Although registering a few recent flashes of optimism, passive component suppliers remain mired in a cycle of stagnant or negative earnings as falling commodity prices continue to offset rising unit sales.
AVX Corp. and Kemet Corp. in the United States and Germany's Epcos A.G. are among those vendors that face ongoing fiscal pressure. Another U.S. supplier, Vishay Intertechnology Inc., has weathered the storm better with its wider product line that includes semiconductors, but likewise views the passives market as a weak link to recovery.
On the bright side, an uptick in unit sales has begun to raise capacity utilization rates that in some cases had sunk to as low as 30%. And there is some cheer that the normally slow third quarter is likely to show strength.
"July has been better than forecasted," said John Gilbertson, chairman and chief executive of AVX, Myrtle Beach, S.C., during a conference call with analysts. "And there are indications that demand will pick up in August and September."
But whether such optimism will translate into profits is uncertain. AVX projects its third-quarter sales as flat with the June quarter, when the company lost $15.9 million on revenue of $256.7 million.
Price erosion has been the main culprit. Gilbertson said prices dropped 5% to 6% in the second quarter as AVX's sales skewed toward commodity passives resulting from demand in Asia for consumer products.
"There was more activity in A and B case sizes where competition is stronger," he said.
AVX derives at least 20% of its revenue from specialty products such as integrated passives. But some end markets for such parts -- in particular communications infrastructure equipment -- remain weak.
"It's a reflection of which end markets are strong," said David MacGregor, an analyst with Longbow Research, Cleveland. "In relative terms, the consumer market is strong. Higher-technology parts are not doing as well."
Matt Sheerin, an analyst with Thomas Weisel Partners LLC, New York, agreed. "The product mix was unfavorable for AVX and Kemet," he said. "Where they see a better mix are parts for communications infrastructure."
Product mix issues are wreaking havoc with gross margins, which for AVX were under 2% in the June quarter. Gilbertson said only a sales increase in the range of $280 million to $300 million would substantially improve margins.
Passive sales at distributors reflect the pricing pressures on the supplier base.
"For the past nine months, we have seen month-to-month unit volumes increase, only to have revenue flatten because of price decreases," said Mike Morton, senior vice president of global product marketing for TTI Inc., Fort Worth, Texas.
AVX's main rival, Kemet, is enduring similar hard times. The Greenville, S.C., company saw unit sales rise 13% in the June quarter, only to be compromised by a 4% drop in average selling prices.
Even before posting a $3.6 million loss on sales of $105.4 million, Kemet took radical action last month to further restructure its operations.
The company, which historically has manufactured only in the United States and Mexico, said it will move all commodity-parts production to Mexico and a plant in Suzhou, China, that is expected to open by year's end. Kemet's Greenville headquarters will become a research and development center for advanced passives.
In addition, the company last month made its first acquisition ever, purchasing several high-voltage and high-temperature ceramic capacitor product lines from Wilson Greatbatch Technologies Inc., Carson City, Nev., to broaden its offerings in high-performance capacitors.
"We are trying to accelerate sales of specialty products," said a spokesman, adding that such products account for 20% of sales.
But like AVX, Kemet has experienced better unit gains in smaller, higher-volume capacitors. The company's goal of selling more higher-margin parts may have to take a back seat if the company hopes to further penetrate growing markets like China, where many OEMs are building cost-conscious consumer products.
"The key is to get market position," Thomas Weisel's Sheerin said. "To get design wins you have to be competitive on price."
But a Kemet spokesman said the company believes it can indeed win design-ins of higher-technology parts in China. "Some of our best markets for innovative parts are in China and Taiwan," he said.
Still, the Asian market overall was not kind to passive suppliers in the second quarter as SARS slowed demand for mobile and consumer electronics.
Epcos watched its sales decline 6% sequentially, from $363 to $340 million, because of weak currency and falling prices, coupled with slackening demand in China caused by the SARS scare.
Capacitor sales fell 7%, from $103 to $95 million, as Epcos reported continuing excess capacity in tantalum capacitors and above-average price erosion.
The company expects September-quarter sales to be flat with the June quarter, said chief executive Gerhard Pegam, during a conference call with analysts. Pegam said the relocation of more plants is likely to reduce costs.
Vishay will also relocate its passives production. Though the Malvern, Pa., company posted a profit in its most recent quarter, Gerard Paul, president and chief operating officer, said during a conference call with analysts that "capacitors is our weakest area."
Paul noted that while capacity utilization for multilayer ceramic capacitors is close to 50%, it remains much lower for tantalums. "Vishay is doing heavy cost reduction," he said. "We're moving tantalum and film capacitor production to China next year, and power capacitor and resistor production to the Czech Republic."
Meanwhile, Asian suppliers, which some industry observers say are selling capacitors and resistors below margin in order to utilize capacity and gain market share, are also looking beyond commodity parts to improve profits.
One, Taiwan's Yageo Corp., is ramping up production of high-frequency passives for Bluetooth applications.
"The recent upturn in the Bluetooth market has seen positive developments for Yageo in high-frequency product solutions," said Mark Burr-Lonnon, corporate chief executive of Yageo's U.S. subsidiary, Yageo North America, Addison, Texas.