Nothing kills a party like running out of food and booze. And, when guests show up in droves, beyond expectation, you check your supplies and commandeer friends for a mad dash to the store, right? Especially if each and every guest feels compelled to plunk down a fistful of dollars for a good time and you want the party never to end.
So as various mobile players-from handset vendors to financial analysts to supply-chain specialists-have raised their forecasts for 2006 mobile handset shipments to between 900 million and nearly a billion units, handset vendors have got to be scrutinizing component supplies and supply chains, and preparing contingency plans.
Of course, to rise to the top of the heap, the largest vendors, such as Motorola Inc. and Nokia Corp., must have figured out how to ramp up capacity, forge exacting supplier contracts to punish non-compliance and solve glitches in manufacturing. Still, the unprecedented volumes of handsets shipping this year must pose a challenge even for successful behemoths, which like the Wizard of Oz are reticent to pull back the curtain as long as they can convey the illusion of utter mastery.
“The handset makers are trying to smooth out the supply-chain process,” said Jeffrey Kagan, an independent telecom analyst. “Large vendors are getting smarter about it and have closer relationships with their suppliers-but that doesn’t prevent shortages. They never talk about the components-or the producers-they’re having trouble with. They simply announce a handset delay.”
One notable exception: remarks earlier this month by Stan Glasgow, president and chief operating officer of Sony Electronics Inc., the $11 billion division of Sony Corp. in the United States, which includes Sony’s end of the Sony Ericsson Mobile Communications L.P. handset business. “Overall component supply is tightening up,” Glasgow said, attributing the shortage in part to phenomenal handset sales. Otherwise, handset vendors’ silence on the issue is virtually complete.
Ask a wide range of industry analysts what they’re seeing and hearing on component supplies and the responses range from “no red flags so far” to “shortages are inevitable” to “watch the third quarter.” Some point to the trend toward the modularization and commoditization of components as protection against supply-chain surprises, while others point out that specific, advanced components are unique to each handset vendor and often are sole-sourced to one supplier, raising the ante on supply-chain management. Yet another analyst suggests that the real game raised by unprecedented demand is not supply-chain hiccups but the nerve-wracking distribution challenge of matching the right handset to the right market in the right quantities to maximize sales and minimize excess inventory.
Does the unprecedented demand this year raise the issue of supply-chain management?
“It invariably does,” said John Jackson, senior analyst with Yankee Group. “In instances of unexpected growth in past years, it tends to be the `bells and whistles’ folks who come up short. This time around, it may be less of a problem because the phenomenal growth is occurring in markets that don’t require the very latest features that typically produce component glitches.”
The ability to protect against supply-chain hiccups probably favors scale, Jackson said. For instance, the top six handset vendors accounted for 189 million out of the 217 million units shipped in the first quarter. Their size, contract stipulations and ability to pay helps them get the components they require. Semiconductor firms that own their own fabrication facilities-such as Texas Instruments Inc. and Freescale Semiconductor Inc.-are well-positioned, but “fabless” semiconductor vendors such as Qualcomm Inc. could see demand heat up, translating to longer lead times or higher prices, according to Jackson.
Scott Smyser, principal analyst at iSuppli, which produces reports on component supplies, said his firm is watching the third quarter for evidence that vendors relying on sole-source component makers might be feeling a squeeze as they ramp up for the holiday season.
“A lot of the integrated circuits in mobile handsets are sole-sourced components,” said Smyser. “When you look at the core ICs in a handset-such as the baseband IC, power management IC, RF transceiver IC-those are ICs that cannot be swapped out at a moment’s notice. The core ICs that enable multimedia features are sole-source, too. When you have a sole-source component in your handset you’re reliant on a single supplier. Whether that supplier can ramp up capacity when demand increases could become a question.”
ISuppli looks into supply-chain health, from factory capacity to lead times to average selling prices. “If lead times and ASPs are going up, that indicates strong demand in the market and, possibly, supply-chain issues,” Smyser said.
“Right now, as I look across supply-chain health of components, it’s really the components that go into mobile handsets that we’re looking at supply issues in [the third quarter], as [original equipment manufacturers] ramp up their production for the holiday season. We’re not forecasting supply issues for the core ICs, but more for the supporting components like crystals, oscillators, filters-passive components supporting ICs.”
In general, however, the larger handset vendors are “pretty well insulated” from supply-chain problems, according to Taha Rangwala, senior analyst with Pyramid Research. They tend to produce their handsets in-house, or design the components in-house, for greater control over production and costs. Basic components increasingly are more modular and commoditized, and vendors typically buy the same component from multiple vendors to prepare for unexpected shortages.
“I haven’t heard of component shortages or manufacturing bottlenecks as being a big issue,” Rangwala said. “I think the larger issue is the possibility that a vendor might send inventory of the `wrong’ handsets to a specific market. When you’re talking hundreds of millions of units shipped each year, and double-digit growth each year, it’s possible that vendors and local distributors might not be able to take the pulse of the local market in time to ship competitive quantities of the right handset, giving their competition a boost.”
In network operator-dominated markets, handset vendors can ask their partners for market intelligence and probably receive pretty solid guidance. But in markets where distributors tend to hold sway, such as India, Pakistan, Sri Lanka, Bangladesh, Brazil and Mexico, “it’s a little more cumbersome to get an accurate read on the market,” Rangwala said.
“In those markets, it’s very important the big vendors get it right to the model number, because a wrong move could cause a couple points shift in market share, which could mean the sales of hundreds of thousands of devices going to their competitors.”
Alan Varghese, semiconductor analyst with ABI Research, concurs. Proper inventory levels are a delicate balance, he said. Vendors must have inventory available to meet demand, but excess inventory contributed in 2001 and 2002 to a downturn in the industry that took “a year or two to burn through” with some write-offs for unsold handsets.
“Listening to vendors, however, I haven’t seen any red flags,” Varghese concluded.
