A purchasing professional serving a PC manufacturer today has very little to complain about. Component supplies are plentiful and prices keep trending in one direction: downward. The latest financial results from Intel Corp. and Advanced Micro Devices Inc., the biggest vendors of PC microprocessors, were dismal – for the chipmakers.
At Intel, sales in the client computing division fell16 percent sequentially and were down 8 percent on a year-over-year basis during the first quarter. Results at AMD were even worse. Total revenue fell 17 percent sequentially and 26 percent from the first quarter of the prior year while gross profit margins fell 3 percentage points, driving the company into another quarterly loss. The short-term outlook for both companies isn’t great.
Buyers benefit from weak sales at suppliers and it can be tempting to ignore vendors’ woes while scooping up deals amidst guaranteed supplies. The PC market has been weak for a while and projections by Intel, the world’s biggest semiconductor supplier by revenue, indicate the slump will continue well into next year. Analysts also say they don’t see an upturn in PC demand cropping up for another year, at least. In such an environment, competition will intensify between suppliers and some of it may be price-driven, again creating a beneficial environment for buyers.
This means purchasing managers at PC OEMs and counterparts at contract manufacturers will continue to have an easier time procuring components from the entire supply chain, including from vendors of interconnects, passives and electromechanical devices used in computer production. They’ll be able to drive down prices and can also push out delivery dates far into the future and closer to production dates. It’s a purchaser’s dream.
Hold off on the celebrations. Weakness at a supplier is no cause for rejoicing, at all. First, the clearly obvious implication is that the supplier is at a weak position because your own enterprise isn’t doing that well either. While the industry continues to focus on suppliers, PC OEMs are struggling financially too. This could impact jobs at the OEMs and may lead to layoffs, including of folks in purchasing department, and the closure of manufacturing plants.
There are more important reasons why weakness at a supplier can have a negative tsunami effect on purchasing. Critical negotiating and supply chain management skills degenerate quickly when procurement conditions become as predictable as they are today. Additionally, suppliers react today faster to changing market conditions and have been swift to implement actions to defend market share and boost profitability.
These steps could include exiting particular market segments or reducing production of components which aren’t seeing solid sales. It’s the old law of demand and supply: when supply overshoots demand, price goes down and eventually a correction occurs that may crimp supplies. It’s already happening at Intel. The chipmaker is investing more in faster-growing products and has seen a huge bump in demand for components used in data centers and Internet of Things. The company is actively rebalancing its product offerings to reduce exposure to the weak PC market.
AMD, too, is diversifying its product portfolio and trimming inventories, actions that will eventually bring demand and supply back into balance, according to company executives.
“Building great products, driving deeper customer relationships and simplifying our business remain the right long-term steps to strengthen AMD and improve our financial performance,” said Lisa Su, president and CEO of the company in a statement announcing first quarter results. “Under the backdrop of a challenging PC environment, we are focused on improving our near-term financial results and delivering a stronger second half of the year based on completing our work to rebalance channel inventories and shipping strong new products.”
Read what you may into Su’s statement but if I were a PC components buyer I would rebalance my negotiating skills too.
Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this article are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.