Component Pricing: One Possible Scenario
Some in the media and on the sell-side are
saying they believe we are in for an extended period of component price declines
— after six months of expressing confidence that prices would hold up.
However,
the inventory-build in many electronics components (CPUs, for one) is something
that most don’t want to acknowledge, and which can have a significant ripple
effect:
- For
Intel it’s bad, because to drive revenue growth it will have to forgo margins
— unless demand picks up substantially. Intel may need to move out parts and
become less dogmatic about what they’re “worth.” This could prop up sales at
the expense of margins, or we could see write-downs at Intel. - For
competitor AMD, my sense is the inventory issue isn’t as bad. AMD has built
some inventories but not to the extent Intel has.
- For
OEMs, it’s fairly positive because they’ll keep part of the price reduction
and pass on the rest to the customer. When suppliers publicly admit they have
inventory it’s always a bonanza for those who buy and use chips. Pricing
becomes negotiable versus the previous year or so that parts have been on
“allocation.” Compounding the risk to the sector is buyers now have an
incentive to wait, since prices seem likely to fall even further. - For
consumers it’s good, because OEMs will slash pricing, and in theory the
average Joe could see lower PC prices.†- For IT
distributors (such as Ingram Micro, Tech Data, etc.) the impact is tougher to
determine and possibly too new to rate. It’s a difficult area to get insight
via broadline distribution, because it’s not a main item, although chips of
some type are in virtually every product sold. There are a lot of cross
currents in PC-land: a fall off in demand could well be offset by a price war
among Hewlett-Packard, IBM, Dell, Toshiba, Sony, and others that could keep
unit sales moving. Pricing and margins then become issues, but with the
various crosscurrents, the impact on distributors is too tough to call right
now.
Since
then, component price declines were temporarily halted by the hysteria in iPod’s
and the alleged consumer electronics boom — except those sales numbers weren’t
that great either. MP3 players and PC speakers were the only categories of
end-users of memory chips with significant unit growth not offset by price
declines. However, taking those two categories out the electronics sales for
calendar 2004 are almost flat versus 2003.
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Meanwhile,
back to component prices, which, in a commoditized market filled with commodity
products, have continued to soften.
DRAM
prices have declined from $4 to $2.35Â over the last few months; however, this
has been largely excused since NAND pricing remained firm. However, DRAM and
NAND are not an “either / or†situation. Now that NAND seems to be rolling over,
I imagine we’ll hear more and more about notebook growth.
I’m hoping
that any “analysts” who pretend to “know†that inventory has been depleted and
revenue / earnings will (always?) increase will soon be eating their words
sometime soon.
Semiconductor, computer system and electronics retail stocks (Circuit City, Best
Buy etc.) seem to be priced for zero quarters of price weakness. That’s pretty
tight in anyone’s language and doesn’t leave any margin for error. It seems to
me, if component price weakness lasts “another few quarters,” this will be a
catastrophe. Even one quarter of weakness at this point could be quite painful;
given that wafers coming out “now” are expected to sell into this year’s
Christmas season.
The most
rational scenario I’ve heard is for a wash-out later this year and in 2006, due
to excess capacity versus demand. Then in 2007 and 2008, retail demand growth in
Asia might start to absorb more of the material and the survivors might see some
profits.
Now if I
could just accurately predict the bottom, I could own Tahiti…
Melanie
Hollands
melaniehollands@yahoo.com
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