05 July 2010

Let’s end the economic madness

After four quarters of growth, the industry now finds itself in the full flood of a classic market boom. Order books are full, customers are building stocks, double ordering is rife, capacity is strained, lead times increasing and deliveries are stretched.


Inventory replenishment started in Q2 2009 – due to the severe inventory over depletion in Q4 2008/Q1 2009 – and was over by Q4 2009, to be replaced by inventory building in 1H 2010, driven by lead time extension. Typically, every week of extra lead time adds at least half a week to work in progress. Double, even triple, ordering (due to supply shortages) only really started in 1H 2010 and is definitely getting worse. But double ordering is not double shipping … yet. For that to happen, supply needs to catch up with demand.
Despite four quarters of growth, no spare capacity, long lead times, low inventory levels and double ordering, not only are ASPs lower than they were pre recession, but they are still falling! Not so with memories, where pricing hit the increase button at the first sign of 'sold out' and are not only back to their pre recession level, but still rising.
Time, perhaps, for a quick reminder of supply and demand economics.
Price equilibrium occurs at the intersection of the demand and supply curves, at which point customers get the product they want at a price they can afford and sellers shift all they can make with no spare capacity.
If demand increases, but capacity cannot keep pace, the selling price rises until a new equilibrium is reached. Likewise, if demand falls short of capacity – the normal case for the chip industry – prices will fall. The theory here is that price elasticity increases demand such that equilibrium is once again achieved.
In the real market, equilibrium can only be reached in theory and the prices of goods less elastic. But one thing is clear: if demand exceeds supply, it's time to increase selling prices, if not for the economic theory,, then at least to get a return on investment.
So it's time to increase semiconductor prices everywhere – it is absolute business, economic and industry madness to keep decreasing prices in a tight supply market
As for the argument 'what about loyalty to key customers?', ask them about their loyalty to manufacturers over the past several years, constantly playing off one supplier against another. Manufacturers should sit down with their customers for a serious negotiation to sell capacity, not to chase purchase orders, based on a minimum five year rolling contract with cast iron, non cancellable commitments.
In that way, industry will finally have long term order commitments, capacity planning can be improved and investment risks shared.

Author
Malcolm Penn

Supporting Information

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http://www.futurehorizons.com

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Future Horizons

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