Power shortage for the holidays?

A notebook builder says it will be light on shipments because of battery shortages, but PC companies don't seem worried yet.

Imagine this: Toyota is forced to delay shipments of the Prius because Goodyear recalled millions of faulty tires, and Michelin can't boost production of replacements fast enough.

That didn't happen. But the prospect that notebook makers could face a similar situation with battery supplies is stirring up the PC industry.

Last week, contract laptop maker Compal that its fourth-quarter shipments would be affected by a shortage of batteries caused by Sony's massive recall, according to reports. The Taiwanese company makes notebooks for brand-name companies such as Dell and Hewlett-Packard, which, like their rivals, are just about to go into the holiday sales season--the two biggest months of the PC shopping year.

Some in the PC industry are shrugging off any notion of shortages, and others are remaining tight-lipped about the impact of the recall on their supply. Some even suggest that Compal might just be trying to use the situation to negotiate favorable pricing. But if there is an impact, analysts say the fourth quarter could shape up as a typical case of the haves versus the have-nots.

"You don't want to have a situation where you can't sell a $1,400 notebook because you don't have a $25 battery," said Roger Kay, an analyst with Endpoint Technologies Associates. "But if this plays out in the usual way, the big guys will get what they need, and the little guys will get screwed."

Sony has recalled around 9 million of its batteries since this summer. Prompted by several incidents involving Dell's notebooks, the Japanese company has admitted that a flaw in its manufacturing process could have caused its batteries to short-circuit and explode, in rare instances. Dell has recalled 4.2 million batteries so far, and Apple Computer followed it in recalling 1.8 million iBook and PowerBook batteries.

At the time the Dell and Apple recalls were announced, Sony insisted that they were the only two PC makers affected. But Lenovo announced its own recall a few weeks later, and Sony eventually agreed to recall batteries supplied to Toshiba, Gateway and Fujitsu, and those used in its own laptops. Sony has said it took a $431 million charge in its second fiscal quarter to cover the cost of the recall.

Low on battery
Rival battery makers--such as Sanyo, Samsung and Matsushita (Panasonic)--are having a tough time coping with additional demand arising from Sony's woes, reports suggest.

That could spell problems for PC manufacturers. In its conference call last week, Compal cut its forecast for fourth-quarter notebook shipments to 4.6 million units, down from earlier predictions of 4.8 to 5 million. It blamed the change on a shortage of batteries.

During the third quarter, PC companies shipped 59.1 million units. This year, Gartner expects notebooks to account for about one-third of all PCs sold. Assuming shipments increase by the usual 13 to 15 percent from the third quarter to the fourth, that means around 22 million notebooks will need batteries during the fourth quarter.

The 9 million replacements for Sony batteries would come on top of that 22 million. That seems like a lot, not even taking into account the customers who buy more than one battery or buy new batteries for older notebooks. However, it's very likely that battery makers won't even have to come close to that 9 million mark, said Samir Bhavnani, an analyst with Current Analysis.

Recalls are somewhat like rebates: Companies know they will never see full participation, Bhavnani said. "They have historical data on how many people are going to take advantage of recalls," and the number isn't very high, he said.

This time around, Lenovo has only received 10,000 recalled batteries from its customers, out of 526,000 it said would be subject to its recall, according to a company representative.

If those anemic levels of participation extend to the rest of the recall participants, battery makers won't have too much trouble filling demand. Dell, Hewlett-Packard and Lenovo said they do not anticipate any problems with battery supply during the fourth quarter.

However, Gateway and Acer declined to comment on how they might be affected by battery shortages, and Apple did not return a call and an e-mail seeking comment.

It's likely that the largest customers are getting assurances that they won't have a problem getting the batteries they need, Kay said. But those promises don't necessarily extend to the companies at the lower end of the notebook market share rankings--making life a little uneasy for some executives.

If shortages do occur, they will likely be in the accessories category, affecting people who buy extra batteries or replacement batteries, Kay said. Customers looking to purchase a backup battery could see ship dates extended several weeks or have a hard time finding the right battery at a retail store, for example.

The difficulty filling the gap after the recall shows the need for standards among battery makers, Kay said. "Every manufacturer has something different," he said, making it difficult to simply crank out extra units. This wouldn't be the case if notebook batteries were like alkaline batteries for consumer electronics gear, which come in standard sizes like AAA or AA batteries across all manufacturers, he added.

On top of the prospect of holiday-related problems, there's some potential that shortages might cause problems in 2007, Bhavnani said. That's because PC companies expect the launch of Windows Vista to augment demand in the first half of the year. But it's too early to tell how this will play out for the industry, he said.