Allocation may be the electronics industry's dirty word, but under current conditions some major component makers are not at all inhibited about using it.
Relatively strong demand and ever-shrinking product lifecycles are pushing the consumer electronics sector into the vanguard of this trend. Though nowhere near the magnitude of the shortages that plagued OEMs in the late 1990s, the growing popularity of digital still cameras, mobile "camera phones," and other portable consumer applications is causing a scarcity of NAND flash memory and charge-coupled devices (CCDs), while escalating sales of recordable DVD players are challenging suppliers to keep up with demand for optical pickup units.
The strain on NAND flash production is evident at the world's No. 1 and No. 2 suppliers--Samsung Electronics Co. Ltd. and Toshiba Corp.--
marking the first serious IC shortage in three years and putting some OEMs in a tough spot as seasonal demand begins to pick up.
"We [have customers] on allocation right now," said Ivan Greenberg, director of strategic marketing at Samsung Semiconductor Inc., San Jose. "Demand is clearly ahead of supply."
"There's a shortage, demand is great, and prices have been increasing," said Scott Nelson, director of memory products at Toshiba America Electronic Components Inc., Irvine, Calif. "We're in the thick of it right now."
Some OEM customers, Nelson said, are looking to lock in long-term flash contracts at prices higher than the market average.
Component shortages are emerging at a tough time for consumer electronics OEMs. Solid demand, led by back-to-school sales, is expected to continue into a strong fourth quarter, buoyed by Christmas and then Chinese New Year.
Nelson said he doesn't know exactly how long the NAND shortage will last, but speculated "it could go through the fourth quarter." Samsung's Greenberg said that demand may exceed supply even through the first quarter of 2004.
Some 40% of all consumer electronics products sold annually are bought in the last quarter, said Jay Srivatsa, an analyst with iSuppli Corp., El Segundo, Calif.
"If you're a component supplier, you must have your product available at least three months before these end products hit the shelf," Srivatsa said. "If you're not able to ship it by the end of Q3, you've missed out on Christmas demand and basically prevented the OEMs from putting their products in the retail shops."
Looking for a solution
Digital still camera (DSC) manufacturer Fuji Electric Co. Ltd. hopes to avoid shortage problems by employing better demand forecasting techniques. Darin Pepple, brand manager at Fuji Photo Film USA Inc., Elmsford, N.Y., maintained that unlike the last decade, OEMs today have a stronger grip on the availability of raw materials and manufacturing capacity.
"Today we can know months in advance when there will be a shortage of a raw material, so we can warn retailers and perhaps shift production to another camera model," Pepple said.
Fuji Film said it is not on allocation for any components used in its DSCs and has no supply concerns--provided sales predictions bear out. "We have secured what we need based on our capacity planning and what our retailers told us they want," Pepple said. "If retailers go beyond what they've told us, there is only a certain percentage left or right that we can move within that capacity plan."
But earlier this year, Fuji, along with Olympus and Matsushita Electric, were hit by a shortage of CCD sensors that forced the companies to launch some cameras later than they had planned. Fuji, for example, postponed the release of its FinePix F700 from May to August and has just begun to ship the camera.
"Where we have found shortages or potential shortages, we've been able to switch to another supplier for conventional CCDs," Pepple said. "We've improved our forecasting ability down to the supplier level, and we're able to switch suppliers to maintain our capacity very far out."
Indeed, the ability to maintain extended lines of communication with suppliers is becoming increasingly important for OEMs, particularly as products are rendered obsolete at a faster rate.
"[Consumer electronics] product lifecycles are probably now close to the same as product development cycles," said Tim Chambers, marketing director for the consumer and micro group at STMicroelectronics Inc. in Carrollton, Texas.
"We have to keep looking into our customers' needs, not just for this generation or the next but for the one after that. We're getting into a couple of different levels where we share information concerning industry trends, product roadmaps, and product development objectives," Chambers said.
Alternative to CCDs
In the case of DSCs, part of the conversation revolving around product development entails an examination of the use of CCD sensors relative to lower-cost, more readily available, but lower-performing CMOS-based image sensors.
Zoran Corp., Santa Clara, Calif., manufactures single-chip platforms for consumer products like DSCs and DVDs, and it, too, felt CCD tightness at the beginning of the year. The company opted to fill the void with its own line of CMOS sensors, said Dave Pedersen, vice president of strategic marketing. Zoran's DSC solutions cover low- to high-end cameras for customers like Canon, Hewlett-Packard, Minolta, and Ricoh.
"There's a managed shortage in Taiwan, so we sometimes don't get all of the business we'd like to get on the CCD side," Pedersen said. "But fortunately, with the quality of CMOS sensors growing, we really haven't been stunned."
Faced with the realization that a shortage of CCDs will only incite customers to look harder at CMOS sensors, Sony Corp., the world's largest CCD manufacturer, said it had doubled CCD output from 3.5 million units per month at the end of last year to 7.2 million per month this summer.
However, the availability of CCDs remains unclear, muddied by difficulties in projecting the unit growth of camera phones, which are growing in popularity.
iSuppli's Srivatsa said the Japanese, Sony included, underestimated the demand of both DSC and cell phone makers for CCDs. "They're now kind of caught between a rock and a hard place with the CCD sensors," he said. "They have to decide whether to supply them to the digital camera guys or the cell phone guys. Digital cameras are a growth market, while the cell phone market already has a lot of volume."
Japan's CCD makers also face a challenge from Taiwan.
"The Taiwanese are buying CMOS sensors from U.S. companies, designing a camera, building it in China, and then selling it at sub-$80 dollar price points, totally bypassing the Japanese and making them very concerned," Srivatsa said. "The Japanese fear they have basically lost the low-end market, but they are also thinking, 'What if the Taiwanese start creeping up into the mid- and high end?' "
But because they can't produce the same image quality as CCDs, CMOS sensors are expected to experience slower growth in high-end DSCs and camera phones, the latter a market where Japanese CCD makers have welded strong relationships with mobile handset makers.
"High-end convergence between CMOS and CCD is yet to happen and it probably won't for a while," said Zoran's Pedersen.
Still, Samsung's Greenberg pointed out that three-megapixel cameras using CMOS sensors are moving below $100, a market sweet spot. "If they start showing up in drugstores and those kinds of channels, it becomes a very easy purchasing decision," he said.
Rising demand for DSCs and cell phones with cameras and USB flash also are contributing to tight NAND flash supplies.
Observers also blamed cautious flash manufacturers that were slow to invest in capacity and die shrinks until clear signs of a market turn emerged. A fresh wave of what many flash vendors deemed to be unrealistic sales forecasts complicated the situation, and several suppliers said they haven't been shy about challenging what customers say their flash needs are.
"There's only so much demand for USB sticks, but you've got everyone and their brother wanting to build them and everybody needs millions of pieces," said Toshiba's Nelson. "Somebody's going to lose and they will lose big. We can't afford to ramp things up and have things come crashing down in the first quarter of 2004."
Similarly, Samsung's Greenberg said the company reviews its customers' sales forecasts. For DSCs, Samsung will look at attach rates to determine how much discrete flash storage consumers are buying with their cameras, in addition to metrics such as camera resolution, product differentiation, and conditions in other spaces like the cell phone market.
"We typically understand what's driving end demand," Greenberg said. "Our customers have a closer view to the consumer and we bounce our data off of theirs. We craft a contract that will hopefully ensure neither one of us will get stuck with a lot of unused NAND."
To help ease the situation, Toshiba is shrinking design rules to 0.12 micron to help increase its die-per-wafer yields. Looking to the longer term, the company has broken ground on a 300mm-wafer fab that is scheduled to come on line in 2006.
Samsung said that the bulk of its NAND flash is at 512Mbits manufactured at 0.12 micron. By year's end, the company will start ramping NAND flash at 90nm, Greenberg said.
Greenberg added that relationships with Tier 1 and 2 customers have been maintained, and that, in general, consumer electronics manufacturers will find a way to meet Christmas demand through retail strategies such as special prices for older products or those products that will be on the shelf shortly after Christmas.
"The [NAND supply] priority is to our customers who've been with us through the good and the bad," said Toshiba's Nelson.
No OPU shortages
One area where suppliers appear to have caught up with demand is optical pickup units (OPUs), which were on allocation in early June, according to observers.
"We're outpacing the growth of the market," said Zoran's Pedersen. "The sales folks just keep saying 'ship more.' Given our customer base and our run rates, I don't think we're being shorted."
At Thomson RCA, a large DVD manufacturer based in Indianapolis, Ind., a spokesperson said the company hasn't been affected by OPU shortages.
However, iSuppli predicts that recordable-DVD producers may be in for some surprises. Prices should fall below $400 this quarter, creating greater demand than previously forecast and setting the stage for a renewed OPU shortage. iSuppli projects sales of recordable DVD players will grow to 2.75 million units in 2003, from 800,000 units last year.