June 17, 2009

Shortage and allocation concerns reappear in storage market

Converge Storage Update.

3.5" Drives.
There has been little change in the 3.5" HDD market month over month. Demand remains steady for 250 GB through 1TB capacity. The $2-$3 price uptick reported in our last Market Insights update for 160 GB through 400 GB devices remains. Similarly, contract pricing on the 750 GB to 1TB capacities is static during the same period. Lastly, we are still seeing liquidity in the 40 GB, 80GB, and 120 GB IDE HDDs.

2.5" Drives.
The terms “shortage” and “allocation” are being widely used to characterize the 2.5" market outlook. As a result, demand remains high even as we approach the historically slowest HDD quarter of the year. Again, this is particularly true but not exclusive to the SATA interface in the 160 GB through the 320 GB range. Meanwhile, pricing for these capacities has increased by $1-$2 each since last month’s report. Finally, we continue to see regular part-specific service demand in all SATA capacities.

Slashing of distribution inventories leads to real shortages

Converge Semiconductors and Integrated Circuits Update.

In tracking the market, Converge does not expect any significant changes in demand over the next several months, continuing the holding pattern that the IC market has seen in recent months. Manufacturing fabrication capacity is at the lowest it has been in a considerable amount of time, and distribution inventories have been slashed to minimal levels. However, for the second month in a row we have seen a month-over-month increase in real shortages due to these low inventory levels.

Some customers are still trying to reduce inventory levels, although the number of those doing so has decreased somewhat over the last several months. Nevertheless, there is still available inventory in the market for savvy bargain hunters.

Additionally, Converge is tracking a minor reduction in demand in some military sectors, indicating a slowing of new manufacturing over the next 6-12 months. Demand for military connectivity devices, however, appears to be unchanged, as the repair business remains steady.

The tiny Atom has yet to take off in the spot market

Converge CPU Update.

May was a steady month in CPU activity, with a focus toward new product launches at the Computex show in Taipei in early June. For this edition of Market Insights, our report will focus on two differing developments in the mobile and desktop markets: the failure of the tiny Atom to take off, and the surprise resurgence of the old heavyweight desktop processor.

The Intel Atom.
As the first generation of Atom processors slides into end of life, it is worth looking at its impact on the spot market. These low-cost, low-speed chips for netbook and other mobile applications arrived on the market with much fanfare but have not yet caught on to be actively traded in the open market. Intel estimated that the Atom accounted for approximately 20% of its mobile processor shipments in Q1 09, while spot market contributions were at a modest 6%-7%. The margins from the low-cost chips, combined with the frequent need to bundle with a chipset or small board, mean that the parts are not simple to move. It is interesting to note that as of yet, AMD has no direct competing technology to the Atom. Perhaps we will see a rise in demand as main models, such as the N270, are replaced by the N450.

Boxing clever.
The month of May saw a reemergence of demand for the desktop CPU at retail. In the past, the high cost of shipping retail desktops made them an uneconomical option, as the boxes contain a heavy cooling device that dramatically raises shipping costs while eroding margins.

With the introduction of inexpensive Intel cooling fans in the spot market, Converge has been able to bundle the fans and CPUs together in kits complete with full three year warranty providing a cost-effective solution to box builders. This has resulted in a resurgence in desktop demand in the spot market, as market cost variances are once again favorable.

Concern about DDR3 supply situation for next 2 - 3 months

Converge Memory Update.

Despite several contract price increases since the beginning of May, the DRAM market remains relatively quiet. Module activity in the spot market remains absent; however, we are tracking an increase in inquires for DDR3 - especially for server modules. Although there have not been any significant spot market buys for DDR3, there has been some concern regarding their supply situation for the next 2-3 months. Spot market pricing for DDR3 is much higher than direct prices, in some cases as much as 10%-15% higher. Converge believes that the box builders are increasing their output of systems with DDR3 memory for the upcoming build season. The DRAM manufacturers aggressively priced DDR3 to speed up the adoption rate, and it appears to be stimulating some demand. There do not appear to be large quantities of DDR3 product available in the spot market, so this could be a development worth watching.