Blog: Wireless Carriers and Electronics Shortage

It is interesting to note that while some telecom equipment makers are struggling, others are are unable to meet consumer demand. Interestingly, hand set makers are in a similar situation as well esp with popular models. WSJ reported in an article that wireless carriers are having trouble due to electronic-parts shortage.

A shortage of electronics parts is curbing sales at telecommunications-equipment makers, forcing them to scramble for supplies as manufacturers that slashed production fail to restore capacity fast enough.

Telecom-gear firms say they are hunting for new suppliers, paying higher prices for components and rushing deliveries by plane. Parts suppliers are hiring more workers, deferring plans to shut factories and rationing parts to their best customers—but demand still outstrips supply.

The problem stems from the recession, when electronics-component manufacturers scaled back production. That created fewer parts to sell to companies, such as Alcatel-Lucent SA and Telefon AB L.M. Ericsson, that make network equipment for wireless carriers.

In recent months, demand for that equipment has accelerated, as wireless carriers need it to increase their network capacity. The proliferation of smartphones is taxing wireless carriers’ existing networks, and the shortages are mainly of basic parts used in equipment to build and upgrade network capacity.

In April, Ericsson said first-quarter sales, which fell 9%, were “impacted by tight industry component supply conditions.” Equipment-supply constraints have hurt AT&T Inc.’s ability to improve its wireless network; the firm recently said it doesn’t expect those constraints to ease until the end of summer.

Shortages aren’t limited to network-equipment parts. Verizon Wireless CEO Lowell McAdam said in May that a shortage of screens produced by Samsung Electronics Co. is hurting sales of its HTC Droid Incredible phone. More recently, he said he expects the company will be able to meet demand for the phone within the next 30 to 60 days as shortages get corrected.

At Alcatel-Lucent, CEO Ben Verwaayen said in a first-quarter earnings statement in May that the telecom-gear maker wasn’t able to “fully satisfy customer demand for our products due to tightening components availability.”

Nick DeTura, vice president for supply chain and logistics in the Americas for Alcatel, said he began to notice parts including integrated circuits, transistors and power supplies—which are used to make wireless base stations, routers and switches—becoming more scarce in the fourth quarter.

Now, Mr. DeTura said there is a 50% to 150% increase in the time it takes his suppliers to fill orders for certain components. He is looking for additional suppliers, offering to pay higher prices for components and having parts delivered to him by plane rather than ship, a move that can cost millions of dollars in extra charges over the course of a quarter, he said.

Alcatel is also creating “buffer stocks” of components that are still available, buying 1,000 units when it would normally buy 10, in case the shortage spreads. Alcatel has even redeployed some of its ow$n staffers to help suppliers identify ways to increase and accelerate output.

“We’re doing everything we can…to get as much as we can of the component-shortage problem rectified in the shortest period of time,” Mr. DeTura said.

Alcatel and Ericsson declined to identify which suppliers are struggling to meet demand. Several Chinese components makers shut factories in the recession and have been slow to restore capacity. More broadly, suppliers now are adding shifts and hiring workers, but analysts say it could be three to four months before they get backup to speed.

STMicroelectronics NV closed a Dallas factory that made analog chips in 2009 and cut capacity in half at a Phoenix factory. The company expects the Phoenix plant to close by the end of 2010, but it is now redeploying equipment to other locations in order to avoid losing capacity, said Alain Dutheil, chief operating officer, and has already redeployed the Dallas equipment.

Texas Instruments Inc., which makes analog chips, has moved aggressively to ramp capacity back up. During the downturn, it laid off workers and idled portions of some factories for several weeks in the first quarter of 2009 to slow production after orders dropped 42% in the last quarter of 2008, said Gregg Lowe, senior vice president of analog at TI.

But as demand for chips started to increase in the second quarter of 2009, TI began hiring 2,500 manufacturing workers and installing new factory equipment. TI says its capacity is now 20% higher than its predownturn peak.