their distributors out to dinner. The role of the distributor in the supply chain will be even more critical this year. Teaming with those that have sophisticated inventory-management programs in place could make all the difference.
Ismini Scouras (firstname.lastname@example.org) is EBN's senior managing editor, news.