Parts shortage plagues makers of tech gadgets

The Wall Street Journal

SANTA CLARA, Calif. — When demand for Palm handheld computers exploded this year, nearly everyone at Palm Inc. rejoiced.

Not Dinesh Raghavan. "All of a sudden, we were scrambling," says Raghavan, Palm’s vice president of global-supply-chain operations. The company needed more computer chips and liquid-crystal display drivers to meet demand, and it was Raghavan’s job to find them.

With his small team of commodity managers, the executive immediately hopped on planes to Japan, Taiwan and South Korea to start begging suppliers for parts. At one meeting in Japan, he told the supplier that he needed to raise his order from 10,000 components a month to 150,000 a month. The Japanese executive gasped and asked, "Are you sure? What changed?"

"We made a mistake," Raghavan said he replied. "What can you do to help us?"

Unfortunately for Palm, the answer was not much. Even now, the company hasn’t found all the parts it needs, and neither have lots of other tech companies that have been caught short by a surge in demand for their products. With consumers displaying a seemingly endless appetite for cell phones, handheld computers, video games and other electronic devices, shortages for all manner of chips are cropping up at levels not seen since 1995. And those shortages are hitting manufacturers right as the crucial holiday shopping season approaches.

A few weeks ago, Sony Corp. announced that production of its much anticipated PlayStation 2 gaming console would be halved, in part because of component constraints. And Sony executives have said they expect the lack of available computer chips to plague makers of products as broad-ranging as DVD players, televisions, camcorders and other digital media products. In many cases, that will translate to shortages for consumers at Christmas.

In a sign of how onerous the constraints are, prices charged to manufacturers for a type of chip called flash memory — used in all manner of electronic gadgets — have jumped to $4.30 a megabyte this year, up from $2 a megabyte last year, according to Gartner Group.

New capacity is hard to add when demand rises suddenly. A flash-memory production line, for example, typically requires a $1.5 billion investment and a two-year lead time.

Concerns about shortages have already affected the stock prices of cellular-phone makers this year, though the companies say that in their case the situation has eased. A range of smaller electronics makers, such as those that produce MP3 music players, are also being affected by shortages of a variety of parts, says Jim Handy, a Gartner Group analyst.

But the pinch has been particularly strong in the burgeoning handheld-device industry. The shelves of many electronics retailers haven’t had any Palms or the rival Pocket PC devices that run Microsoft Corp. software for months.

The constraints have hurt sales: Analysts estimate the company could have sold 50 percent more devices over the past quarter if it had had enough parts.