Smartphone Makers Struggle With Chip Shortage

Posted on: Saturday, 21 August 2010, 09:26 CDT

Makers of smartphones are scrambling with the after effects of last year’s slowing economy as chipmakers struggle to ramp up production levels after scaling back due during last year’s global recession.

The result is that device manufacturers such as Motorola Inc. and HTC Corp. simply can't build enough smartphones to meet demand.

The problem is expected to last through the holiday shopping season, leaving rivals of Apple Inc.'s iPhone struggling to produce enough phones to compete with the popular device. It's also affecting some wireless network operators, some of which are seeing delays in upgrading their networks, and could even affect computer prices.

The issue is not an across-the-board chip shortage, but rather problems with certain components. However, if just one of the many vital processors required to build a smartphone is unavailable, the whole production line grinds to a halt.

The Associated Press reported that Sprint Nextel Corp. could not meet demand for HTC Corp.'s EVO 4G in some parts of the country. Meanwhile, Motorola Inc. said shortages of a number of chips are hindering its ability to supply enough of the new Droid X phones to Verizon Wireless.

Smartphone chips compete for production capacity with other processors at large factories, known as foundries, operated by major contract manufacturers such as Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. Makers of a wide variety of electronics also depend upon these factories.

The semiconductor industry had a rough time in early 2009, with February sales at just $14.2 billion, a 30 percent drop from the prior year, according to data from the Semiconductor Industry Association (SIA).

And while sales returned later in the year, anxious manufacturers had already scaled back investment in their factories. Indeed, capital spending fell 41 percent to $25.9 billion in 2009, after declining 31 percent the prior year, according to research firm Gartner Inc. Total chip production capacity also fell.

Foundries are now struggling to quickly ramp up production.

"The semiconductor guys are really continuing to operate on all cylinders," the AP quoted Linley Gwennap, president of research firm The Linley Group, as saying.

The SIA said the foundries are now running at 96 percent capacity, up from just 56 percent capacity at the depth of the recession.

Global investment in the semiconductor industry is also on the rise, with Gartner predicting an 84 percent increase this year to $47.5 billion.

However, it takes months to establish new production lines and upgrade existing ones, meaning the shortages will likely continue until next year .

A faltering economic recovery might also slow things down, Gwennap warned.

"Even where companies are facing shortages, they're saying 'Nah, I'm not sure I want to invest right now, because demand could turn down any minute.' That makes for a very difficult environment,â€