Analog vendors battle phantom forecasts

TI in the spotlight
TI's lead times began stretching out in the third quarter of 2009 and sales suffered as a result, admitted Ron Slaymaker, vice president, investor relations, during a conference last October. Pressed by analysts, Slaymaker said TI was unable to completely satisfy demand for its products during the third quarter.

"Given the rapid and unforecasted increase in our customer demand for analog and frankly a lot of other product lines, our supply is constrained in some areas," Slaymaker said. "We're working very hard to address that."

That was five months ago. There are signs TI is still feeling some whiplash in demand, possibly even double-ordering as manufacturers jostle for sufficient analog component inventory. TI forecasts sales in the first quarter will be about equal to or even higher than what it reported for the traditionally strong fourth quarter—unusual in an industry where sales typically fall on a sequential basis in the first quarter.

TI is investing heavily in front- and back-end manufacturing to meet the surge in demand for its products, but Slaymaker admitted during its fourth quarter conference call in January that TI still has some "operational bottlenecks especially on our assembly and test areas," adding that lead times, while improving, have yet to come down to normal levels.

Along with problems in its back-end operations, TI has also been a victim of its own success. The company certainly does not like to be portrayed in a bad light about how it manages its supply chain to ensure customer demands are satisfied.

After taking some flak from customers, brokers and even rivals over the last several months, TI executives brought out their big guns, claiming that the company has seen lead times stretch out partly because of above-average demand for its products.

"There are some suppliers, especially in the analog marketplace, that have been vocal and crowing about their short lead times," he said. "I'll also note those are the same analog suppliers that for the most part aren't growing."

He added: "Although some of the analog competitors and suppliers are starting to show some sequential growth again, I don't think any of our major competitors in analog have posted anywhere close to the 27 percent growth that our analog business just did from a year ago."

TI also has increased its manufacturing investment and is now trying to boost capacity. According to Slaymaker, TI is trying to strike the right balance between manufacturing capacity and actual customer demand. "If you look at the investments we are making and generally the relationships we have with our customer base, it's pretty clear to us that they like where we're headed long term with the capacity investments we're making," Slaymaker said.

The quest for supply-demand equilibrium remains for the semiconductor industry, but an old foe remains: greed The constant battle for pricing advantage between OEMs and component suppliers is fueled by the competing goals of preserving gross margins at the expense of the other party.

While OEMs and suppliers publicly talk about their partnerships, most are engaged in a vicious cycle in which one side (suppliers) tries to keep average selling prices as high as possible while the other side (OEMs, EMS providers) try to slash it to the bare minimum so it can increase gross margins.

Finding the optimal point where the component vendors and the OEM customers are equally happy requires that they match production, or supply, with demand. For most of its history, however, the electronics industry has never quite managed to find that exact balance.

Hampered by their inability to accurately determine future demand and optimal production capacity, manufacturers are repeatedly forced to compensate for previous errors by either cutting back or boosting production. The result is that they end up pushing the pendulum too far in the opposite direction, setting up the industry for another round of cyclical swings.

Analog vendors say they are deploying all the supply chain management tools in their arsenal to strike the right balance for delivering what customers want when they need it and at the right price. Even now, no company interviewed by EE Times has claimed victory.

Companies like Analog Devices and Linear Technology claim they are doing better than others while admitting they must remain on constant alert. The sudden snapback in demand during the third and fourth quarters of 2009, for instance, did not upset the apple cart at either company, both of which said they were able to satisfy customer demand and keep lead times at normal levels.

Linear's Swanson is quick to note his company did not have a better insight into market performance, but insisted the company fared better by simply refusing to completely clamp down on production when sales cratered. It also opted to keep plants open, he said, after weighing the risks of shutting down entire production lines against the dangers of not being able to meet resurgent demand.

"The strategy could have backfired if demand continued to drop, but it was still the better option for Linear," Swanson said.

Analog supply problems remain. Chip manufacturers are still struggling to get a solid handle on actual demand in order to sync up output from their manufacturing facilities.

Through focused monitoring of demand from OEMs as well as end-customers and the deployment of the latest supply chain management applications—and perhaps a bit of luck—companies like Analog Devices and Linear successfully weathered the uncertainty in demand.

Industry analysts, brokers and executives at competing companies say OEM customers remained concerned about procuring enough products not just from TI but other key analog vendors like STMicroelectronics.