As passives manufacturers continue to consolidate production and cut their workforce in an ongoing battle to restore profitability, they may be sabotaging their ability to meet a sudden, rapid rise in demand.
Such a scenario, said iSuppli Corp. analyst Shawn Wood, El Segundo, Calif., could cause shortages of capacitors and resistors--almost foreign to suppliers still recovering from the inventory glut of the past few years.
Wood estimates that 30% of global production capacity is now mothballed, with overall supply chain inventory at just 50 days. He added that the 45 days required to bring production capacity back online could catch suppliers short.
Wood's forecast does have an upside: he projects capacitor and resistor unit shipments to increase 22% over 2002, though revenue will rise a modest 7%.
Passives suppliers and other industry analysts don't think Wood's shortage scenario will materialize anytime soon. They say all signs point to a slow recovery that will continue to justify limits on capital spending.
"If the market comes back, we could have spot shortages in the most innovative products, but in the older, more mature products, there's still lot of capacity," said a spokesman for capacitor supplier Kemet Corp., Greenville, S.C.
With capacity utilization running at no more than 50%, according to the spokesman, Kemet has slashed its workforce by more than 60% over the past two years and now employs roughly 6,000.
Warner added that Kemet's 2003 capital spending will remain at $6 million per quarter, much of it allocated for equipment maintenance and tooling for new-product development. By contrast, Kemet spent as much as $50 million per quarter in 2000, when component suppliers scrambled to add capacity to overcome massive shortages.
Similarly, Murata Manufacturing Co. Ltd., Kyoto, Japan, is holding the lid on capex. It expects to spend $200 million in its 2002 fiscal year ending March 2003, down from $260 million in fiscal 2001.
"It may be at this time next year when the market accelerates and prices stabilize," said John Denslinger, senior vice president for Murata Electronics North America Inc., Murata's North American subsidiary bas-ed in Smyrna, Ga.
Ongoing price erosion has negated any unit sales gains for passives suppliers since last year, eroding profit margins and making it difficult to justify any significant capital spending. Many passives manufacturers continue to experience 5% to 10% quarterly price erosion, instead of the 5% to 10% annual price erosion considered normal.
"A lot of these companies will continue to pull in expenses and manage with what they have," said Herve Francois, an analyst at CS First Boston, New York. "I don't see any of these companies rushing to expand capital expenditures to facilitate meaningful revenue growth."
Also, any market rebound is unlikely to approach the magnitude of the upturn three years ago, according to Eric Gomberg, an analyst at Thomas Weisel Partners LLC, New York.
"Many companies still have quite a bit of capacity and are waiting for signs of a sustained upturn," Gomberg said. "At this point, it doesn't appear likely that spending will recover to 1999 and 2000 levels, when there was a simultaneous explosion in all end markets."
As the industry recovers, passives suppliers will also probably relocate plants in lower-cost regions like China as more OEM and EMS customers set up there.
Kemet, for instance, will begin producing capacitors at an unspecified location in China later this year, moving assembly from several of its plants in Mexico.
Passives supplier Vishay Intertechnology Inc., Malvern, Pa., is also beginning to move tantalum capacitor production to China, said chairman and chief executive Felix Zandman, during an analyst conference call last week. About 38% of Vishay's sales are in Asia, he noted.
China, in fact, could determine whether passives shortages materialize, Wood said. He believes global production capacity will be adequate if China-based capacitor suppliers make good on their plant expansion plans.
But even China-based passives manufacturers like Yageo Corp. are cautious about expanding because their production capacity is currently underutilized.
A spokeswoman for Yageo said that the company's capacity utilization for MLCCs is 75% and for chip resistors only 64%. The company, which said its capex in 2003 will be about $1 billion, has no plans to add capacity this year, she said, although it does expect to begin building a second plant in Souzhou, whose capacity has not yet been determined.
Yageo expects corporate PC demand to improve in the second half of 2003. Should demand emerge more rapidly, Yageo would require at least three months to increase capacity, the spokeswoman said.
Passives suppliers also believe inventory management systems implemented in response to inventory glut will make it easier to prepare for and mitigate any part shortages.
For instance, Denslinger noted that Murata has unified inventory control through most of its 47 operating subsidiaries, using common part numbers and enabling parts to be easily pulled on short notice.