Resistor maker caught in surge/purge cycle

Upswing suddenly gives way to inventory overhang, lower prices, unused capacity

By Gina Roos
EBN
(06/07/01, 11:14:46 AM EST)

Here's some good news and some bad news in the resistor market. The good news for buyers is that supplies are plentiful and prices are lower. Lead times range from four to eight weeks, a significant improvement from 16 to 30 weeks last year, according to resistor suppliers.

May's lead time for thick-film resistors was 4.5 weeks, down from 6.9 weeks in April and 11.5 weeks in March, according to EBN research. Prices have eroded about 15% to 20% this year, according to resistor manufacturers.

This isn't good news for the seller. However, the entire supply chain is feeling the pain of disappointing demand. This is old news for component industry veterans who have felt the effects of surge/purge cycles before. A little more than a year ago, passives makers were adding capacity during an upswing that many thought would last several more quarters.

The slowdown began in the fourth quarter of last year when demand from the cell phone, computer/peripheral, and PDA markets started to weaken, according to Glyndwr Smith, assistant to the chief executive and senior vice president at Vishay Intertechnology Inc.,
Malvern, Pa. 

The resulting inventory overhang, lower prices, and underused production capacity translates into top- and bottom-line pressure for resistor manufacturers. Worldwide resistor sales are projected to decline this year, according to the marketing research unit of iSuppli Corp., an El Segundo, Calif., research and supply chain services company. The
surface-mount, thick-film-resistor market will tumble from $1.12 billion in 2000 to $1.04 billion this year.

Resistor makers are tightening their purse strings by paring head count and reining in capital and R&D spending. But they know that's risky: if they cut back now, they may not be ready later on with the right product mix at the right time. Some observers are advising resistor makers to show caution in curtailing their manufacturing capacity. The industry is already concerned about shortages in larger-case-size resistors.

In fact, some say that when the market rebounds, customers will look for new twists on today's technology. Miniaturization, integration of functions, and consolidation of
separate components in a single package continue to be the prevailing trends in passive components.

Surviving the slump
Salvaging this year will be tough, resistor executives say. They are divided between those who believe the worst is over and those who see their top lines for the year dropping if orders don't pick up in the second half. Most industry watchers are optimistic that the third quarter will bring better market conditions that will continue into 2002. But that hinges on the economy, how fast the industry can work off inventory, and a recovery in the cell phone and telecom markets.

Chip resistor sales will be down this year, but the market will grow about 15% to 20% next year, according to Richard Schuster, president of NIC Components Corp., Melville, N.Y. "There will be a gradual improvement because there's still a substantial amount of inventory," Schuster said. "I think we'll see an improvement in the third quarter."

Vishay's Smith expects demand for thick-film commodity products to pick up in the second half, with unit shipments returning to 12% to 16% growth next year. He estimates that prices will drop 15% this year.

Sales at Rohm Corp. had been flat, but improved in April. "We're nowhere near what our projected run rates were supposed to be, but it was a positive book-to-bill across the line [in April]," said Ken Sykes, senior vice president of Eastern sales and worldwide distribution at Rohm in Atlanta.

Unless the market rebounds in the second half, growth for standard products will be negative for the year, said Ron Sullivan, vice president of marketing and sales at BI Technologies Corp., Fullerton, Calif. "We're hoping-like a lot of companies-that our new
products will catch on and make up for the segments that are slow."

BI's new products center on incorporating more resistors in the same size package and integrated passives devices. The company is also working on its own version of a high-density ball-grid-array package for both thick- and thin-film products.

Resistor makers are optimistic about the long term. They expect their business to rebound along with one of their biggest consumers-the wireless communications market, which is predicted to show decent growth in the next five years. "With the inventory overhang in the wireless communications market dissipating, ... we believe overall revenue growth through 2005 will average 6.5%-about half of what it was for the past five years," said
Dale Ford, an analyst at iSuppli. iSuppli forecasts worldwide shipments this year of 474 million cellular handsets, which represents growth of less than 15% from last year and a far cry from the 40% to 66% gains achieved during the past several years, according to Ford.

Trimming expenses
The slowdown has resulted in some layoffs and other cutbacks. Vishay, for instance, has reduced head count, capital expenditures, and R&D spending. "We have to do all things that are necessary to maintain our value to our shareholders," Smith said.
   Vishay has slashed its R&D budget this year to about $120 million, down from $230 million last year. Still, the component giant plans to introduce 150 products this year, about 20 to 30 of which will be resistors. Vishay, like many resistor makers that added production capacity last year, is holding the line on such expansion this year."We won't be adding too much more in additional production capacity this year because we added about 20% to 30% last year," Smith said.

NIC has scaled back its production capacity in Japan by 15%. The company has also laid off all part-time workers and reduced overtime.

Many suppliers added so much capacity last year that a lot of it is unused. Panasonic, for instance, increased capacity 10% last year, but due to the slowdown the added capacity is not being fully utilized, said Bob Galli, senior product manager at Panasonic's Electronic Components Group in Secaucus, N.J.

It's the same story at Bourns Inc. "We doubled capacity last year, and now we have a lot that is underutilized," said Wil Cantrel, product line manager for resistor networks at Bourns, Riverside, Calif. "I'm watching it very carefully, but I'm currently adding capacity and upgrading and automating my lines so when business comes back, I'm in a very good position," he said.

Bourns has made other cuts. Initially, the company cut back on overtime and part-time workers, but because of the excess inventory for thick-film product, permanent workers in the factory have been affected. Bourns also is evaluating moves to lower-cost manufacturing regions. "We're looking at each product line to determine if manufacturing needs to be shifted to a market where we can optimize our labor cost, or if we can automate the line and eliminate some of the cost," Cantrel said.

Is the downturn the pause that refreshes?
"I wouldn't say it's welcome, but it's an opportunity for us to take advantage of the slow market," Cantrel said. "Last year equipment was running seven days a week, and we found areas that needed a lot more capacity additions and required a lot of maintenance."

BI has no regrets about its additions in 2000. The company expanded production capacity by 30% to 40% last year, but in the long run it was a good move, Sullivan said. "We saw it as a chance to purchase more state-of-the-art equipment. The equipment is faster and provides better yields," he said.

Other resistor makers, although investing cautiously, continue to expand production capacity in preparation for the next upcycle. KOA Speer Electronics Inc. last year increased production capacity by about 60% for thin-film product and 30% to 40% for thick-film devices, depending on case sizes. "We still have plans to increase our capacity. The electronics market is very robust [long term], and we feel this is just an inventory correction. But as we all know, there are cycles in this business, and it's going to come back stronger," said Jeff Rice, vice president of sales and marketing at KOA Speer, Bradford, Pa.

The PC market is already starting to recover, according to Rice. "The PC market is not as bad as telecommunications, where there is so much end-product inventory in the pipeline." The PC and automotive markets are the best at controlling their inventories, but the PC market is doing a better job, he said.