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COMPONENTS SHORTAGE COULD BE DEMAND CATCHING UP WITH SUPPLY

The popularity of wireless may be contributing to an industrywide shortage of some components used in mobile devices, although device manufacturers may not be feeling the effects just yet.

After suffering through a slump during the last several years that was characterized by an oversupply of many components, the semiconductor industry now is dealing with a shortage of those same components. Industry experts say the shortage is likely a situation of demand catching up with supply, rather than a slowing of production.

Flash memory, one of the components in short supply, is nonvolatile, programmable storage that is used in many portable devices including wireless phones and digital cameras.

“Basically the flash memory situation has been a supply and demand thing,” said Scott Allen, a spokesman for Advanced Micro Devices Inc., which is a leading supplier of flash memory products. “For about 18 to 20 months prior to the beginning of this year, there was more capacity than there was demand, and flash prices reflected that fact.

“The fact of the matter is that demand now far exceeds the industry’s ability to supply flash memory,” he said. “It mirrors the history of ICs over the past 30 years. We always have too much or too little.”

Allen said the company is essentially sold out of flash memory and is in what it calls “allocation” mode in which it negotiates with customers for factory output. Price and customer relationships figure into the equation, he said.

“There is indeed a shortage of flash memory in the wireless and mobile industry,” said David Dickstein, spokesman for Intel Corp., another leading supplier of flash memory. “That’s true with other parts that go into wireless devices, such as radio-frequency components.

“The cellular phone market has grown so quickly that its continued strength surprises everybody, including the phone manufacturers themselves,” continued Dickstein. “Intel is hitting all our commitments. We shipped three times as many bits this year than last year to meet demand.”

A recent report by IC Insights indicated the total integrated circuit market is expected to increase 14 percent in terms of dollar volume this year, with the programmable logic device, dynamic random access memory (DRAM) and flash memory product segments growing at more than twice that rate.

Total IC unit shipments are expected to grow 9 percent this year, while flash memory unit shipments are expected to grow 41 percent.

Brian Matas, vice president of market research for IC Insights, said the shortage is being driven by end-user products like wireless phones that a few years ago were not widespread but are now gaining mass consumer acceptance. Matas said he expects the flash memory shortage to last at least through next year and possibly into 2001.

Matt Hoffman, wireless equipment analyst at SoundView Technology Group, said most handset manufacturers have been able to secure enough components to meet their production levels. Where problems might arise, he said, is if manufacturers want to increase their output of handsets.

Representatives from L.M. Ericsson, Nokia Corp. and Alcatel all said the flash memory shortage hasn’t affected their company’s handset production. Ericsson and Nokia both noted they purchase flash memory products from more than one supplier, insulating them from problems caused by shortages.

Analysts also speculated wireless handset manufacturers are likely being supplied ahead of other device manufacturers that are perceived as lower on the food chain.

However, Qualcomm Inc., in its latest earnings report and recent Securities and Exchange Commission filings, has indicated component shortages are limiting its production growth and margin improvement. The company said it expects the component shortages to continue, possibly affecting its results during the fourth fiscal quarter and the first quarter of 2000.

Jeffrey Schlesinger, analyst with Warburg Dillon Read, said Qualcomm’s component shortage as well as pricing pressure it is experiencing, are company-specific problems.

“They don’t have the procurement strength that the big guys have,” said Schlesinger. “Qualcomm’s estimated 10 million units per year pales when compared to Nokia and Motorola, which are expected to produce over 68 million and 50 million units, respectively.”

Some chip companies have indicated plans to increase flash memory capacity to address the shortage, while others have announced plans to convert DRAM manufacturing capacity to flash capacity. IC Insights’ Matas, however, said capacity can be expensive to add and can take a year or more to ramp up.

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