SAN FRANCISCO For two years chip makers have been at the mercy of their customers, who have not been shy about playing the overcapacity card to their advantage by pressing for lower prices and shorter lead times. Now, emboldened by rising orders and shipments, some integrated-device manufacturers may be ready to start pushing back.
Intel Corp., for one, confirmed this past week that it would raise prices 20 to 40 percent across the board for its flash memory devices by Jan. 1. An Intel spokeswoman said the price hikes are justified because of high demand for flash memory used in cell phones. Newer handsets outfitted with digital cameras and color screens are using two to three times more flash than older models, she said.
It's been two years since Intel has boosted prices for its flash products, though the company has seen sales rise steadily for a year. "It's a bold move," said Alan Niebel, president of Web-Feet Research Inc. (Monterey, Calif.). "Since they are the volume leader, they can set prices on the short term and ship everything they are booking. That's what you do when you're in a tight supply situation like this."
Other flash memory suppliers, such as Advanced Micro Devices Inc., tell a similar story. "The rate of growth in the last few quarters has exceeded the rate of bit growth in 2000, which was one of the strongest years the industry has ever had," AMD president and chief executive officer Hector Ruiz said here at a recent Lehman Brothers technology conference.
It's still unclear, however, how much leverage chip makers have gained over bargain-hunting OEMs in other markets. IC makers are still in the midst of a fragile recovery, and industry executives speaking here didn't dare talk directly about the possibility of raising prices.
But the anecdotal evidence the executives provided was less gloomy than in past months: Less and less fab capacity is sitting idle; inventory levels are coming down; device shipments are climbing; and average selling prices are leveling off and, in some cases, starting to creep upward.
Among those spreading the word were T.J. Rodgers, president and chief executive officer of Cypress Semiconductor Corp. Over the last year, prices fell so much that the company was "barely treading water," he told conference attendees. But Rodgers said it now looks like prices are strengthening once again.
"This last quarter, for the first time in two years, our average selling price went up. You can barely see the uptick, but it did," Rodgers said. "It appears that we've got high unit volume and it appears that we've got an inflection in ASPs, and that's what we've been looking for."
Executives of other companies who spoke here were also building a case for a modest turnaround. DRAM, for example, is making a comeback thanks to the introduction of newer double-data-rate devices. That only a handful of suppliers are left to build the memory chips in high volume is also helping their case.
"DDR is hand to mouth; essentially there's no inventory," said Steve Appleton, president and chief executive officer of Micron Technology Inc. "With synchronous DRAM, people talk about weeks of inventory. But you have to remember that the pure quantity of DRAM has come down in terms of production and shipments. When you say you have four weeks of SDRAM on hand it's actually far less if you compare it to production levels that existed a couple of months ago."
Even so, executives kept whatever optimism they may be harboring muted. Though many of them said orders are on the rise, they left little doubt that customers still have the upper hand. Kirk Pond, president and chief executive officer of Fairchild Semiconductor, said his company will ship 15 billion units this year, more than any other year. Demand is clearly there, he said, but the company still has little leverage over pricing.
"The environment today is very aggressive in terms of pricing, particularly in the mature products," said Pond. "We're having to fight for every order. Inventories are low everywhere but lead times are also low. Customers are ordering on an as-needed basis."
A similar story is being played out at Texas Instruments Inc. Rich Templeton, executive vice president and chief operating officer, said customers are still reluctant to build up a backlog of inventory, which is one reason TI expects its semiconductor revenue to fall 5 percent this quarter. As a result, TI is having to build up a cushion of inventory to meet these piecemeal order requests, either by building up die banks or other "staging techniques."
"If we look at order entry rates right now, particularly for high-performance analog, we're receiving close to two-thirds of our orders with request dates of less than four weeks," Templeton said. "That's indicative that our customers are very cautious right now in terms of how much backlog they want to place and how much backlog commitment they want."
Moreover, there are still lingering questions about end demand for semiconductors. PC sales are still disappointingly flat. Europe, which is driven by the communications market, is expected to lag any recovery in the United States and Asia. And although most chip executives believe inventory levels have come down considerably, some say there are still certain areas where excess inventory needs to be burned off, such as gear used in core networks.
Customers see this as evidence that semiconductor suppliers are still saddled with too much capacity, giving them the confidence to continue to press for low prices and short lead times. And chip makers, fearing they will lose the business, are still willing to oblige them.
This state of affairs will likely persist until chip makers can fill their fabs again. To bring capacity back into balance with market needs, many are writing down their excess capacity and in some cases switching to a so-called "fab-lite" business model to make greater use of foundries. In one extreme case, Vitesse Semiconductor Corp. said it wants to get out of chip manufacturing completely. The company is planning to sell its fab in Colorado Springs, Colo., and then buy the wafers from the new owner. Vitesse hopes to reach a deal by year's end, said vice president and chief financial officer Eugene Hovanec.
Such moves appear to be nibbling away at excess capacity. Rodgers said Cypress' fab utilization rates have been climbing from their low of 65 percent for the last two quarters, and hopes that they'll reach the point where he can look at his customers as an equal again.
"That number is going to have to get back up to about 90 percent or 85 percent before we can have a buyer and a seller, not just a buyer and a buyer and you get into their room if you're lucky," Rodgers said.
Still, one of the big problems chip makers face is that their customers are offering few indications about future demand, forcing them to survive on short-term orders and hold back purchases of new capital equipment. This situation persists today, even though more purchase orders are coming in.
'Business is happening'
"What we've seen for the past couple of quarters is real business being transacted. Purchasing orders are being placed every day and purchasing people are talking to our salespeople," said Wilfred Corrigan, chairman and chief executive officer at LSI Logic Corp. "The one thing that is lacking is forward visibility. You'll hear this from virtually every one of our customers even though business is happening on a daily basis."
Chip makers may soon reach a point where they can start talking with their customers again without playing the supplicant. But right now there's scant evidence that price-conscious customers are ready to sit down at the negotiating table not when their own future is so uncertain and not when there are still so many vendors that aim to please.
"Today they call you up and say: 'I want some USB chips and could you deliver them tomorrow, please? Oh, and by the way, I want my price to drop 20 percent from the last quarter or I'm going to call your competitor,' " Rodgers said.
That's a scenario that could play out at Intel when it raises its flash memory prices next year. Though shipments are strong and manufacturing capacity is getting tight, Intel still risks losing some business to suppliers of NAND-type flash memory, such as Samsung and Toshiba, said Niebel, the Web-Feet Research analyst.
"In the next year we'll see if Intel softens the prices on some of these solutions as NAND solutions become more available," he said.