PARIS A shortage of basic electronic components that has hurt Alcatel-Lucent and Ericsson among others could last into the second half of 2011, limiting manufacturers' ability to respond to improving demand.
Memory chips and other fundamental components such as resistors and capacitors are in short supply after their makers slashed output, fired staff, put equipment purchases on hold or went out of business during the recession.
In contrast to what happened in 2001 after the dot.com crash, makers of components for the consumer electronics, telecoms, automotive and solar industries are not scrambling to meet short-term demand, risking another boom-and-bust cycle.
This time around, key suppliers such as Hynix (000660.KS), Toshiba (6502.T) and Murata 6981.OS are taking a longer-term view, considering how sustainable demand is likely to be before making big investments in new equipment and staff.
"What we've seen is a pretty significant response on low-capital industries to bring capacity back on line, but high-capital industries have been somewhat more reluctant, particularly semiconductors," Tom Georgens, chief executive of storage-equipment maker NetApp (NTAP.O), told the Reuters Global Technology Summit in San Francisco this week.
John Stankey, operations chief at U.S. telecoms giant AT&T (T.N), told the summit the difficulty of getting parts had been exacerbated by the fact that many components had been made by small Chinese firms that went out of business in the recession.
"There was a large number of marginal components suppliers that built the components that go on boards and cards that are used in electronics and PCs that could not survive the capacity shakeout that occurred and they went out of business," he said.
"All of a sudden, you have a particular transistor that was made by three people in the world, and now there are two."
The shortages have already been blamed for weaker-than-expected results last quarter at telecoms gear makers Alcatel-Lucent (ALUA.PA)and Ericsson (ERICb.ST), who are in addition struggling with a shrinking market.
For them and for others, short supplies will lead to higher costs, and probably lower cash flow as they build up inventory.
Rick Pierson, an analyst who tracks the components industry for technology research firm iSuppli, says suppliers are likely favouring tier-one makers of notebook computers and smartphones, whose sales are surging, over other competing customers.
"Guys like telecom, some of the other ones, they're just not up there in the pecking order," he says.
Top consumer-electronics manufacturers such as Hewlett-Packard (HPQ.N), Apple (AAPL.O), Cisco (CSCO.O), Dell DELL.O or Nokia NOK1V.HE are far more likely to get the parts they need in times of shortage, he says.
"These are customers that are strategic to their suppliers."
Telecoms and technology research firm Gartner estimates the smartphone market will grow 46 percent this year, while computer shipments are expected to rise by 14 percent, driven by notebook sales.
Pierson estimates the supply constraints could last longer this time than the 10-12 months it typically takes to address bottlenecks by hiring and training staff and installing new equipment, due to doubts about the economic recovery.
Component makers will also be more careful this time around because they understand better the phenomenon of double ordering -- when customers place orders with two or more suppliers and simply cancel the others as soon as one delivers.
"The rest of this year is still going to be a constrained market for a lot of these popular commodities," he says. "You'll start to see some light at the end of the tunnel maybe late Q1, Q2 of next year."
Alcatel-Lucent's Chief Executive Ben Verwaayen, speaking to the Reuters summit in Paris this week, declined to forecast how long the shortages would last, but reiterated he expected an improvement quarter by quarter.
"If you're recovering, it hits you harder than if you were already in a profitable position... It has to do with capacity in a lot of the common components, and we'll see," he said.
He added that the industry was facing increased competition from the automotive sector -- which is recovering, thanks to government stimulus and scrappage schemes.
Memory chipmakers began hiring and investing some months ago and have bet most aggressively on a recovery, encouraged and enabled by rising average selling prices.
The chief financial officer of Korea's Hynix (000660.KS) told the Reuters summit in Seoul the company expected strong market conditions to prevail until at least early next year, and said it may raise investment again.
"We are still unable to meet demand for PC and server DRAM chips," Kim Min-chul said.
ISuppli expects global semiconductor industry sales to rise 30 percent this year to $300 billion, driven by consumer demand for computers, phones and TVs.
But the firm warned in a report this month its forecast could change if trouble spots in the economy -- such as the Greek debt crisis -- spread.
"The economy represents the biggest wild card in iSuppli's 2010 forecast," it said.
(For more on the Reuters Global Technology Summit, see)
(Additional reporting by Paul Thomasch in New York, Neol Randewich in San Francisco and Rhee So-eui in Seoul; Editing by David Cowell)