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Companies fear no end in sight for component shortages

The intensity and duration of the current parts shortage is putting component companies in a slightly embarrassing but lucrative spotlight.

Delta Electronics vice president Yancey Hai has seen business soar as technology companies clamored for his firm's video displays, switching power supplies and networking products.

But lately, Delta has been struggling to meet a voracious appetite for laptops, cell phones and handheld computers. Demand for Delta's telecommunications equipment more than doubled in a year, Hai said, resulting in a parts shortage that excites but also troubles managers of the Taiwanese company.

"It has become quite a significant problem--one of our biggest," said Hai, who declined to specify how much product was back-ordered. "Our purchasing manager told me that, at least for this year, he does not see anything changing...If anything, shortages are getting worse."

The intensity and duration of the current parts shortage has put component companies--a relatively obscure industry unknown to most consumers--in a slightly embarrassing but lucrative spotlight.

Few factories can produce enough capacitors, flash memory, liquid crystal displays (LCDs), computer microprocessors and other electronic parts to satisfy surging demand for computers and cell phones, and manufacturers are clamoring for more parts--sometimes at any cost.

A Micron Technology executive, for example, said the supplier of computer memory is no longer selling 64-megabit memory chips for less than $8, and demand has outstripped supply.

Electronics giant Sony also announced today that a worldwide shortage in key components will slash its forecasted operating profit for the year by 10 percent. Sony executives said the shortage is worsening, and the company is desperately seeking electronic capacitors, LCDs and flash-memory chips.

Micron and Sony represent only the latest in a long string of similar announcements.

Ericsson, the world's largest maker of cellular phone networks, announced last week that a lack of parts could cause losses in its phone-making unit in the third quarter.

Philips Electronics, Ericsson's main supplier, blamed the shortage on a fire at an Albuquerque semiconductor plant, which halted production for six weeks in the second quarter. Philips also complained that its suppliers couldn't procure enough flash memory chips--a dilemma that threatens to disrupt production of 18 million phones this year.

Dell Computer CEO Michael Dell said last month that his company is struggling with parts shortages from suppliers, including Intel. Some analysts say Dell, the only major PC maker that uses Intel products exclusively, would be particularly stung by a supply crunch for Intel's microprocessors.

Palm acknowledged in May that shortages of memory and LCD screen parts had dried up supplies of its popular handheld computers--a problem that forced some potential buyers to search for used Palms at online auctions. Flash memory chips used in cell phones, handheld computers and other portable devices have become one of the fastest growing segments of the semiconductor industry.

"Capacity is not balancing with demand," AMD president Hector Ruiz said recently, predicting that the situation will continue for the next 18 months. AMD manufactures flash memory chips which are used in cell phones, PDAs, digital cameras and PCs. AMD is sold out of flash for the rest of 2000.

"It's a crazy market," Ruiz said.

Manufacturers' difficulty in forecasting demand for products is partly to blame for the shortages, which have hobbled virtually every sector of the technology industry, from MP3 players and Palm Pilots to high-end PCs and servers.

Sun chief operating officer Ed Zander said last week that shortages had become so acute that the company may revamp forecasting methods. Sun's order backlog at the end of the quarter was $1.8 billion, according to chief financial officer Mike Lehman.

The accelerated pace of new product debuts may also be partly to blame for shortages. As product cycles shrink, factories must halt, retool and ramp up assembly lines, disrupting the smooth flow of parts.

According to DDI, which specializes in speeding the average time to market of technology products, the average life cycle of telecommunications equipment is six to nine months. Flextronics International, one of the largest electronics manufacturing services companies, introduces a new product for Cisco Systems every three days--and the company expects to double its Cisco business in 2001.

But some responsibility for shortages lies with component parts makers themselves. Analysts say many component companies struggle with managing their supply chains and completing orders in an industry that lives by just-in-time manufacturing. As manufacturers accelerate the amount of parts and products that they outsource to suppliers, experts fear that shortages could become more common and more acute.

"All the (manufacturers) are going to an outsourced model, and it's a good, efficient model," said Robert Maire, an analyst and managing director of Bear Stearns. "But if you don't manage your sub-assemblers, and they have control of key parts, there are pitfalls--shortages being one of the worst."

Manufacturers have become so frustrated with component parts companies that some have started ordering two or three times as many parts as they need--just in case the component company only delivers a portion of the order. The phenomenon has forced some component parts companies to play a dangerous guessing game with their clients.

"We have had to screen that out very carefully," said Susan Wang, senior vice president and chief financial officer of contract manufacturer Solectron. "We do a quick test, pushing the numbers back to the OEM, who must guarantee purchase and assume liability. If they're just saying the excess is for 'future and later delivery,' it's not firm, and we can detect that."

Tom Smach, vice president of finance for Flextronics International, would not comment on delays of products for specific clients, which include IBM, Acer, Intel, Nokia, Ericsson, Motorola and Lucent. But he's hopeful new factories will take the heat off of component companies by the middle of next year.

"Nine months ago, I would have said the problem would be cleared up by the end of this year," Smach said. "Now I'm saying early- to mid-2001. It's hard to predict."

To be sure, excess demand is a relatively benign problem for component companies--despite the grief it may cause consumers. This year is expected to be the first in which component companies reap big profits on flash memory, and many component companies have enjoyed soaring stock prices that dramatically outstrip growth of broader markets in their home countries.

Supply chain experts say the tech industry's insatiable demand for certain components could translate into an unprecedented marketing opportunity for component companies, including many international firms that are unrecognizable to average consumers.

"If it's a great product, the consumer will wait, albeit not patiently," said J. David Sandoval, executive director of supply chain practice for Dechert-Hampe & Company in Northbrook, Ill. "In the extreme, you have price escalation and more attention focused on the suppliers, who may want more name recognition. Look at Harley-Davidson: You can't buy a new one. You have to pay more for a 2-year-old than a new one because supply is so short. Harley loves it."'s Stephanie Miles contributed to this report.