The passive components market shows few signs of emerging from an extended funk as intensifying competition continues to keep prices low and complicate a recovery.
Price erosion has slowed on a quarterly basis to the low to mid-single digits, but that is still enough to strain passives suppliers' margins, particularly U.S. companies that continue to shy away from contracts that force them to sell parts below cost.
Additionally, U.S. and European sellers of tantalum capacitors face increasing competition from Asian companies making multilayer ceramic capacitors (MLCCs) as alternatives to tantalum.
While passives vendors often attribute their plight to lagging end markets, demand is there, according to analysts.
"If the U.S. is out of Iraq prior to June, the unit demand for ceramic capacitors in 2003 will nearly equal that of 2000," said Shawn Wood, an analyst at iSuppli Corp. OEM purchasers might face stabilizing capacitor and resistor prices toward the end of 2003, according to the El Segundo, Calif., research firm.
Global unit sales of capacitors could reach roughly 700 billion this year, up 15% to 20% from 2002, said Glyndwr Smith, senior vice president and assistant to the chief executive at Vishay Intertechnology Inc., Malvern, Pa. "There's reason to believe demand will match capacity by year's end," he said.
But improving demand may be a moot point if U.S. and European passives suppliers continue to lose business to Asian vendors. A recent UBS Warburg report said that Taiwan's Yageo, Japan's Murata Manufacturing, Korea's Samsung Electro-Mechanics, and other suppliers are playing a game of tug of war by cutting prices to gain market share and fill capacity.
"Nearly all competitors are very similar on price," said John Denslinger, senior vice president of sales for Murata Electronics North America Inc., the Smyrna, Ga., subsidiary of Murata Manufacturing. "The difference is often at the fifth decimal place. As long as one supplier is reducing prices, everyone else responds in kind."
UBS Warburg noted that the price wars are forcing U.S. pasives suppliers like AVX Corp. to withdraw bids on some contracts because capacitor prices would be below the cost of goods sold. AVX, Myrtle Beach, S.C., did not return calls for comment.
"U.S. passives companies are leaving business on the table," said UBS Warburg analyst Patrick Parr, New York.
Smith said that Vishay, too, has walked away from business.
"We've always taken the position to protect the bottom line," he said, adding that while ASPs on commodity capacitors and resistors are falling 3% to 5% a quarter, revenue from semiconductors has helped Vishay offset the loss.
UBS Warburg said companies like AVX and Kemet Corp. face stiff challenges because of heavy exposure to the capacitor market. Stung by a string of unprofitable quarters, Kemet, Greenville, S.C., has cut its workforce more than 50% and is moving manufacturing offshore. The company will begin production in China later this year.
"We're going to maintain our market position," said a Kemet spokesperson. "At some point, price declines will abate and we'll be a successful low-cost producer."
Germany's Epcos A.G. is also reducing expenses. The company is moving production to Eastern Europe and China, according to Denny Salmang, president and chief executive of U.S. subsidiary Epcos Inc., Iselin, N.J.
Though Asian suppliers are placing U.S. and European passives makers at a competitive disadvantage, so far there's been no industrywide effort to tackle the problem, according to Bob Willis, president of the industry trade group Electronic Components, Assemblies, & Materials Association, Arlington, Va.
"We're not as nationalistic as some semiconductor people," Willis said, referring to U.S. semiconductor trade group efforts to fight Asian suppliers' questionable selling tactics. "But if a contingent of our members brought this issue forward, we would facilitate."
Asian vendors argue they are cutting prices and margins because of pressure from OEMs and their partners, many of which are relocating to China and looking to curtail their bill of materials costs.
"OEMs are still pushing EMS providers, distributors, and component suppliers for reductions," said Murata's Denslinger. "The buyer is continually able to leverage volume every quarter, thus lowering prices."
The MLCC battering ram
To gain market share, Asian passives suppliers are bolstering production of MLCCs in the range of 0.01 to 10 microfarads, which can compete in price and performance with tantalum capacitors. This concerns vendors like Kemet, which specialize in tantalums.
The Kemet spokesman, however, said higher-frequency tantalums are offsetting the threat of MLCCs.
"With advances in ceramic technology, MLCCs have been able to compete with tantalums, but higher-frequency requirements have shifted the market in favor of larger-size tantalums."
But competitive pricing and fears over the tantalum supply are driving OEMs to use MLCCs instead of tantalum capacitors, Denslinger said. Samsung Electro-Mechanics is expanding MLCC capacity 50% this year to meet demand from notebook and cell phone makers, the company said.