Asian parts makers beset by slow demand, supply glut

SINGAPORE--A shortage of parts no bigger than a grain of salt kept cell-phone makers like Nokia Oyj from meeting demand last year--and production at Japan's Murata Manufacturing Co humming. Not anymore.

Murata, the largest maker of tiny capacitors that regulate electricity in cell phones, is bracing for slower earnings growth and will cut capital spending by a third for the year starting next month. Analysts say similar announcements may be in store as companies cope with fewer orders from their customers.

"It could take at least two quarters," said Dane Anderson, vice president for Internet and computing research at IDC Asia Pacific Ltd. "A lot of it is tied to how long it takes for the American consumer to rev up spending again."

Such is the fate of Asia's parts makers, producers of components for gadgets ranging from cell phones to portable music players. Companies like Japan's TDK Corp. and Taiwan Semiconductor Manufacturing Co are struggling to make money while sales slow at computer and cell-phone makers.

And there isn't much relief in sight. Consider the latest: Palm Inc, the largest handheld-computer maker, this week said it'll fire 250 workers, will have an unexpected loss this quarter and sees sales lagging forecasts. Ericsson AB said yesterday it plans to cut 3,300 jobs to counter slowing demand for network equipment and cell phones.

Recovery
Analysts say a recovery may be delayed if demand slumps in Europe, sentiment underscored by Hewlett-Packard (HP) chief executive Carly Fiorina's comment this month she's ''not optimistic'' Europe is immune.

That's leaving Asian manufacturers of tiny parts such as capacitors, batteries, flash memory and liquid crystal displays with extra capacity after increasing production last year to meet an unexpected backlog of orders.

"The first half of the fiscal year was too good," Michihisa Yamamoto, an executive vice president at Kyocera Corp., told reporters at a press gathering last month. "It was a bubble period for electronics components."

Nokia in January lowered industry handset sales forecasts to as low as 500 million from 550 million previously. In contrast, worldwide shipments of mobile phones last year surged to 412.7 million from 283.6 million in 1999, according to Dataquest Inc, a unit of Gartner Group Inc.

In the quarter ended December, PC sales in the US, the world's biggest market, grew just 0.3 percent on year, and fell 3.6 percent from the previous quarter, according to market researcher International Data Corp.

Now it's time to cut the fat. Along with Murata, Asian electronics parts makers are cutting spending next year.

Computer chipmaker TSMC, which doubled its production capacity last year, plans to cut its expansion budget by almost a fifth this year.

Both TSMC and its biggest rival, United Microelectronics Corp., warned their first-quarter sales and profits will fall by at least 25 percent from the fourth quarter

"We are very much tied to the PC industry and if we see some pickup in PCs I would be amazed if we didn't benefit," said Morris Chang, TSMC's chairman.

Tokyo-based TDK Corp, which relies on PC parts for as much as half of sales, cut its full-year profit forecast last month.

Cell-phone parts makers are among the hardest hit.

Sanyo Electric Co, which makes two-fifths of mobile phone batteries worldwide, plans to cut about 6,000 jobs in Japan, or 12 percent of local staff. The company said profit may fall in the next six months.

Singapore-based PCI Ltd, which relies on Motorola Inc for about 40 percent of sales, said it may swing to a loss in its second half ended June as demand for its cell-phone liquid crystal display modules slows.

Brighter Days
To be sure, some component makers say the oversupply is short-term and continue to build plants to prepare for higher sales next year. Others are using the slowdown and subsequent lower interest rates to raise cash for future expansion amid the slump in technology shares.

Chartered Semiconductor Manufacturing Ltd, the world's third- largest maker of chips to customers' design, sold this month US$500 million of bonds convertible to stock. It needs to raise US$3.5 billion for a new Singapore plant to keep pace with rivals TSMC and UMC.

Sharp Corp is betting demand for parts will grow as an increase in digital television and other devices boosts demand for optical disks that store data.

Sharp, Japan's largest liquid crystal display maker, will spend 30.8 billion yen (US$250 million) to build new plants. The company will initially make laser diodes used in compact disc and DVD players at a plant slated to open in September 2002.

Others are counting on their US clients to contract out more production to cut costs.

HP, the second-largest computer maker, said it will give S$700 million in new orders to Singapore suppliers as it starts server production there, benefiting companies such as Venture Manufacturing (Singapore) Ltd. and Omni Industries. HP gave S$4.3 billion in contracts to local producers last year.

Agilent Technologies--a maker of test and measurement equipment spun off from HP--also said it will transfer all manufacturing of printed circuit board testing equipment to Singapore from Colorado in the US.

Growing sales in emerging markets such as India and China may also help make up for the decline in the US, said Ian Bertram, regional director for computer and peripherals research at Gartner Group in Singapore.

"There's a glut for the short term, but a 10-year investment will be very easily recouped," Bertram said. "There's still lots of demand."