The capacity crunch that has plagued tantalum supply in the past year has carried over to multilayer ceramic capacitors (MLCCs), forcing suppliers to double prices and beef up their budgets.
Major suppliers like AVX Corp., Kemet Electronics Corp., and Vishay Intertechnology Inc. have placed OEM customers on allocation and raised tags by more than 100% compared with last year. A booming wireless market, the recovery in Asia's economy, as well as mounting raw material costs are the primary forces soaking up supply and boosting prices.
Vendors stressed that they are working to protect their key customers and distributors through this kink in the supply-chain curve. In addition to working more closely with OEMs on forecasts, manufacturers have finally decided to break open their piggy banks after hesitating for several quarters to resume spending on capacity for fear of another glut.
The heavy increase in spending, however, will be padded into rising capacitor prices, vendors said. From the looks of the end market, it appears as though customers need parts regardless of price.
What's driving demand?
The wireless industry has been the culprit for shortages across the electronic- components industry. In a typical cell phone, there are about 255 capacitors, 15 of which are tantalum.
"Multiply that by the 400 million cell phones expected over the next year, and that's a lot of capacitors," said Willie King, director of product marketing at AVX, Myrtle Beach, S.C.
The industry sold 285 million cell phones in 1999, up 90% from 1998's 150 million units, according to San Jose-based Dataquest Inc. and Nomura Research Institute Ltd., Tokyo.
But cell phones are not the only end products that use MLCCs. As the number of cell phones continues to climb, demand for MLCCs that feed the infrastructure needed to support the phones (such as base stations) has also increased, King said. As a result, there seems to be no easing of demand in sight, according to suppliers.
During last week's Capacitor And Resistor Technology Symposium (CARTS) in Huntington Beach, Calif., procurement managers and engineers said they don't expect sales in the wireless market to slacken. At the same time, the number of components in a typical wireless product is expected to increase by 30%, according to industry estimates, as OEMs design more functions into the products.
In the next two years, the number of MLCCs in a cell phone will increase to 300 from about 240 today, said Dave Richardson, applications engineer for the capacitor group at Vishay Intertechnology, Malvern, Pa.
"And you will also see smaller-size [components]," he said. "The trend is moving toward anything that can be done to pack more components in a smaller space."
Wireless demand isn't the only culprit
The shortage also stems from the economic downturn in the Far East a couple of years ago, said Glenn Spears, executive vice president of Kemet Electronics, Greenville, S.C.
"The electronic-consumer-product market there was on its back," Spears said. "So the [capacitor makers] in Japan and Asia turned their guns-loaded with their excess capacity-toward the U.S. and European markets, markets dominated by Kemet, Vishay, and AVX."
Prices eroded "because they were willing to sell at any price to keep their factories open," Spears added.
Subsequently, any new capacity in the pipeline at U.S. capacitor makers was put to a stop. But by early last year, capacitor consumption in the Japanese consumer- electronics market increased.
"So the Japanese capacitor makers turned their backs on the commitments made to U.S. and European [OEMs] and started supplying Japan again," Spears explained. "That created an instant shortage at the same time of the wireless and telecom boom."
Prices are up, up, and away
Meanwhile, prices continue to climb. Prices of the more common types of MLCCs have risen to 1.5 cents, up from 0.5 to 1 cent a year ago, Spears said. Tantalums have climbed to about 15 cents, from about a dime a year ago.
A lack of supply, though, is only partly to blame for rising prices. Soaring prices of palladium, a raw material used in the manufacture of MLCCs, has had the greatest impact on MLCC prices. Palladium prices peaked at nearly $1,000 per troy ounce two weeks ago, from about $450 in December and less than $100 eight years ago.
"A tightening supply of ceramic capacitors has allowed for significant increases in ceramic-capacitor prices in recent weeks, effectively allowing AVX, Kemet, and Vishay to pass through the rise in palladium to their customers," said Jerry Labowitz, an analyst at Merrill Lynch & Co. Inc., New York.
Suppliers have been retrofitting their manufacturing facilities to substitute palladium with cheaper base metals such as nickel. But it takes time to make the switch.
Labowitz, for example, expects nearly 85% of AVX's MLCC sales by the end of the year to be nickel-based, compared with 35% currently.
OEM customers understand their suppliers' challenges. A procurement manager for a U.S.-based telecom OEM acknowledged that the switch can't happen overnight. "But for me, the bottom line is that I'm still faced with higher prices and tight supply," she said.
Erratic swings in palladium prices forces MLCC tags to be changed every month, said Joel Girsky, senior vice president of strategic business at Jaco Electronics Inc., a component distributor based in Hauppauge, N.Y.
"Prices may go up 30% to 40% in a month," he said. "No one can tell what the prices will be. So there's enormous pressure on OEMs and distributors. The distribution system is stressed."
If a major OEM such as IBM wanted to order from Jaco $10 million worth of capacitors in an 18-month period, the company would have to turn it down, according to Girsky.
"I can tell you that we couldn't take their order because I can't get the additional parts," he said.
So what are suppliers doing about it?
Suppliers are working to increase capital expenditures, as well as stepping up forecasting efforts with their OEM partners.
Vishay, for example, is expecting to dole out 40% more in capital expenditures this year than the $120 million the company spent in 1999. AVX, meanwhile, plans to spend $140 million this year, and anticipates raising its budget to $175 million in 2001.
Kemet poured $90 million into increasing capacity in the past few months, and Spears said the company is spending $120 million in the fiscal year that begins April 1.
Customers, though, will have to pay.
"To increase capacity, you need to put more equipment on line; and to realize that return, you will have to maximize on that pricing as well," AVX's King said.
Through these changes, suppliers said they are working to protect their customers "so they can keep up a continuous flow of product," he added.
That means maintaining a clear dialogue with OEMs during these demand surges, suppliers said.
"What we are really selling is capacity, not capacitors," Spears said.