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Shortages of basic electronic components are hitting makers of computers and mobile phones, and may be followed by price increases, analysts and manufacturers say. Cheap resistors and multi-layer Ceramic Capacitors (MLCCs) are in short supply, said Mei Chen, who handles investor relations for Yageo Corp, one of Taiwan's largest manufacturers of what are known as passive components. "Companies like Acer typically will order seven to ten days in advance, but because of the shortage now, these companies are placing orders out as long as three months," said John Brebeck, electronic components analyst at Jardine Fleming Securities in Taipei. "PC unit sales are growing very strongly this year," Brebeck said, "also [mobile phone] handset sales are very strong this year. Passive components are used extensively in both. Also you've got some new products, like digital cameras, which are starting to sell well." Not only are more products being sold, he said, but they tend to be more complex, and use more passive components than in the past. According to industry sources, said Brebeck, the shortage of passive components will last "at least through the end of the first half of next year." The same sources expect Yageo to increase prices during the second half of 1999. Last year, price competition in the cheap resistor market pushed the market price down 25 per cent on average, said Chen -- some prices went down 40 per cent. Profit margins fell to single digits, and many companies closed down or dropped out of the market. Companies that stayed in the market shelved expansion plans, especially those in Japan and Korea. Yageo, alone among Taiwanese companies, continued to expand capacity, despite the falling margins, claimed Chen. Yageo built new production facilities in China last year, Chen said, because many of the company's customers had moved their factories to the mainland. Yageo reduced costs 30 per cent last year in an attempt to cope with price erosion, she said. Despite this, the company's gross margins last year fell from 30 per cent to 27 per cent. Even if components manufacturers start expanding capacity now, Chen said, there would still be a four to six month lag before their new products reached the market. New entrants to the market face technological and financial entry barriers, Chen said, and returns on investment are slow. "We expect from June 99 to June 2000, our competitors' production capacity of MLCCs won't expand too much." Yageo estimates that it holds around 13 to 14 per cent of the global cheap resistor market, in volume terms. Yageo has recently entered the MLCC market, monthly output will be 300 million capacitors by the end of this year, increasing to 500 million next year, according to Chen. Yageo aims to capture about 15 per cent of Taiwan's MLCC market initially. Executives at Team Young, a local MLCC manufacturer, believe their industry is at the beginning of an upturn that may last two years, said Brebeck, who visited Team Young last week. Team Young's current inventory is below its normal one month level, and the company is experiencing shortages of several raw materials, he said. "Their sales growth is constrained more by production capacity than by demand." Team Young expects MLCC prices to "increase by five or six per cent in the second half of 1999." Jonathan Yi, of local motherboard maker, Shuttle Inc, said that the shortage was affecting manufacturers of computer motherboards. However, he said, they are also facing a more serious shortage of chipsets, a vital motherboard component. Supplies of Intel chipsets are only meeting about half of the demand, he said. Shuttle's production averages about 150,000 motherboards a month, according to Yi. ®

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