May 19, 2010

Set-top box builders' long life cycle problem

In today's blog, we'll take a look at the reverse logistics of the set-top box market.

From my perspective, there is plenty of room for improvement in the return process for set-top box builders. Achieving improvements in the returns process is actually not difficult when you implement life cycle planning principles. In this blog, I'll touch upon the issues of managing the long life cycle of these materials.

Set-top boxes are widely used and recognized in the consumer market. These are the cable and satellite boxes used with televisions and found in most households in many shapes, sizes and configurations. They have a very long life cycle, staying in homes for years after initial installation. But the life cycle itself is not the core of the problem. The real issue is the core commodities (memory, storage drives, etc.) in each set-top box that reach end-of-life while the box is still in use. This creates a problem for set-top box manufacturers, who have to ensure that they have a supply of materials to properly service and repair equipment that has been in the field for a significant amount of time. This ultimately leads to manufacturers making substantial last time buys (LTB) to handle end-of-life component issues – thus inflating their overall service parts inventory – or finding engineering solutions for the products to utilize other replacement materials.

Compounding this situation is the fact that legacy storage devices have been rapidly moving to the newer models and configurations in the hard drive industry over the past few years. In response, set-top box manufacturers have moved to newer architectures and discontinued the use of older technology. But this response raises several issues: Vendors can't get an ample supply of materials or support older architectures, or if they can, it's at significant cost. The end result is that manufacturers are forced to choose between two options: either negotiate for LTB (significantly increasing service spare inventory levels) or find an in-house engineering solution. It's a risky business proposition in both cases.

The third option that I recommend is to more closely evaluate the manufacturers' return stream, meaning boxes or parts that come back from service calls in the field. Typically, when these parts are returned, they are an afterthought and end up ultimately being recycled or liquidated for pennies on the dollar. These materials are usually stored for long periods before disposition and are not factored into the forward supply chain. In this example, the manufacturer or the service provider might be receiving significant numbers of no-trouble-found components from the return stream, or reverse supply chain, that they just don't realize they have.

The valuable parts inside the returned set-top boxes could be harvested to be reused or remarketed back to the service supply chain, removing the need to purchase large quantities of LTB components. However, this option is usually not considered. And rightly so, because teardown is generally not a core competency for most manufacturers and is considered a cost center.

Utilizing the skills of a third-party service provider can remove this roadblock. Third-party reverse supply chain organizations, such as Converge, are highly skilled in tear-down, testing, kitting, packaging and shipping materials back to the manufacturer or service provider for reuse in their service spares inventory. A third party can also properly recycle materials or save any valuable components that meet testing requirements for future use.

This solution is environmentally friendly because it minimizes waste while maximizing reuse. It is also cost-effective because it produces a stream of service materials that are already owned by the manufacturer while removing the need for costly LTB. And it doesn't cost as much as you would think. In fact, a service like this is essentially a net gain for the customer.

What are your thoughts on reusing tested and screened materials in the service environment?

May 12, 2010

LCD market ready for a storm of activity

Converge LCD Update.

The LCD market has been reasonably stable as we move deeper into the second quarter of 2010. Seasonal factors are a primary contributor to the recent downward slope of demand, following the holiday-crowded first quarter. A number of factories are not quoting firm pricing in May on TV panels that are 40" and larger. Instead, clients with forecasts are advised to negotiate contract pricing on a case-by-case basis. Pricing on sizes of 26" through 37" remains stable, with fluctuations in single-digit amounts. A high level of inventory in the distribution channel is another reason dictating the current market conditions. Overall, TV panels yield higher profits in comparison with notebook and desktop panels. As we approach the third quarter, when OEMs finalize their forecasts to meet the year-end demand, panel makers will be juggling to expand production capacities for TV panels at the expense of other product lines. Panel shortages and pricing instabilities may very well be in store in the near future.

The first product segment to feel the effect of shifting production capacities is notebook panels. Although not officially announcing the fact, factories are surely and quietly realigning their production lines to maximize profits in the third quarter. Given the ongoing material shortage and that Foxconn will be consuming a considerable portion of the Chimei-Innolux output, a shortage on notebook panels appears imminent. If such speculations become the consensus of the market, Converge expects to see upward pricing pressure in the open market in anticipation of the panel shortage as early as the second half of May. An estimated 3% to 5% price increase between June and July does not seem out of place at this point. The shortage will potentially spill over from the mainstream 15.6" and 17.3" to all other sizes. Meanwhile, the strong demand from the service industry for 14.1" with WXGA resolutions and CCFL backlight will likely stay center stage throughout most of the quarter, particularly for panels made by AUO and LG Philips.

The market for desktop panels is fluctuating modestly in May, with factory pricing largely unchanged for most sizes. Average lead time quoted by the factories is still in the four-to-six-week range. Little change took place in demand from April to May — although factory output volume as well as pricing may be due for adjustment amid the upcoming realignment of production lines. Like for panels for other applications, industrial panel supplies are also expected to be tighter as we approach the end of the quarter. For the month of May, Converge sees increased booking in preparation for the upcoming shortages. Despite a relatively quiet April and May, the LCD market seems to be staging itself for a busy third quarter. Stay tuned.

HDD pricing slopes expected to continue into June

Converge Storage Update.

Higher-capacity 3.5" desktop SATA HDD pricing continues to drop. In our last Market Insights we reported a price drop in the 1.5 TB and 2.0 TB capacities. Now these price declines are occurring in the 750 GB and 1 TB drives as well. The 750 GB models are selling in the high $40 to low $50 range, and 1 TB drives can be purchased in the low to mid $60 range. Meanwhile, the 1.5 TB has dropped to the high $80 range, and 2 TB can be found at around $120. Converge believes this is due not only to the seasonal slowdown in the HDD market but also to reports that a 3 TB model will be introduced in the market later this year. Additionally, analysts are reporting that the big PC builders are pressuring the major HDD manufacturers for improved pricing after seeing HDD margins soar in 2009 while experiencing slim margins themselves. As a result, we expect the pace of this erosion to continue through May and into June. While price is eroding in the higher-capacity 3.5" desktop SATA HDD, this has had little effect month over month on the lower capacities, with prices off by only $1 to $2 on 80 GB through 500 GB drives.

Activity in the enterprise market is heating up, with the SATA interface emerging as the preferred interface. The higher-capacity ranges coupled with lower costs have significantly displaced the SCSI and Fibre Channel HDDs. Manufacturers continue to push development of larger-capacity, faster and quieter offerings in the SATA interface. In April’s Market Insights report, we noted the release of Western Digital’s newest addition to the Velociraptor line — a 600 GB, 10K RPM, 32MB, 2.5" SATA HDD. As previously mentioned, Seagate is believed to be releasing a 3 TB 3.5" HDD later this year, to be followed by a 1 TB 2.5" model. However, the SAS drives are slowly gaining favor in this space. They can’t compete dollar for dollar on cost per drive with SATA. However, the available speeds per capacity, as well as reliability, are justifying price for some and thus gaining favor and market share.

Finally, the IDE shortage continues. This is most evident in the 2.5" FF, resulting in soaring open market prices. This was reported last month and remains unchanged. Prices are up $5 to $7 per capacity. The 40 GB, 60 GB and 80 GB 5400 RPM models are selling for approximately $27, $30 and $36, respectively. With demand unlikely to change any time soon, we expect pricing to remain elevated for several months.

Lead times and shortages remain steady

Converge Semiconductors and Integrated Circuits Update.

Lead times on most of the shortage items Converge has been tracking over the past six to eight months have remained steady. There are some products, most notably the TI TPS data converters and MSP430 series microcontrollers, that are seeing some easing in lead times, although it’s too early to tell if this is temporary due to a slight dip in overall demand during the past several weeks. Lead times continue to be long, however, in their DSPs, as some products are out to 28 weeks with open market prices climbing to record highs. Optoelectronic lead times remain steady in the 16-to-24-week range. Some families of On-Semi diodes are still tight, while others have loosened slightly. Microsemi diodes are still the kings of stretched lead times, with some pushing out over 50 weeks. AMCC has joined Atmel, Infineon, Freescale and TI with some microcontroller lead times out over 20 weeks.

Many of the spot shortages we have been tracking have been resolved by product “trade off” in the manufacturing process, allowing for delivery on some products while forcing others to go short. Chip manufacturers are still not sold on the strength of any global recovery and as a result continue to hold back on increasing capacity. Instead they are opting to make the best of what they have currently available. This is causing the easing of lead times of specific chips within a product type, while allowing for deliveries of others within that same product type to lengthen. In other words, shortening the lead times of a part that has been a problem at the expense of another.

All in all, barring an unforeseen downturn in the economy, we expect more of the same market conditions we’ve been watching for the past six to eight months to continue through the summer build season.

Market dynamics offering double-digit margin savings

Converge CPU Update.

In April the market was active, as shortages and savings were in abundance across the range of processor families. This positive bounce, which was unanticipated, bucked the trend set in Q1 with sluggish demand across the main mobile and desktop markets.

In particular we saw the full force of the Intel Arrandale shortage, with the I-330M, I3-350M and I5-430M all suffering from depleted stock as OEMs moved from the Intel Montevina platform. This resulted in parts changing hands at inflated pricing during April. We expect the I3-330M to settle in the $100–$110 range, but spot market prices of around $130 have not been uncommon.

Currently, we are seeing a swath of excess inventory in the market as the Nehalem, Wolfdale and Montevina families go end of life. The T7700s, T8100s and P7350s are among the CPUs selling below their direct pricing in the spot market. Server chips continue to deliver savings, particularly in the 45 nm Nehalem and Dunnington families. In some instances, double-digit margin savings can be attained, making this an opportune time to gain a price advantage as we cross between new and old architectures.

Expect memory prices to slide in May, rebound in June

Converge Memory Update.

The memory market, specifically for modules, has been showing some signs of weakening over the past four weeks. Although activity in the spot market for DDR2 and DDR3 modules has been relatively light since late February, pricing has remained stable. However, as a result of the lack of spot market procurement, prices for 2GB DDR2 and DDR3 modules are showing signs of coming down. Another factor that Converge believes has added to the pricing instability was the unexpected announcement that the contract price for 2H April had settled at stable to slightly down. As Tier 1 box builders weigh the option of reducing memory content for upcoming shipments in consumer desktop and notebooks, supply seems to be catching up.

Judging by the tone of numerous memory vendors, we could see the spot market price continue to slide a little over the next three weeks as we approach the long holiday weekend in the U.S. Converge believes that any further drop for DDR2 and DDR3 memory will be minimal. Pricing is expected to stabilize and possibly rebound by the beginning of June as the industry begins to prepare for the build season.