Weak market conditions and an inventory glut have fueled another cycle of sharp price cuts by Asian suppliers for commodity passives, creating a favorable OEM buying environment that will likely persist into at least early next year.
As OEMs negotiate supply contracts, several Asian vendors, including Murata, Walsin, and Yageo, reportedly sliced multilayer ceramic capacitor (MLCC) prices by at least 10% last quarter and are doing the same this quarter in a desperate attempt to unload excess inventory and secure business.
And Korea's Samsung Electro-Mechanics, despite the inventory overhang, has decided to increase production capacity to meet anticipated demand for wireless phones next year.
U.S. passives suppliers, however, have so far avoided the latest price war. Accustomed to annual price erosion of 6% to 8% and unwilling to sell parts below cost, they have lowered their prices to a lesser extent than their foreign counterparts.
"U.S. companies are conceding the low-end business," said Patrick Parr, an analyst at UBS Warburg in New York."They're walking away from business where they can't get a return and are being selective about the business they will take. This will provide some limit on their revenue growth coming out of the trough."
For Vishay Intertechnology Inc., Malvern, Pa., selling below cost is not in the cards.
"There has to be a bottom somewhere," said Glyndwr Smith, senior vice president and assistant to the chief executive at Vishay. "You have the cost for materials and for putting the parts together. If you're going to take business that will cause you economic stress, it's not worth it."
Smith also noted that Vishay's passives prices are falling at a low-single-digit rate per quarter, slower than earlier in the year.
Two of Vishay's competitors, AVX Corp. and Kemet Corp., also indicated in their most recent earnings reports that price erosion was beginning to moderate. Kemet, for instance, said prices in the third 2002 calendar quarter fell 4% sequentially from the second quarter, and would fall at a similar pace in the fourth quarter.
One analyst who asked not to be identified believes U.S. passives suppliers will see price erosion this quarter and next average at least 2% to 4%, and the erosion will last longer if battered end markets like communications and computers don't show an uptick, originally expected to occur toward the end of 2002.
"As long as end markets are down, OEMs and EMS customers will ask for price cuts," said Herve Francois, an analyst at Credit Suisse First Boston Corp., New York.
While most of the price cuts have concentrated on capacitors, suppliers of other passive products, such as precision resistors and integrated passives and networks, are also feeling the ripple effects of Asian manufacturers' tag reductions.
"Companies like [Taiwan's] Yageo Corp. are just driving prices [downward]," said Steve Wade, sales and marketing director at the IRC Advanced Film Division in Corpus Christi, Texas, a subsidiary of global component supplier TT Electronics plc of Surrey, England. "There's no sense to what they're doing."
Published reports said Japan's Murata Manufacturing Co. Ltd. cut prices of MLCCs 10% in the third quarter, leading Yageo and Walsin Lihwa Corp., another Taiwanese supplier, to do the same. The companies reportedly expect to cut MLCC prices another 10% in the fourth quarter.
None of the Asian suppliers could be reached for comment.
Not to be outdone, Samsung Electro-Mechanics reportedly sliced its MLCC prices 20% in the third quarter to relieve six months worth of inventory. But unlike other suppliers that have cut back production, Samsung increased monthly MLCC production from 7.7 billion units in the second quarter to nearly 8 billion in the third, and expects production to increase to more than 8 billion units in the fourth quarter.
Why Samsung Electro-Mechanics would increase MLCC production amid an inventory glut and falling prices could partially be due to the thriving wireless phone business of its parent, Samsung Electronics Co. Ltd.
Samsung Electronics said last week that global sales of its mobile phones rose 23%, to 11.7 million units, in the third quarter.
But UBS Warburg's Parr believes Samsung Electro-Mechanics' actions are motivated more by an attempt to hold and capture market share, since only a relatively small percentage of its MLCCs go into the parent company's wireless phones.