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Huang Xuehua, 24, from Guangdong province works inside a Foxconn factory in the township of Longhua in the southern Guangdong province May 26, 2010. (BOBBY YIP/Bobby Yip/Reuters)
Huang Xuehua, 24, from Guangdong province works inside a Foxconn factory in the township of Longhua in the southern Guangdong province May 26, 2010. (BOBBY YIP/Bobby Yip/Reuters)

Smartphone boom stutters as demand exceeds key part supplies Add to ...

Investors may have to start getting used to smartphone supply disruptions as demand surges and smartphone makers strain to accelerate output while integrating increasingly sophisticated components.

In less than a year, smartphone leaders Samsung Electronics and Apple as well as various Chinese competitors have been hard hit with inventory challenges.

In China, manufacturers have had to scramble to appease consumers’ voracious demand for cutting-edge smartphone devices, particularly features such as five-inch 1080p high-definition screens. Samsung’s blockbuster Galaxy Note 2 carries these screens, prompting suppliers to ramp up their production lines. Of course, they’ve often fallen short meeting difficult targets.

Other components in short supply have included the 12-megapixel cameras, 16GB internal storage chips and DRAM chips. In this environment, Coolpad Chinese handset vendor Yulong and rising stars OPPO and Xiaomi in China, made clear in March that their suppliers were having a hard time keeping up.

The most popular components for Android smartphone manufacturers are the five-inch 1080p hi-definition screens, 12-megapixel cameras, 16GB internal storage chips and DRAM chips, according to David Yang, an industry analyst at Santa Monica, Calif.-based market research firm IBISWorld.

David Walker, a technology analyst at Boston-based Trillium Asset Management LLC, which manages about $1.3-billion, including Apple shares, said of the production of smartphones, added that “I hope it’s [the supply crunches] not the new norm, but these are very complex machines. It hurts your brand. It has hurt Apple. There is a cost to multiple when people think you can’t execute.”

Last month, Taiwan’s Android-based HTC One delayed the full rollout of the product because its cutting-edge Ultrapixel camera sensor couldn’t be manufactured quickly enough. The HTC Butterfly device that beat iPhone sales in Japan during its first week on the market last December also had problems filling orders due to component shortages.

Last September, Apple shares slumped even though it managed to sell more than 5 million iPhone 5s in three days as the company ran into supply shortages complicated by rioting at a factory of 2,000 workers at Foxconn’s Taiyuan plant. Just last week, Sprint fell in New York as the mobile-phone operator and peer T-Mobile said they had to delay the introduction of Samsung’s Galaxy S4 due to inventory challenges at the Korean electronics manufacturer.

Walker said that Samsung is trying to bring 4G baseband processor technologies in-house as part of its efforts to bolster its control over the supply chain, but remains a generation behind Qualcomm in mastering this key, but extremely complicated smartphone capability. At the same time, Qualcomm lacks its own factories and must outsource the manufacture of its chipsets to contract chip manufacturers such has Taiwan Semiconductor Manufacturing (), who may not be able to achieve optimal yields on such complex devices especially on short notice.

“Qualcomm is really at a competitive advantage [compared to other chip companies] because they can spend so much more money on R&D making sure they have the technology right, but even if their chipset design works they still have to hand off to a contract manufacturer,” said Walker. “For semiconductors, when the processes change, the yields are not always optimal. So with products like Apple, and with products like the [Samsung] Galaxy that have such strong consumer demand, particularly with the semiconductor manufacturing, if the yields are off, that is the mitigating factor within the supply chain.”

“With the Apple mini and iPhone 5 there were definitely issues. With the iPhone 5, the chip that they were using – the baseband and applications processor – was a smaller line-width and Taiwan Semiconductor Manufacturing had an issue with the yield. To add the increased speed, to add the increased complexity, you’re having to shrink the line width. And when you change the geometries from one line width to another... sometimes you do have hiccups.”

“The overarching issue is that product innovation from the handset makers, whether it’s Samsung or Apple, has not kept pace with the slower rates of suppliers – the supply chain to adapt changes into their manufacturing processes,” said Brian Sozzi, CEO and chief equities strategist of Belus Capital Advisors in New York. “News like this is somewhat becoming a new norm in the industry as companies duke it out for market share and market street cred.”

“The problem that stems from this race to the top is that some quarterly sales and earnings may be missed as product is unable to be brought to market to meet demand. Also, remember, where there are materials shortages, that puts suppliers in a more advantageous position to raise prices, in turn weighing on the margins of Apple and [other smartphone companies.],” Sozzi added. “An investor therefore has to view sales/earnings guidance with greater skepticism than the norm.”

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