Chinese handset makers led chip slowdown
Chinese makers' inexperience with managing their supply chains does not signal a wider downturn in demand
By Sumner Lemon, IDG News Service October 04, 2004
A slowdown in demand for semiconductors that began earlier this year was caused in part by Chinese cellular handset makers' inexperience with managing their supply chains and forecasting end-user demand, according to the top executive at semiconductor distributor Avnet Inc.
"It really has been a China-led slowdown in incoming orders," said Roy Vallee, Avnet's chairman and chief executive officer, during a recent interview with IDG News Service in Beijing.
Orders for chips and other components began to slow in China during May, sparking concerns the technology industry was sliding into another downturn, Vallee said. "We've all been trained that when incoming order rates slow, that's the signal that we're in the next technology down cycle," he said.
But not all of the evidence supports this view. While incoming orders have slowed in recent months, there has been no indication of a slowdown in sales to end users, Vallee said. "We cannot identify any meaningful slowdown in end demand, either on the consumer side or on the business side," he said.
Considering the absence of a slowdown in end-user demand, Vallee believes the slowdown in demand for semiconductors reflects supply-chain issues within the industry, particularly among Chinese mobile handset makers, and does not signal a wider downturn.
Late last year, product lead times had stretched to as long as 14 weeks and capacity utilization rates were rising at chip makers, signalling to Chinese handset makers the possibility of higher prices and shortages for some components, Vallee said. In a bid to avoid being caught by rising prices or without access to key components, Chinese handset makers began to aggressively place additional orders, he said.
At the same time, Chinese handset makers have not fully developed the sophisticated forecasting techniques needed to predict how much of China's market they will be able to serve with their products, Vallee said. "They're relatively immature in terms of forecasting," he said .
This means that Chinese handset makers are largely unable to know how much demand there is for their products until they reach the marketplace, Vallee said. "You have that dynamic coupled with aggressive, backlogged (order) pipelines and that combination served to push back the supply chain," he said.
Looking ahead, there are signs that this slowdown in orders may be short-lived. Vallee expects to see incoming orders pick up again during the final quarter of this year, putting to rest fears of a wider industry downturn.
"I would say it is not fully over but I would say we're seeing signs that it is over," he said.
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