What's Holding Back Tech

When mobile-phone giant Nokia (NOK) reported a surprising third-quarter loss of $832 million Oct. 15, it placed some of the blame on shortages of handset components. "We would have sold more phones in the third quarter without the capacity constraints," declared Chief Executive Olli-Pekka Kallasvuo.

Suddenly, after a yearlong slump, there's a bounce back in demand for tech gizmos—everything from smartphones to laptop PCs. Market researcher Gartner (IT) had expected PC shipments to decline 5.6% in the third quarter but instead found that sales had increased by 0.5%. Now spot shortages are showing up in a wide range of components, including digital camera modules, LCD screens, and memory chips, because production was lowered dramatically during the recession. Think of the global tech industry as a huge machine that has been running at half speed but sputters and backfires as it throttles up.

The coming months could be tricky. Manufacturers must gauge demand accurately amid economic uncertainty. Their suppliers have to ramp up production without overshooting. The ones that manage supply chains best will come out ahead as the recession eases. "Most suppliers are in true survival mode, and they're going to be very conservative about expansion," says analyst Eric Pratt at tech market researcher iSuppli.

Given the depth of the recession, the sudden rekindling of demand in late summer surprised tech leaders. Microprocessor maker Intel (INTC) says it's garnering more orders than it expected, including for its new processors for corporate server computers. It's ramping up inventories.

But imbalances could persist in other industry segments. No company has built a fabrication plant for the essential dynamic random-access microchips found in computers since 2007. James Kim, vice-president at Korea's Hynix Semiconductor, the second-largest DRAM maker, expects supplies to be tight through next year. Meanwhile, DRAM prices increased 40% between the first and third quarters, according to market researcher IDC.

When the economy shifts, it can take months to bring dormant factories to life. Texas Instruments (TXN) completed a $320 million factory in Texas in 2006 but never started it up. Now TI is installing equipment in the factory but won't be manufacturing chips in high volumes there until late 2010.

MANAGING FLUCTUATIONSome tech companies made moves during the downturn that are helping them react more quickly today. Linear Technology (LLTC), which makes chips for cell phones and cars, decided last year to keep its four plants operating and didn't lay off employees—unlike its competitors. Instead, it staged rolling factory shutdowns. Now it's able to fill orders in two to four weeks. "Our sense was the business would come back, but we didn't expect it to come back so quickly," says Chief Executive Lothar Maier.

Will tech industry demand keep climbing? PC makers have high hopes that the release of Microsoft's (MSFT) Windows 7 operating system will stimulate powerful demand for new PCs, but analysts are skeptical. "People won't buy new PCs for Windows 7. They'll only buy them if they need them," says analyst Mikako Kitagawa of Gartner.

In fact, some analysts say today's uptick in orders for PCs and handsets is caused mainly by retailers restocking in anticipation of strong holiday sales. If consumers don't spend, the tech industry's mini-recovery will turn into a bust—and nobody will be fretting over component shortages anymore.

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