Recent reports that mobile phone sales are rebounding after two years of stagnation represents mixed news for passives suppliers, many of which are seeing increases of unit sales for wireless handset parts negated by ongoing price erosion.
Despite an appreciable increase in mobile phone shipments and glowing projections for the coming quarters in both the replacement and new phone markets (see story this page), passives manufacturers have yet to enjoy the same degree of optimism as their counterparts in the semiconductor industry.
For sure, passives suppliers acknowledge that rising demand for their products, particularly capacitors, is being triggered by robust mobile phone sales. But a continuing production capacity glut and price pressure from OEMs--which themselves remain under intense pressure to lower costs--has so far meant a continuation of single-digit quarterly price erosion.
"We are excited about the growth of the mobile phone industry," said Denny Salmang, president and chief executive of Epcos Inc., the U.S. subsidiary of German component supplier Epcos A.G., headquartered in Iselin, N.J. "But while unit volumes have gone up substantially, the revenue has not increased because the prices are not attractive."
Salmang said that the price of wireless phone parts such as ceramic and tantalum capacitors, modules, and wireless components is likely to erode for another quarter or two, with visibility limited beyond that.
Somewhat more upbeat was John Gilbertson, president of AVX Corp., Myrtle Beach, S.C. Speaking at a conference in New York last week, Gilbertson said his company's orders and book-to-bill ratio in July and August have been positive, with revenue improving despite continuing price and margin degradation.
With their margins threatened, passives suppliers believe price erosion will slow in coming months, though such a scenario has been projected for several quarters.
"Pricing hasn't really firmed yet," said Bill Glass, national sales manager at Samsung EM America, the San Jose-based subsidiary of Korea's Samsung Electro-Mechanics Co. Ltd. "We're now seeing the rate of price declines going down. Some EMS providers are asking us to extend last quarter's pricing, indicating that pricing is starting to level off," he said.
Not helping matters is what many say is a continued glut of production capacity, particularly for commodity parts.
"There is enough capacity in the world at the moment, though there are some problems with specialty capacitors," Epcos' Salmang said.
Such capacitors, however, don't find their way into most handsets, which suppliers say continue to use small case-size commodity passives. This tends to make gains from unit sales increases negligible, even with newer, more feature-laden phones.
"The camera phones now being sold may have more capacitors than normal mobile phones, but they still use small case-size capacitors," said a spokesman for capacitor supplier Kemet Corp., Greenville, S.C.
"If the mobile phone demand stimulates demand for wireless basestations, we would get more excited," he said, given that such products tend to use more and larger capacitors.
"Overall, it remains a challenging market," said Lee Zeltser, an analyst at Needham & Co. Inc., New York. "You will see unit growth, but not enough to overcome overcapacity in the industry."
Glyndwr Smith, executive vice president and assistant to the chief executive at Vishay Intertechnology Inc., Malvern, Pa., expressed a different view. He believes growing mobile phone demand could soon constrain capacity of commodity parts such as 0402 capacitors, as inventories dwindle and production capacity remains stagnant.
"I believe inventories have been brought down to a minimum, and no new capacity is being added," Smith said. "Average selling prices are leveling off, and I think you will see a different situation by the end of the year."
That could create a new problem for passives vendors if capacity constraints surface but profits do not. "We're getting close to capacity points where companies will have to reopen lines that they've shut, but pricing pressures are keeping these decisions from being made," said Samsung's Glass, who added that capacity utilization for some parts is in-ching toward 80%--which is considered full utilization.
Another factor that could influence the market is the increasing integration of passives and semiconductors into single devices, which reduces overall component count.
"If you go back five years, the number of integrated passives in mobile phones was next to zero, now they comprise 20% of the parts," Smith said.
Integrated parts command higher prices and margins than the discrete parts they replace. But whether they improve suppliers' overall revenue is debatable. "When you sell integrated passives you lose because you sell fewer parts," Glass said.
Passives manufacturers, particularly those in the United States and Europe, also face the increasing likelihood that as OEMs, ODMs, and EMS providers build mobile phones in regions such as China, they will tend to use suppliers already based there that can offer lower prices.
"Global mobile phone OEMs have resisted using Chinese component suppliers, but some are now looking at adding some of them to their approved- vendor lists," Samsung's Glass said.
However, Vishay's Smith argues that China's suppliers still lack the global presence necessary to get on OEMs' approved-vendor lists. "The marketing strategies of regional China suppliers are not cohesive enough to provide a steady source of supply for Europe and the U.S.," he said.