Last year's massive inventory glut continues to linger for component suppliers as poor end-market conditions, shifting product designs, and fierce global competition mar suppliers' recovery efforts.
While the electronics industry has progressed in depleting inventory, the components sector -- including interconnect, passive, and electromechanical devices -- is holding onto higher-than-normal levels despite production cutbacks, price reductions, and supply chain reform.
"There's not a lot of inventory depletion going on," said Sandy Beck, senior vice president of marketing at Kemet Electronics Corp., a Greenville, S.C., capacitor manufacturer.
According to data from the U.S. Department of Commerce, the U.S. inventory-to-sales ratio for components, excluding semiconductors, has stagnated in recent months. The ratio fell only slightly from 2.10 in May to 2.09 in June, after declining steadily from a high of 2.69 last September, and remains above 2000 levels, when the ratio was below 2.0.
"The data is seasonally adjusted, so inventory levels are still way too high," said Jim Haughey, staff economist at EBN. "We don't expect July to be much different."
Component suppliers had the equivalent of 62 days of inventory in June, above the industry norm of 51 days and exceeding the 56-day level in the beleaguered telecom industry, according to EBN and the Commerce Department.
Shawn Wood of iSuppli Corp., El Segundo, Calif., argues that Commerce Department data misrepresents inventory conditions because the inventory-to-sales ratio reflects not the number of parts sold but their monetary value, which has eroded considerably in the last two years.
"Because component prices have come down, the cost of the parts in inventory is more than the cost they're sold for," Wood said. "In 2000 rising part prices caused the inventory-to-sales ratio to rise."
Too much by any measure
But even if unit sales of components were factored in, any recent increases have not been enough to deplete remaining inventory, noted David MacGregor, an analyst at Midwest Research, Cleveland.
"They're not burning off as much inventory as they could," MacGregor said. "Until end markets stage a recovery, it will be difficult for suppliers."
Passives suppliers that produce hundreds of millions of parts annually agree that weak end markets have slowed orders. They say the inventory overhang stems largely from a surplus of older parts OEMs no longer want for newer designs.
"The rate of inventory depletion has slowed because levels may be getting down to slower-moving parts," said Glyndwr Smith, senior vice president and assistant to the chief executive at Vishay Intertechnology Inc., Malvern, Pa.
"Two years ago, people would buy anything they could get their hands on in the way of capacitors," Kemet's Beck said. "This included many surface-mount tantalum capacitors with less popular values that OEMs purchased anyway just to get parts, which now just sit."
"Most of the inventory out there is junk," Beck said, adding that the unsold parts will likely be obsoleted.
Changing product designs often results in a surplus of older parts while tightening supplies of newer parts, according to John Denslinger, senior vice president of sales at Murata Electronics North America Inc., based in Smyrna, Ga.
"Customers designing, say, cell phones are looking for 0402 capacitors. But older 1206 and 0805 capacitors are not in as great demand because new designs are going to the smaller parts," Denslinger said.
Many older parts will likely wind up on the spot market, said Grant Johnson, manager of marketing intelligence at Converge Inc., an excess-inventory exchange in Peabody, Mass.
"Most component suppliers have taken their medicine by now and accepted write-downs on difficult-to-deal inventory," Johnson said. "As a result, more buyers are turning to the open market for good deals on some of these older passive components."
Margins on the decline
Outside of passives, the inventory glut is less severe but still present.
For instance, ITT Industries, Cannon, Santa Ana, Calif., has brought down its inventory levels during the last nine months, though there's still an excess of some backplane and optical connectors because of the weak communications infrastructure market, said Frank Breslin, director of marketing and sales at the company's Connector Americas operation.
"We're seeing an improvement in our distributor business, with some distributors replenishing stocks," Breslin said.
TTI Inc., Fort Worth, Texas, said conditions are improving.
"Our inventory levels are generally in line, but we're tweaking in certain areas," said Craig Conrad, TTI's vice president of sales.
A recent report by Thomas Weisel Partners LLC, New York, said inventories at components distributors are declining, with some beginning to replenish stocks of passives and connectors.
Still, the ongoing component glut has also stalled any production capacity increases while maintaining pressure on prices that were originally expected to level off.
"We have plenty of unused capacity," Murata's Denslinger said. "And we don't see bringing any more capacity on line soon."
MacGregor of Midwest Research noted that prices on some passive parts, such as multilayer and ceramic chip capacitors, continue to decline up to 3% to 5% a month, further eroding suppliers' margins but leaving them with few choices if they want business.
Vishay's Smith, however, said passives prices are starting to level off, as suppliers can no longer let their margins erode.
Supply chain reform
The inventory bubble of the past two years forced suppliers to implement supply chain reforms such as vendor-managed inventory and better forecasting systems, so far with mixed results.
"VMI programs just transfer responsibility for the inventory," Denslinger said. "What will improve inventory management is better forecasting."
Smith agreed, adding, "I have to believe there's better inventory control with the new software programs, but it's the numbers that go into these systems we have to be more tactical in understanding."
Kemet's Beck said that most recent forecasts have been fairly accurate, but he noted, "Today, nobody has an incentive to overstate what they want [sales] to be."
Contributing to suppliers' malaise is the move by OEMs and EMS providers to continue moving manufacturing to low-cost regions like China. They are opting to work with regional suppliers like Taiwan-based Yageo Corp., forcing U.S. suppliers to recoup lost sales.
"A lot of business that was formerly in North America and Europe is now in Asia, and those companies tend to fare better with locally based suppliers," iSuppli's Wood said. "It's a fact of life that there's a regional preference."