The explosive growth in smart devices is fueling a shortage of a tiny electronic component, which could drive up prices across a wide array of technology ahead of the all-important holiday sales season.
The component, a multilayer ceramic capacitor, or MLCC, is sometimes no bigger than a grain of sand and usually costs less than a penny per unit, but industry experts call it the workhorse of the electronics industry. MLCCs are used in large volumes on circuit boards to filter noise, store power and control the flow of energy, among other functions. A single smartphone can contain several hundred, and the industry manufactures trillions each year. But as consumer devices get smarter, more MLCCs are needed than ever before, creating a shortage that is trickling down the supply chain and threatening higher prices and reduced availability for many devices in the third and fourth quarters of this year.
"Right now, all we do morning, noon and night is talk about MLCCs and deal with MLCCs and have conversations with customers and vendors about MLCCs," Tobey Gonnerman, executive vice president of global trade at Fusion Worldwide, a global independent distributor of electronic components, said in an interview. Before the shortage began, Gonnerman said he typically had perhaps one conversation about MLCCs per quarter.
"It's really taken over our life," he said.
Kamran Malek, vice president of marketing at Advanced MP Technology Inc., a global distributor of electronic components that also provides supply chain solutions, said the shortage emerged around late 2016, early 2017.
"At that point, demand started to exceed the supply capability," Malek said. New verticals requiring MLCCs include electric cars, smart homes and the internet of things. Intel Corp. estimated the number of IoT devices will grow to 200 billion by 2020, up from 2 billion objects in 2006, citing its own data as well as that from data group IDC and the United Nations.
"We had some of these [devices] before but we didn't have the huge numbers produced," Malek said, adding that the number of capacitors needed per device is also growing.
"As they increase the number of functions in each device and each appliance, that requires more capacitors," he said.
Dennis Zogbi, CEO of Paumanok Publications Inc., a market research and consulting firm focused on the passive electronic component industry, said an even bigger problem is that manufacturers have moved toward more complex MLCCs, especially in cars and smartphones.
Staff members work on the production line at Foxconn,
As an example, he pointed to Apple Inc.'s iPhone X, which contains a few different capacitor sizes. For each component being used, Apple, like many other companies, is "pushing the maximum number of layers in those part sizes and because of that, it's sucking up all of the available stacking capacity," Zogbi said in an interview. He said this capacity is the real bottleneck in the shortage, as it involves manipulating ceramic and metal nano-technology that is "no bigger than a grain of salt." Very few companies have the expertise to do this.
In the current environment, Zogbi said companies are offering to pay more to get the parts they need, creating a "competitive" market for MLCCs. Companies that make the component — such as Murata Manufacturing Co. Ltd., Samsung Electro-Mechanics Co. Ltd. and Taiyo Yuden Co. Ltd. — "are being offered more money for what they produce so that companies can get in front of the line and make sure they have continued supply for ... the Christmas production season," Zogbi said.
Gonnerman said Fusion is seeing pricing that is "20x, 40x or even 200x the standard cost." Like Zogbi, he said this increase is driven in part by the pressure to produce ahead of the upcoming holiday season.
Executives at ARRIS International PLC, a major supplier of equipment such as modems and set-top boxes for the U.S. cable industry, recently discussed the impact the shortage is having on its business. ARRIS CEO Bruce McClelland said during an Aug. 1 earnings conference call that the company will "adjust prices in the second half of the year and 2019 to reflect increased component cost, primarily memory and MLCC capacitor components."
McClelland said ARRIS and others "are in an environment where trying to secure supply is on a week-to-week basis and prices fluctuate pretty significantly," though the CEO noted that ARRIS is trying to minimize the premiums it is paying for parts.
ARRIS has been "pretty upfront and open with customers on what the price increases are" for the second half of 2019, he said, adding: "It's been [a] bit of a journey on that and [a] difficult discussion with many customers, but it's a reality of the entire market at this stage."
ARRIS is far from the only company facing tough conversations with customers. In late June, The Wall Street Journal reported Sony Corp.'s PlayStation 4 consoles were in short supply because engineers at Sony ran out of the MLCCs they needed, and Advanced MP Technology's Malek said he has heard rumors that the MLCC shortage could impact the release of Apple's next iPhone.
"One capacitor can stop the production of a device that's going to be sold for $1,000 … if it's missing, the whole thing stops," Malek said.
An Apple spokesman did not respond to a request for comment.