Some confusion exists in the wireless industry over whether mobile-phone-component shortages are affecting the handset supply in the United States.
Major handset suppliers say they aren’t struggling with component shortages, but one major carrier said its lower subscriber additions in the third quarter were caused by handset shortages stemming from an undersupply of components such as flash memory and soft filters.
AT&T Wireless Servicessaid it was constrained in adding customers last quarter because of capacity problems and inventory problems. One of AT&T Wireless’ major vendors, Nokia Mobile Phones, the world’s largest phone manufacturer, said component shortages have not affected the company’s handset production.
“We’re building to forecasts for our customers,” said Megan Matthews, Nokia spokeswoman. “We’re not having any problems with components. We get components from more than one supplier.”
Another large AT&T Wireless handset vendor, Ericsson Inc., did not answer requests for information, but told RCR last month that it was not struggling with components shortages either. However, Ericsson is shifting its product cycle to ramp up production of the T-series handset, and the manufacturer recently said production of the T-series was not fast enough to meet market demands in the third quarter.
“We pulled back in a lot of places because we were concerned about inventory shortages,” said Ken Woo, director of corporate communications with AT&T Wireless. “Given that situation, we didn’t want to give customers another negative experience … We should have enough inventory for the fourth quarter.”
AT&T Wireless added 269,000 subscribers in the third quarter, down 17.4 percent from the previous year and down significantly from 473,000 additions in the second quarter. The nationwide Time Division Multiple Access carrier said it stopped advertising in some markets because of the shortage and capacity problems.
Analysts suspect AT&T Wireless’ handset-shortage problem is indirectly associated with the undersupply of components. AT&T Wireless’ shortages, they say, primarily stemmed from other vendors missing shipments, and all carriers are having a hard time securing shipments of handsets beyond what they forecasted with vendors because of the tight supply of components.
AT&T Wireless expected volume shipments this year from vendors Panasonic Telecommunications Systems Co., Mitsubishi Wireless Communications Inc. and Motorola Inc. Motorola began shipping tri-mode TDMA handsets this year but is expected to ramp up volume shipments to AT&T this quarter. Mitsubishi is commercially ramping up manufacturing for its new quad-mode handset that will allow customers to access AT&T Wireless’ digital, analog and Cellular Digital Packet Data network, say analysts. Panasonic and AT&T entered into a two-year supply contract for tri-mode handsets in early 1998, but the carrier has yet to see any product from the vendor.
“Vendors were not able to deliver on these contracts, and they wound up having a shortage of phones,” said Phil Redman, senior analyst with the Yankee Group in Boston. “This could get worse. As the next generation of handsets come out, most manufacturers are focused on the larger size of the market. They’re not focused on TDMA.”
“AT&T is very supply-dependent on Ericsson and Nokia,” said Brian Prohm, analyst with Dataquest. “There’s not many global TDMA handset vendors that see this market as lucrative.”
Carriers must forecast handset supplies many months in advance. The components problem comes into play when a carrier is looking to purchase handsets beyond its forecasts since wireless growth is exploding worldwide this year. While handset vendors had ample access to components just six months ago, they now are having difficulty securing extra amounts now. And many manufacturers are dipping into their reserved inventory, say analysts.
“What you forecast is what you’re going to get,” said Matt Hoffman, analyst with SoundView Financial Group in Stamford, Conn., said of carriers. “The problem is if you’re looking for more handsets.”
Compounding AT&T Wireless’ problem, say analysts, is the hot demand for TDMA handsets in Latin America, where carriers reportedly have been willing to pay more for the phones.
“If you underestimate the need, you could be up against capacity and allocations to other carriers, especially with some of the TDMA operators in Latin America,” said Prohm. “Demand in Latin America has been so high this year that some of the secondary and tertiary channels are shipping product there.”
Other U.S. operators, primarily Global System for Mobile communications carriers, did experience some shortages during the third quarter, but most expect enough inventory for the holiday season. Analysts say enough new CDMA models entered the market to keep supplies up, while GSM carriers experienced some temporary shorages of phones due to better-than-expected subscriber additions.
Nokia is increasing its manufacturing capacity and shipments to VoiceStream Wireless Corp., the company said. VoiceStream also has added Motorola handsets to its indirect distribution channels and will introduce new consumer model phones from Mitsubishi.
AT&T believes it has stock-piled enough Nokia and Ericsson handsets and expects Motorola to come on strong in the fourth quarter. TDMA operator BellSouth Cellular Corp. said it has enough supplies for the holidays, but expects shortages of some handset models because of the components-supply problem.
“The market has clearly grown so much beyond everyone’s expectations that its reasonable there will be component issues that pop up here and there,” said Prohm.
In general, handset analysts don’t expect widespread handset shortages this quarter, historically the strongest quarter in the wireless industry. But if fourth-quarter numbers fall in line with the staggering demand for wireless phone service this year, the wireless industry is in for some astounding numbers, which could put a strain on handset suppliers and keep subscriber additions from reaching the stratosphere.
“Demand is great for handsets,” said Nokia’s Matthew. “We ship them as fast as we can produce them.”
Jeffrey Schlesinger, technology analyst with Warburg Dillon Read in New York, believes subscriber growth in recent quarters, though strong, could have been even stronger if there wasn’t a shortage of components. The undersupply of components is largely due to better-than-expected demand, a good problem.
Worldwide handsets sales have increased by 10 million every quarter this year, said Schlesinger, from 50 million in the first quarter to about 70 million last quarter. Schlesinger estimates the world’s handset manufacturers could ship up to 265 million units in 1999.
“Supply and demand continues to exceed even increasing supply,” he said. “Everyone is selling whatever they can make globally … There’s a shortage problem because there is 10 percent more demand out there they can’t satisfy.”
Analysts say component shortages could have more of an impact on handset supplies next year since manufacturers are in the midst of negotiating component inventories for 2000. Most major vendors secured an adequate supply of components earlier this year to meet carriers’ 1999 forecasts.
Schlesinger said many component suppliers are aggressively moving to increase production capacity, which should ease shortage concerns next year. Qualcomm Inc., whose handset division suffered with the shortages in recent quarters, said the situation is easing somewhat.
