Component Demand Recovery Strains Supply Chain

Wary vendors worry about the quarters ahead.

Rising demand and increasing prices normally are a good thing for the electronic component business. However, because of uncertainty regarding fourth-quarter demand levels, component makers are reticent to expand capacity or build inventories, placing strains on the global electronics supply chain, according to iSuppli Corp.

Prices for most major categories of electronic parts tracked by iSuppli’s Component Price Tracker (CPT) service rose in the third quarter compared to the second. Lead times in the third quarter also increased or were on an upward trend for nearly all parts categories tracked by iSuppli, i.e. analog parts, capacitors, standard logic ICs, discretes, filters/crystals, oscillators, connectors, resistors, magnetics and most memory devices.

For component suppliers, this has resulted in rising gross margins and increasing utilization rates. These companies in the first half of 2009 had cut staffing, reduced capacity and slashed inventory levels to adjust to lower demand levels amid the global economic meltdown.

Normally, as demand improves, these companies would move to hire back workers, boost capacity and expand inventories in anticipation of further sales gains. However, with the underlying economic forces that caused the downturn still not having been fully corrected, component companies are wary of increasing capacity and inventory until the seasonal, fourth-quarter uptick passes.

While electronics market visibility has improved, considerable uncertainty lingers regarding the market outlook in the first half of 2010. Most suppliers are likely to continue to hold off on capacity increases until their outlook improves.