Focus on the Open Market: Open Market Review: Volatility and Opportunities

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Two points stand out from the first half of 2007: worldwide semiconductor sales increased only 2% YoY for 1H07 (SIA); and DRAM prices dropped over 70% during the same period and are only projected to grow 1.97% in 2007 (iSuppli). Yes, low single digit growth supports analysts' view of a maturing semiconductor market implies stability and predictability. But DRAM and NAND performance highlights the extreme volatility still seen in the submarkets. Today's organizations face the challenge of adapting to diverse market changes and finding open market opportunities that can improve margins.

Highlights from the 1H07 and Forecasts for 2H07

Memory:

  • DRAM:  2Q07 witnessed the lowest average selling prices (ASPs) in recent history (down approximately 39% during 2Q07, according to iSuppli) widely attributed to oversupply.  August saw the beginning of a brief bounce-back. September is now seen as the start of a new slump due to the ongoing excess supply.  3Q cuts in production will be critical to the market’s health (iSuppli).
  • NAND:  NAND ASPs experienced relatively minor declines during 1Q07 (approximately 15%, according to Gartner), and an uptick moving into 2H07. Samsung’s power outage coupled with an anticipated boom approaching the high demand season is making for favorable 2H07 predictions (particularly after Apple’s iPod Touch unveiling and iPhone price cut).

Processors:

  • According to an August report from SIA, microprocessor unit shipments were up 19% for 1H07 compared to 1H06. SIA also reports that year-on-year price attrition for microprocessors dropped below 10% for the first time this year (source: SIA press release 8/3/07). Digital Signal Processors (DSPs) showed just over a 3% growth in unit sales for 1H07 (source: SIA 7/2/07).
Integrated Circuits (IC):
  • Gartner sees reduced market growth for general purpose analog ICs and discretes for all of Y07 (6.3% and 4.3%, respectively.) This is due to inventory corrections during 1H07 (source: ICTWorld).
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iSuppli recently re-evaluated the global electronic equipment market and forecasted a slowing in growth to roughly 6% for 2H07 and edging down, YoY, to 4.8% for 2009 (August 2007).  Forecasts for the semiconductor industry’s global CAGR have also been lowered unanimously by analysts, from 6-8% in the original forecasts down to the present 2-4% range for 2007 YoY (sources: Lehman Brothers, Morgan Stanley, iSuppli, Semiconductor Industry Association (SIA), and World Semiconductor Trade Statistics (WSTS)). However, IDC predicts that the global semiconductor market will grow at a rate of 8.1% in 2008 (DigiTimes).  Now the looming question is whether the industry will see a seasonal upward correction or if there is a more widespread market adjustment underway. Significantly, while generalized industry trends are muted, the industry’s submarkets are the key to realizing opportunities as individual sectors are dynamic, particularly consumer electronics and the mobile industry.

A Changing Market
The semiconductor industry is showing definite signs of economic maturity, according to a recent study by Lehman Brothers, and echoed in recent 1H07 market reviews (Lehman Brothers, The Semiconductor Handbook, 2007:15). A clear indicator of economic change is the fact that since 2000, semiconductor industry revenue growth closely correlates to global gross domestic product (GDP) growth (Lehman Brothers finds a correlation of 0.90 (ibid, 2007:3)). For 2007, the semiconductor market is poised to parallel GDP growth in the 3-4% range. 

An important aspect of this close GDP correlation is the smoothing in amplitude and duration of the industry’s cycles. While the semiconductor industry’s up- and downturns have typically lasted a couple of years, more recent cycles are shortening and flattening, including the recent downturn. However, the market data also point to the development of ‘mini-cycles’ within submarkets. These mini-cycles are dynamic and are often masked in industry-wide analyses. Furthermore, overages and shortages will continue to occur due to product lifecycles and external effects: plant/power outages, mergers and acquisitions, end market volatility, and other factors. As a result, parts that have been a sourcing nightmare or an inventory and balance sheet burden can suddenly become a worthy commodity, given the appropriate broad market knowledge, agility, and value chain partnerships. This continued volatility can be realized as opportunities in the open market, through a well-positioned and informed independent distributor (see Stay Ahead of the Cycles inset below for more information).

Maturing End Markets
To understand today’s semiconductor market, we need to keep an eye on the different growth trajectories of the major semiconductor submarkets and their maturing end markets. While the PC/computing end-market comprises 40% of semiconductor unit consumption, other sectors are gaining importance as indicators of the industry’s potential growth opportunities. The core sectors influencing overall semiconductor industry growth include consumer electronics (21% of consumption), wireless (19%), wired communications and networking (6%), automotive (6%) and industrial/military/aerospace (8%) (source: Lehman Brothers 2007:22).

Morgan Stanley’s Q2 2007 Global Technology Data Book provides detail on new product cycles within the semiconductor industry that are ‘emerging as important drivers’ (Morgan Stanley 2007:13) and highlights four main segments that will see significant growth opportunities: TFT-LCD, NAND flash, WCDMA infrastructure and handsets, and notebooks and network application storage (ibid, 2007:4). 

As industry submarket cycles diverge, they create opportunities across the semiconductor industry because different components will have different supply-demand dynamics. The ability to move inventory appropriately, and the agility to respond to demand and supply dynamics when and where they exist are key to capitalizing on such opportunities. Today’s successful companies are acquiring this type of broad market awareness and agility through critical value chain partnerships that provide access to the open market and its wealth of opportunities.

Inventory Management: Unlocking opportunities
Inventory excesses were one of the top variables contributing to market instability during 1H07. This ongoing issue, particularly for DRAM and the continued spot-market price declines, has led many OEMs to shift the burden of inventory holdings back to suppliers, requiring a rebalancing of inventory itself, as well as risk management.

Inventory levels, a supply-side dynamic, affect the entire industry’s health – making inventory management a critical aspect of strategic business planning. As such, numerous big players such as Cisco and HP have adopted Lean Practices (cf. Achieving the Zen of Lean, MarketWatch Quarterly Spring 2007), and are requiring the same of their supply and value chain partners (cf. New Value Chain Strategies Defining the Electronics Industry, MarketWatch Quarterly Summer 2007).

As inventory holdings shift back up the chain and lean initiatives are implemented, many companies face the problem of how to best leverage their inventory. The open market offers proven means to recoup losses and to remedy problematic holdings, particularly during periods of market volatility (e.g., end-of-life components, excess inventory, ASP shifts, and contractual obligations, among other issues). Having an informed position on the very different submarket dynamics within the semiconductor industry is a key factor in realizing opportunities. 

The open market cross-cuts geographies, industry verticals, and component submarkets within the semiconductor industry. Governing open market conditions are based on true demand and supply cycles and a series of secondary variables relating to logistics and natural events. The semiconductor industry is an expansive market. While the general forecasts are presently on hold, the fact that there are dynamic changes in the submarkets points us to more immediate business opportunities and pitfalls. The open market has provided the release valve for all of the industry’s supply chain fluctuations, serving as a means for remedying shortages and oversupply. The open-market players are accustomed to tracking and mining the numerous submarkets to help value chain partners balance supply/demand dynamics.  

In the fall MarketWatch Quarterly issue we will look further at open market preparedness for unforeseen, even cataclysmic events that may dramatically affect component submarkets and the semiconductor industry.

Stay Ahead of the Cycles:  Smith & Associates Inventory Management Solutions

Smith & Associates offers inventory management solutions that permit electronics manufacturers to use the open market to ease electronic component cost fluctuations. With more than 20 years’ open market experience, Smith has the resources to manage projects of any size or scope. 

Smith & Associates offers a wide range of electronic component sourcing and inventory management programs for a variety of customers, including OEMs, ODMs, EMS providers, and distributors. These partners rely on Smith to meet critical inventory management goals, including:

Reduce exposure to component price fluctuation

  • Smith & Associates’ Strategic Sourcing solutions can help customers choose the right time to make cost-saving and opportunistic component purchases on the open market.
  • Smith’s Component Hubbing program offers a fixed source for high-value components, assuring availability at a fixed price for the life of a project.

Reduce inventory holding costs

  • Smith can help customers achieve Just-In-Time inventory levels by analyzing bills of materials and production forecasts. Orders go straight from the receiving dock to the production line.
  • Smith can manage a segregated On-Site Inventory location at a customer’s manufacturing facility. This program ensures immediate availability of critical components while holding costs down.

Achieve returns on unused inventory

  • Smith & Associates pioneered electronic component inventory resale, and has been managing our partners’ excess inventory since 1992. The hallmark of Smith’s Excess Inventory Resale programs is flexibility. Smith customizes asset recovery solutions to suit the needs of partner companies through: consignment of excess or surplus inventory; non-consignment marketing and sales from lists of excess inventory; lot buys; and customized hybrid programs

Reduce service and repair inventory levels

  • Smith & Associates can support customers’ Warranty Service and Repair Inventory needs through a complete outsourcing solution. Smith stocks parts for products specified under a service agreement, minimizing customers’ service and repair inventory costs. Smith can produce field kits including parts for a specific unit, to be shipped to any repair facility worldwide or directly to the customer for use by field personnel. Smith can also manage warranty replacement with component manufacturers on customers’ behalf. 

Manage component lifecycless

  • Smith & Associates can evaluate customers’ bills of materials to create periodic Component Lifecycle Reports. During a part’s normal life cycle, Smith helps customers secure the most favorable pricing and manage product change notices (PCNs) and engineering revision levels to ensure consistent functionality.
  • Smith’s unsurpassed market intelligence helps us identify the optimal times to make cost-saving Opportunistic Purchases on the open market.
  • As components near end-of-life (EOL), Smith can assist with volume purchases for components, and can provide warehousing and management service for opportunistic purchases and Last-Time-Buy (LTB) Inventory.

Commitment to quality places Smith & Associates at the forefront of the independent distribution channel. QualityFirst is Smith & Associates’ ISO 9001:2000 certified system for assuring the reliability of every component Smith customers receive. QualityFirst is a cornerstone of any Smith inventory management solution.

If you are interested in exploring inventory management opportunities with Smith & Associates, contact Gary Morrissey, Vice President of Business Development, at 713-430-3960 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Gary will help identify ways that Smith can help you achieve your sourcing or inventory management objectives.

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