January 22, 2009

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.

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