January 22, 2009

PATA interface continues to command higher pricing than SATA

Converge Storage Update

3.5" Drives
Demand and sales volume decreased significantly during the second half of December 2008. However, this trend has reversed in early January, although pricing continues to decline. Direct cost on the 1 TB HDDs is approximately $100, while the 750 GB capacity is in the low $80 range. This sharp decline, quarter over quarter, has impacted open-market pricing on all lower capacities. The 500 GB, 400 GB and 250 GB can be found at $45, $37 and $28, respectively. The 320 GB is not readily available. PATA interface continues to command higher pricing than the SATA interface, at $2 to $3 per drive. Although we are seeing volume sales, it is opportunity and price driven.

2.5" Drives
Converge has seen increased activity in the 2.5" market. This activity is specific to the SATA interface in the 160 GB capacity and higher, and is part number driven. For example, most of the requirements we are receiving are for the Toshiba and Western Digital brands. Otherwise, the market continues to decline with little speculative purchases. Outside of the demand-driven market, pricing for the SATA interface can fluctuate widely because many integrators need to purge excess inventory. There is little change in IDE pricing, month over month, in the 80 GB capacity and higher. Meanwhile, pricing for the lower capacities has dropped significantly, with 20 GB, 30 GB and 40 GB HDDs selling at $16, $19 and $22, respectively.

Early indications of renewed tightness on mil-spec connectors and Microsemi diodes

Converge General IC Update

December activity was softer than normal, caused primarily by some extended holiday shutdowns due to the slowing economic climate. December is typically a time when OEMs and CEMs focus on moving excess inventory - a strategy that also was affected by the economic climate in the form of greater emphasis on excess opportunities.

December did present short-term procurement problems for some customers who needed Freescale processors, which have shown tightness for several months, as well as some Broadcom networking devices such as Ethernet switches, controllers and transceivers. Altera still is experiencing some spot shortages, but some of the difficulties on Analog Devices products seem to have eased. As this trend continues into January, we also see early indications of renewed tightness on mil-spec connectors and Microsemi diodes. The tantalum capacitor shortages, driven by raw material price increases that were anticipated several months ago, have yet to materialize, while the isolated ceramic capacitor shortages we experienced through most of last year have disappeared.

Opportunities for cost savings still are in demand as companies try to take advantage of current excess opportunities in the market.

Semiconductor chips present margin opportunities

Converge CPU Update

A shortage market when least expected
January was forecast to be a grim month for the CPU market, with demand expected to slow after a weak holiday buying period. Instead, a series of mobile CPU shortages combined with early price drops encouraged OEMs to sell inventory into the open market, creating new cost-saving opportunities.

There are a number of factors contributing to this activity. Intel cut its supply of TJ midrange OEM CPU models, while a cluster of shortages on T2390, T3200, T3400, T4200, T5800, T5900 and T6400 chips caused prices to increase by 10%.

In addition, the upcoming Chinese New Year in late January typically sees a reduction in a significant portion of the supply channel, which means that beginning-of-the-month rising prices have no time to soften.

Launches and drops
January 18 saw new Xeons, desktops and several mobile CPUs arrive on the market, prompting price drops on existing models. This had a domino effect, as several OEMs that were affected by these changes pushed their inventory parts into the spot market.

This dynamic continues on a daily basis. Converge recommends that OEMs and CEMs monitor the spot market continually for cost savings, as semiconductor chips are available in various quantities and present margin opportunities.

A grim PC outlook provides opportunities
Intel’s profit projections act as a weathervane not only for our CPU market, but also for the computer market as a whole. After two profit warnings in December 2008, it was no surprise when the chipmaker announced a 90% profit drop for its fourth quarter. This was the first time in 20 years that its third quarter earnings were higher than its fourth quarter results.

Intel’s explanation of its shortfall echoed the concerns of many PC builders: Managing inventory levels was going to be a major challenge for the coming months.

However, Converge believes this situation creates positive buying opportunities within the open market, as independent distributors are adept at identifying excess inventory creating cost saving opportunities.

Converge predicts SDRAM activity will continue

Converge Memory Update

Activity in the DRAM market has been surprisingly steady in the first few weeks of January, with most activity taking place on SDRAM PC133 chips. While the DDR2 market remains quiet, SDRAM is experiencing a boost in open-market activity. Converge believes that SDRAM activity will continue for several reasons. Contract manufacturers still use large quantities of 128 MB, 256 MB and 512 MB PC133 chips. Many of the DRAM manufacturers are producing less SDRAM and soon the technology will be phased out all together. And pricing still is low enough for contract manufacturers to take advantage of cost-saving opportunities, before the market starts to dry up heading into the second half of this year. While we believe that the DDR2 market will remain in oversupply for at least the first half of 2009, SDRAM could be where the opportunities exist in the open market.