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IC – Component Shortage Likely to Last Through 2010

Fears of a double-dip recession are keeping suppliers from boosting output significantly to meet growing demand. Hoarding and speculation exacerbate the deficit.

The shortage of ICs and components is slowing production and raising costs at China factories. Delivery schedules to finished product companies have been pushed back six to 10 weeks, while quotes have increased by an average 10 percent. Some ICs have even become six times more expensive. The situation, however, is not likely to be resolved soon.

Uncertainty in the global economic climate is leading many suppliers in China and overseas to be cautious about expansion plans. Although demand has picked up, concern over the EU debt crisis has companies questioning the feasibility of bringing all lines back to production. Should the situation in the EU worsen and affect worldwide financial markets, orders will fall once again and manufacturers may find themselves in a far worse position than at the height of the downturn.

Back then, factories could not escolhasegura simply reduce output in line with declining demand. This is because IC production equipment needs the same amount of deionized water, highly purified gases and electricity regardless of whether it runs at full capacity or not. To be able to really save on costs, companies would have to close or sell their plants, which is what many suppliers did in late 2008.

Manufacturers did not expect global economies to rebound as fast as they did, however, and were not able to recover capacity quickly enough. Those that sold off assets have to invest in new equipment, a step that requires both time and significant funding. Machinery companies normally produce units only on request. This is because the technology advances quickly rendering equipment outdated. It usually takes at least six months before new units can be delivered, sometimes even more than one year.

Suppliers that shuttered factories will have to recalibrate the machines. They also need to purchase chemicals and highly purified gases, which take several months to produce.

The first signs of a shortage in ICs and components came about in H1 2009. The problem gained pace in the second half and escalated further in 2010. If factories remain unwilling to boost output significantly and soon, the deficit can extend through the rest of the year.

At present, suppliers are bringing into operation only a few production lines at a time, waiting until they enter the lean period to boost their IC stockpile in time for the buying season in 2011.

Hoarding squeezes supply further

Finished product makers, especially large companies that source ICs and components in bulk, are contributing to the shortage. Manufacturers such as those offering terminals often stock up on key parts to minimize the impact of the deficit on their lead times. During procurement, many order 30 to 200 percent more than what they need and require deliveries to arrive a lot earlier than necessary. This practice is exacerbating the supply-demand situation so much that in June, discretes had a lead time of 20 weeks, up from the typical 10 to 12 weeks.

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