Some of the most ominous indicators of a tight market to come are a steep rise in memory prices over the past week, a hike in graphics chip costs, and a lack of core support components for processors. The result could be higher PC prices, a shakeup of the "free" PC market, delays of some PC models, and depressed earnings.
Hewlett-Packard chief executive Carleton "Carly" Fiorina said today that fourth-quarter growth will take a hit because of the earthquake. "We said revenue growth would likely be in the 10-13 percent range...With the Taiwan disruption, which effects, most especially, our PC business, we don?t think we?ll achieve the high end of that range and are more likely to come in closer to the low end," she said today in a conference call.
"We are sure of some disruption and delay in some elements of our PC supply chain," she added.
Also, BancBoston Robertson Stephens downgraded Dell stock today because of, among other reasons, the recent supply issues caused by the Taiwan earthquake, according to electronics analyst Daniel Niles. "We are lowering our calendar 1999 earnings-per-share estimate from 0.77 to 0.74, he added.
Meanwhile, component suppliers are raising prices. S3, one of the world's largest graphics chipmakers, said that it is increasing prices to customers. "Because of supply and demand dynamics, we will raise prices," said Ken Potashner, the chief executive at S3.
The company sources its chips from Taiwan-based manufacturers including United Microelectronics Corporation (UMC) and Taiwan Semiconductor Manufacturing Corporation (TSMC), according to Potashner. Both of these companies sustained damage and lost power during the earthquake and are still trying to return to full production.
Potashner estimates that it has lost seven- to ten days of production, though he added that they had "adequate inventory." Also, because of S3's $600 million investment in UMC, it was getting everything it could possibly get from its manufacturing partner, he said.
Another critical PC component, memory chips, are also on the rise--an extremely steep one. At the end of June, 64 megabytes of memory--the standard capacity for computers today--was selling for about $40 on the spot market. Those were the good old days, according to Nathan Brookwood, an analyst at Insight 64. Today, prices in some cases are four times the June price levels, hitting the $160 mark, he said.
At NECX, a major reseller of electronic components, some memory products have leaped $40 in just the last week. A representative at the sales arm of memory heavyweight Micron Technology also confirmed price rises this week. S3, which uses memory but does not manufacture it, expects that prices for memory used with graphics chips will go up too. "Spot prices of memory have gone up and this will be passed along," Potashner said.
Indeed, this flurry of price hikes was anticipated by TSMC's North America president Magnus Ryde. The effects of the earthquake "will ripple through the whole supply chain," he said earlier.
Cheap PC market may be hurt
One of the most conspicuous consequences for consumers may be the nascent "free" PC industry.
"This whole free PC thing may be affected more than anything," according to Brookwood. To keep prices down, this ultra low-cost segment of PC market depends on an ample supply of cheap components. These components will become either pricier or harder to find, Brookwood estimates. "I don't think anyone is going to make a lot of $500 PCs over the next four months."
PCs at the other end of the price spectrum may also suffer. For instance, supply of high-end consumer PCs based on Advanced Micro Devices (AMD) new Athlon processors may dwindle due to a lack of circuit boards, Brookwood said. AMD is more exposed because of an "almost 100 percent reliance on Taiwan" for its Athlon boards, he said.
Availability at retailers bears this out. The online sales arm of CompUSA shows no availability for any of the three Athlon-based Aptiva PC models from IBM using this chip.
IBM announced the E series models based on the Athlon processor in early August and at that time said systems would be available in 30 to 40 days. A spokesperson from IBM was unavailable. AMD had no comment, and motherboard makers could not be reached for comment.
Dell is also getting hurt, according to analysts. BancBoston Robertson Stephens analyst Dan Niles said today that the Austin, Texas-based PC maker is suffering from rising component costs and supply issues due to the earthquake.
"Key component shortages will limit [PC] output," Brookwood added. He also said he has doubts about some of the upbeat statements being released by Taiwan suppliers of these components. "I don't think these guys can be back in production when they say they will."
Chipsets--companion chips to the main processor--are also beginning to experience small price spikes, according to NECX's Web site. Some Intel chipsets on this site are posting the sharpest rises since last week. That doesn't bode well for the future. S3 is preparing to bring out later this year a chip which combines graphics with chipset features. Manufacturers of this product are also based in Taiwan, though Potashner would not comment about supply or price prospects.
Psychological factors no less important
Some of the price trends driving this market have psychological underpinnings. "The response of the spot market is highly emotional," according to Jim Handy, an analyst at Dataquest. "When the Kobe [Japan] earthquake struck a couple of years back the DRAM [memory] spot market doubled for about a week, even though Kobe had absolutely nothing to do with [memory chips].
"We experienced the Taiwan quake at a time when panic buying was already happening, so this has caused an astronomical jump in prices," he added.
But Taiwan has much more to do with the making of memory and other chips than Kobe. Taiwan is home to 28 plants that make semiconductor wafers--the building blocks for chips--and Taiwan's factories account for more than half of the world's semiconductor contract manufacturing and more than ten percent of the world's silicon area processing capacity, according to a report from Dataquest.
The impact on Taiwan's chip and component business alone gives some indication of the ripple effects that will hit the PC market over the next few months. "Every day the 28 fabs are out of operation, more than $40 million is lost," said Handy. The sales revenue for TSMC alone in the fourth quarter is expected to fall by $88 million, according to a company press release.
One of the most pesky problems, as previously reported, is replacing broken quartz tubes used for chip fabrication. "The breakage has been so widespread that some worry that there is not enough quartzware capacity worldwide to replace these tools within a reasonable time," Handy said.
"This could cause many [plants] to sit idle, waiting for this critical equipment."
TSMC announced that 95 percent of the company's wafer process equipment is now ready for production but in an earlier statement added that an estimated 28,000 wafers had to be scraped because of the quake.