Battered by the prolonged downturn, commodity component suppliers and their distributors still face their biggest battle: severe price degradation. Though unit volume shipments have climbed over the past couple of quarters, any chance of revenue growth has been offset for several consecutive quarters by sinking average selling prices (ASPs).
Much of the price degradation can be attributed to excess capacity. But some industry players say it's partially caused by Asian component suppliers, notably those from China. Those vendors have been the most aggressive price cutters, particularly for passive components.
It's also a simple case of supply vs. demand. Purchasers for large OEMs and electronics manufacturing services (EMS) providers are simply squeezing component manufacturers for lower prices, taking advantage of the overcapacity situation.
But they're also using low-bid quotes from Chinese component manufacturers as leverage to get lower prices from their traditional suppliers. Does it work? Sometimes, but in many cases suppliers have to walk away from the table because there is simply no margin to be made.
Many component suppliers complain that what used to be annual contract negotiations with purchasers have turned into quarterly price negotiations, sometimes with both the OEM and its contracted EMS providers.
Internet auctions are another challenge. Component suppliers say e-auctions are causing unfair price degradation that's unrelated to the supply/demand ratio. Such auctions have eroded profit margins and jeopardized supplier-customer relationships.
When you take all these factors into consideration, I believe Chinese component suppliers are the main culprits. Armed with the lowest prices and adding to an already glutted market, they will provide the final and most resounding blow to many component suppliers if customers don't get back to basics and ask themselves a couple of key questions: Will the supplier be around in one, two or more years? Has the buyer developed a key relationship with the vendor to ensure support if there are quality issues or short supply? Does the vendor supply quality parts?
Companies had better wake up to the fact that if they continue to severely pound their suppliers on pricing-by placing more value on pricing than on quality and service-those vendors may not be around much longer.
Gina Roos covers components and distribution for ProductWeek. She can be reached at gmroos@aol.com.
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