Instead of a brand new cell phone under the Christmas tree, will Santa Claus be leaving an IOU? Already strained by shortages of color screens, image sensors and NOR flash, the handset supply chain is being additionally stressed as the scarcity of parts spreads to other commodity areas.
While most companies EBN contacted by EBN last week reported no serious disruptions due to component allocation, iSuppli Corp. asserted that demand for high-end handsets in the second half of the year is outstripping anyone's expectations. The El Segundo, Calif., market research firm last week raised its 2003 forecast for cell phone shipments from 480 million to 510 million units. iSuppli also bumped up its 2004 forecast by 10 million units to 550 million.
As the preholiday rush kicks in, shortages are spreading to components including STN LCD drivers, voltage-controlled oscillators, and pseudo SRAMs and NAND flash used in stacked packages designed specifically for handsets, according to iSuppli analyst Dale Ford.
Japan's Renesas Technology Corp. supplies this configuration of NAND, which it calls AND, although it's a minor portion of the company's overall flash production.
“The 256Mbit AND part that's used in cell phones has fewer end markets, but it comes from the same fabs as the 1Gbit devices that go into flash cards for digital cameras,” said Tad Keeley, AND flash marketing manager at subsidiary Renesas Technology America Inc., San Jose. “If a manufacturer is producing a lot of 1Gbit parts they may come up short for a time on 256.”
Keeley said that virtually all AND and NAND suppliers have resorted to allocation, though the severity is difficult to judge because of double ordering. Few cell phones use this type of flash, so the shortage is not as pronounced as with flash cards, he said.
Based on confidential information from clients, iSuppli believes service providers are not getting all the phones they want because OEMs are unable to get the components they need.
“It's not to the extent that lines are down, but procurement departments are really scrambling,” said iSuppli analyst Greg Sheppard. “There's double ordering taking place, and we're starting to see price increases creep in.”
Other companies did not support that assertion.
Major service providers, for example, reported that handset inventory levels are adequate, while OEMs said that component shortages have not interrupted handset production.
Siemens Information and Communication Mobile Group hasn't experienced specific shortages, but the Munich, Germany-based OEM said it is not prepared to handle much upside demand.
“We are able to fulfill all of our orders,” said a Siemens spokeswoman. “However, we are at our production limit right now. If we had to supply more to an operator because a competitor could not, it would be pretty difficult for us.”
iSuppli is basing its forecast hike in part on this week's rollout in the United States of local number portability (LNP), which allows handset users to keep their phone number if they switch service providers. The feature was introduced in Europe last year, but few users took advantage of it, said the Siemens Mobile spokeswoman.
To entice subscribers, iSuppli's Ford said, service providers are giving away new phones with features like integrated cameras and color displays–to the tune of tens of millions more handsets than they expected to ship this year.
“If suppliers were going by the common consensus of 440 million units in 2003, all of a sudden they're trying to make up for another 70 million units of production,” he said.
Even before the revision, iSuppli's handset outlook was among the most optimistic. Semico Research Corp., Phoenix, is forecasting 430 million units this year, while leading cell phone maker Nokia Corp. projects a global number of 460 million. At CIBC World Markets, San Francisco, the expectation is 484 million units.
“When nobody agrees on what's going on, it means there is probably a change about to happen in the marketplace,” said Semico analyst Jim Handy. “Semico believes that pent-up demand is starting to loosen, and it's not just cell phones. It's also PCs and telephone network equipment updates.”
That people disagree on a future number is not surprising. What's curious is that almost a year later, no one can agree on how many handsets actually shipped in 2002. Estimates range from 393 million to 447 million.
Mismatched expectations, compounded by component shortages, are what make the cell phone supply chain so tenuous, said iSuppli's Ford.
Whatever problems do occur are likely to smooth out by the first quarter, most seem to agree.
A spokesman for Verizon Wireless (Bedminster, N.J.) said the company has “adequate supply of phones in stores,” though he added that the rollout of LNP in the United States is expected to drive an increase in handset unit sales next year.
“The vast majority of people [who use LNP] are going to need a new cell phone because of incompatibility between systems,” said the Verizon Wireless spokesman. “Even if you change providers within the same technology, you're still faced with the fact that certain models have never been tested on a specific network.
“We won't know what the impact will be until it actually happens,” he said. “I don't know that we've put in additional orders because of it.”