Shortage Drama Hits the Small Screen

Everywhere you look these days, people are carrying portable devices: wireless phones, PDAs, Palm Pilots or even Game Boys. The demand for these convenient pocket devices has skyrocketed and has prettied up companies' bottom lines. However, thanks to component shortages such as LCD chips and drivers, many companies are not able to produce enough units to meet demand.

According to Herschel Shosteck, industry analyst, these component shortages have hit the wireless market hard.

"There were more than 285 million wireless terminals sold in 1999," he said. "It could have been 10 to 20 million higher if not for the shortages."

Shosteck isn't limiting the shortages to LCD components: Batteries and keypads also are in short supply.

"Everyone underforecast the market," said Shosteck, who included his company, Herschel Shosteck Associates, with the miscalculators. Thanks to lower tariffs, higher subscriber growth and an increased terminal-replacement rate, he said that all forecasts fell far short of actual performance.

Shosteck pointed specifically to the huge increase in terminal-replacement rates as skewing projections. In 1992, the worldwide replacement figure held at about 10%. In 1999, it surged to a whopping 37.3%. He anticipates that the rate could go as high as 50% in the next 12 to 18 months.

The terminal-replacement rate is minimally affected by churning customers. Shosteck said that increased functionality of wireless networks has propelled worldwide replacement rates, especially in Europe and in Japan.

"As functionality increases, users are getting new phones to take advantage of new features," he said.

For example, NTT DoCoMo's i-Mode service in Japan delivers new cartoons daily, and subscribers need a special phone to deliver that feature. In the future, other "cute and sexy applications" will require special phones. Consumers' preference for the latest and greatest phones likely won't wane anytime soon.

Shosteck pointed to the teen market as driving the replacement rate upward. He said that teens around the world are extremely fashion-conscious, and they have more disposable income to invest in fashion. He said wireless phone devices soon will begin competing with Abercrombie & Fitch, Gap and Old Navy for the disposable income of youth seeking fashion statements.

Shosteck predicted that the component shortages will continue to affect production volumes through the rest of this year, hitting the small manufacturers the hardest.

"The big guys like Ericsson, Motorola, Nokia, Matsushita and Samsung will get a bigger allocation," he said. Even though the smaller companies may get some of the components, their allocations will fall short of what they ultimately need to be successful.

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Worldwide Terminal-Replacement Rate

1992 — 10%
1996 — 9.7%
1998 — 32.0%
1999 — 37.3%

Source: Herschel Shosteck Associates