WITH THE DEMAND picture becoming increasingly bleak and the industry-wide effort to reduce excess inventory having stalled, prices for electronic components are continuing to decline, a trend that should last through Q4.

Pricing for electronic components, with the exception of some high-end DRAM, fell across the board in August, extending trends seen in previous months. Most of the components tracked by iSuppli -- which include passives, discretes and ICs -- are continuing to report short to decreasing lead-times, reflecting weak demand and strong availability.

Demand for electronic components is being depressed by persistent softness in the telecommunications and wireless handset markets. However, the PC sector--which is the largest single-application market for semiconductors--also is starting to show signs of weakness, with the back-to-school season shaping up to be slower than normal. iSuppli predicts the electronic equipment market will contract by 2.2 percent in 2002. And sales of data processing equipment--which includes PCs--will decline by nearly 1 percent for the year.

Meanwhile, the massive reduction of excess semiconductor inventories, which occurred from early 2001 through early 2002, stalled in Q2. The remaining excess inventory has pooled at the semiconductor suppliers. With copious excess inventory and weak demand, semiconductor suppliers are being forced to reduce their manufacturing utilization rates, according to iSuppli data.

Because of this, component suppliers have little leverage to increase prices. Suppliers that attempted to grab market share by slashing prices over the past two months have ended these efforts for the most part because the price competition became too fiscally painful. iSuppli expects component prices to flatten and slowly increase in early 2003 as demand growth begins to absorb existing capacity. Data shows that the regional price trends of a typical logic part represents overall component price trends (see chart above). Pricing for the logic part fell in a range between approximately 3 percent and 5 percent in August in the major electronics production regions.

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Jonathan Cassell is a principal analyst for electronic components at iSuppli Corp. and is the editor of the weekly iSuppli Market Watch newsletter. He can be reached at jcassell@isuppli.com

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