Passive component vendors are keeping the lid on capital expenditures this year as inventory and capacity utilization rates remain at undesirable levels.
Unable to justify equipment purchases, many passives companies are sharply scaling back budgets for the second consecutive year. In 2000, companies invested heavily in additional plants to fill shortages of many commodity parts.
Existing production capacity is more than adequate to meet any upturn in demand, which is not expected until at least midyear, according to analysts.
"Even if demand increases to normal levels by mid-2002, the industry will still have 20% excess production capacity in capacitors and resistors," said Shawn Wood, an analyst at iSuppli Corp., El Segundo, Calif. Wood added that the available production capacity for these parts exceeds current demand by almost 40%, though he declined to specify the number of units.
Lagging demand caused passives suppliers last year to idle much of their recently upgraded production capacity. While some suppliers said they are operating at roughly 50% of capacity, Matthew Sheerin, an analyst at Thomas Weisel Partners LLC, New York, estimates capacity utilization is closer to 40%.
"Passive component suppliers will see extremely poor demand based on end-market conditions and inventory levels," Sheerin said. "The bottom was severe and deep. Clearly, there will be an upturn in business, but not so much to support meaningful capital spending."
Suppliers that plan to spend as much on capital expenditures this year as 2001 will funnel funds to increase production of new-technology products or to bolster production in booming low-cost regions such as China. Still, no major plant capacity expansions are planned until business conditions improve.
"I don't think anyone can say the bottom has been reached," said George Newhart, vice president of investor relations at CTS Corp., an Elkhart, Ind., component supplier. The company's 2002 planned capital expenditures of $40 million are half that of 2001 and a third of 2000 expenditures.
In a similar vein, Japan's Taiyo Yuden Co. Ltd. expects to spend $180 million in fiscal 2001 ending March 2002-one-third the $530 million in fiscal 2000, according to Toshi Watanabe, senior vice president of marketing and business development at the company's Taiyo Yuden (USA) Inc. subsidiary in Schaumburg, Ill. In fiscal 2002 the company plans to spend about $120 million.
But other suppliers, still trying to gauge business conditions, haven't signed off on their capital spending plans for the year.
One such company is Bourns Inc., Riverside, Calif. "We're waiting to see how the first quarter comes back and will continue to be cautious," said Patricia Moorman, vice president of worldwide distributor sales.
Kemet Electronics Corp., Greenville, S.C., is also unsure about its capital spending plans. The capacitor maker will spend about $100 million in its 2002 fiscal year ending March 31, according to John Warner, director of investor and public relations. He added that capital spending for the upcoming fiscal year will decline by an unspecified amount, determined by "customer input between now and March."
Some suppliers said 2002 capital spending will not change substantially from 2001 levels.
"Our 2002 capital spending will be flat with 2001, which is down about 40% to 50% from 2000 levels," said Steve Wade, director of sales and marketing at IRC Advanced Film Division, Corpus Christi, Texas, which is part of the global component supplier TT Electronics Inc.
Wade added that IRC will invest in equipment to manufacture new products such as surface-mount current-sensing resistors and 3W standard- value resistors.
Vishay Intertechnology Inc., Malvern, Pa., projects its 2002 capital spending to be almost even with 2001's estimated $120 million, according to Glyndwr Smith, senior vice president and assistant to the chief executive. The company plans to increase production of niobium capacitors, low thermal coefficient of resistance resistors, and low ESR capacitors, Smith added.
AVX Corp. declined to reveal its projected 2002 expenditures. However, the company will concentrate on developing alternatives to tantalum capacitors as well as more integrated parts, according to Willie King, division vice president of marketing at the Myrtle Beach, S.C., company.
Ted Kundtz, an analyst at Needham & Co. Inc., New York, projects slightly higher capital spending in 2002 for AVX and Vishay, attributing the increases to new-product development and in Vishay's case to the blending in of recently acquired companies such as General Semiconductor.
As some suppliers invest in technology, others are allocating capital to expand geographically, particularly in China.
Epcos Inc., the Iselin, N.J., arm of Germany-based component supplier Epcos A.G., expects its 2002 capital spending to be in the neighborhood of $140 million to $145 million, down from $307 million in 2001, according to chief executive Denny Salmang.
Salmang expects Epcos to bolster production of multilayer ceramic capacitors, ferrite materials, and varistors in several plants the company opened in China during the past year, with some production moved from Europe to reduce labor costs.
Murata Corp. also opened several plants in China in 2001 and will open an additional plant there this year, according to Jiro Miyazaki, vice president of marketing at Murata Electronics North America Inc., the Smyrna, Ga., subsidiary of the Japanese capacitor supplier. The company's Far East business remains strong, he added, but weak conditions in the United States and Europe will likely force the company to cut planned capital spending in fiscal 2002 to $302 million from an estimated $816 million in fiscal 2001.
AVX, which up to now has had only sales offices in China, will also establish a plant there to support a growing wireless headset business, according to King.
With suppliers so severely curtailing production capacity, will they be able to respond to a sharp industry upturn?
Vendors all agreed the production equipment is now in place to handle an increase in business. But manpower could be an issue, conceded Kemet's Warner. "Everybody has cut back substantially on people, so there could be a situation where lead times stretch out again because workers have to be hired and trained," he said.
"The supply chain is not good at handling upside forecasts," said Shawn Severson, an analyst at Raymond James & Associates Inc., St. Petersburg, Fla. "If you had a rapid rebound coupled with depleted inventory, there could be disruptions in the supply chain."