The seemingly recession-proof smartphone is starting to suffer from a side-effect of the rough economy — manufacturers simply cannot build enough of the gadgets because chip-makers, who rolled back production last year, are finding it difficult to ramp up production quickly enough.
The chip shortage means Apple Inc’s rivals are having trouble making enough phones to compete with the iPhone, a problem that is expected to persist for the duration of the holiday period. This situation is also affecting wireless carriers, some of which are having to delay much needed improvements to their networks and could even lead to an increase in computer prices.
There is not an across-the-board shortage of chips, but rather problems with certain components here and there. However, If just one of the 20 to 30 critical chips that go into a smart phone is unavailable, the whole production line screeches to a halt.
Sprint Nextel Corp, for instance, has been unable to satisfy demand for HTC Corp’s (宏達電) EVO 4G, the first phone to use a faster “4G” network, in parts of the US.
Motorola Inc said shortages of a wide range of chips, from memory to camera sensors to touch-screen controllers, are contributing to problems it is experiencing in supplying sufficient numbers of the new Droid X phones to Verizon Wireless. The carrier’s online store reports a two-week wait for shipping orders.
The chips that go into smartphones compete for production capacity with other chips at gigantic factories run by contract manufacturers such as Taiwan Semiconductor Manufacturing Co (台積電) and United Microelectronics Corp (聯電).
At the same time, the manufacturers of a vast array of electronics, from TVs to data center switches, also depend on the factories.
The chip-making industry had a tough start to last year. In February sales were only US$14.2 billion, down 30 percent from the previous year, according to the Semiconductor Industry Association (SIA).
Although sales sprang back later in the year, manufacturers were spooked and reined in investment in chip factories. Capital spending plunged 41 percent to US$25.9 billion last year, after dropping 31 percent the year before, according to research firm Gartner Inc.
Total chip production capacity shrank.
Now factories are experiencing difficulties scaling-up production fast enough, with chip factories, or “foundries” already running at 96 percent capacity, up from 56 percent at the depth of the recession, according to the SIA.
“The semiconductor guys are really continuing to operate on all cylinders,” said Linley Gwennap, president of research firm The Linley Group.
Gartner predicts that worldwide investment in the chip industry will soar 84 percent this year to US$47.5 billion. That forecast is up from March, when it expected a 56 percent increase.
While investment is recovering, it could take months to set up new production lines and upgrade existing ones. That’s why most executives are expecting shortages to last well until next year.
Gwennap identified caution in the industry as another problem, with the global economic recovery starting to look increasingly tentative.
“Even where companies are facing shortages, they’re saying ‘Nah, I’m not sure I want to invest right now, because demand could turn down any minute.’ That makes for a very difficult environment,” he said. “In normal times, companies would be hiring, investing in more equipment and factories and trying to increase supply, but these aren’t normal times.”
More positively, although consumers may have to wait for new phones, they are unlikely to notice price increases.
Phone prices are heavily subsidized by carriers and competition in the industry makes it likely that someone in the supply chain will absorb the higher prices currently commanded by chips.
However, research firm iSuppli warns that the short supplies of memory chips could mean an increase in prices for PCs this year. The prices for these commodity chips are highly volatile. Smaller memory-chip manufacturers need to replace factory equipment and tool suppliers are struggling to keep up, iSuppli said.
Makers of computer and phone networking equipment were the first to report problems this spring. They continue to face constraints, which means more trouble for US wireless carriers that are already struggling to increase network capacity to cope with data traffic from the iPhone and other smart phones.
Alcatel-Lucent and LM Ericsson AB, the two largest makers of equipment for US telephhone companies, have reported problems making deliveries.
Both companies supply AT&T Inc, which has complained that it is unable to beef up its wireless data network as fast as it would like, as it tries to deal with traffic from the iPhone.
Computer networking giant Cisco Systems Inc is also feeling the pinch and indicated that it expects problems to continue through the year.
“We continue to see challenges in procurement of components this quarter,” Cisco chief executive John Chambers said recently. “Supplier lead-times now appear to have stabilized, but are still longer than we would like.”
Apple is the one exception in the industry.
Although the company cannot keep the iPad and iPhone 4 in stock, it blames that on demand being so high that it outstrips assembly line capacity, not on problems procuring the right chips.
That may be partly “dumb luck” on Apple’s part, Gwennap said, but it could also be a case of it being “good to be the king.”
“As a chip supplier, you’re going to service your best customers first,” he said.
“If my choice is to try to make Apple happy or some smaller customer of mine, I might take all of my supply and give it to Apple,” Gwennap said.
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