x Abu Dhabi, UAEThursday 20 July 2017

The sum of all gadget parts can add up

Working out the profit margin of a high-tech device must include factors other than basic supply and demand of parts. But pricing the bits that go into those devices is handy for investors.

Many factors affect the electronics industry, with supply issues and geopolitical instability creating volatility in the market and causing prices to rise.
Many factors affect the electronics industry, with supply issues and geopolitical instability creating volatility in the market and causing prices to rise.

Buying the latest must-have smartphone or laptop can seriously damage your wallet, unless you happen to make them.

Popular gadgets such as the iPhone, the BlackBerry, the iPad and upmarket laptops sell for thousands of dirhams. But they cost far less to make, helping to generate multimillion-dollar profits for their manufacturers.

Like all businesses, making electronic goods is a margins game. Buy all the pieces you need for as cheap as possible, assemble it and sell it for a premium.

But the high-tech electronics industry is not quite as straightforward as that. A number of factors including supply issues and geopolitical instability can create volatility in the market and raise prices.

"The semiconductor industry is very much tied to global macroeconomical and geopolitical trends," says Rick Pierson, a senior semiconductor analyst with the Californian research company iSuppli.

"If there's any hiccup in [either] of those two, it could send a ripple through the whole market and have an effect on pricing and availability."

Some of the continuing conflicts in central Africa are affecting the mining of precious metals such as gold, which is used in wiring and circuitry. Any problems in the mining industry trickles down to the manufacturing process, causing delays, price increases and even drops in consumer confidence, Mr Pierson says.

"The fact is that in today's society, everybody's got an electronic gadget and a lot of the material that goes into one is derived from this part of the world [Africa]," he says.

"It's very hard to trace and it's not dissimilar to blood diamonds. It's very difficult to pinpoint the place of origin because it goes through so many hands, but it's something the market has problems with."

The issue was recently highlighted after China announced a cut in exports of rare-earth elements such as europium, which is used in laptops and LCD televisions, and cerium, which is used in the semiconductor industry to help polish microchips.

That could create pressure to source specialised elements and minerals used in the production of microchips, says Doug Grose, the chief executive of the Abu Dhabi-owned microchip maker Globalfoundries.

"We don't go to places that are necessarily at risk in a geopolitical sense to shut us down … we can't afford that," Mr Grose says.

"We have a strategy when we go in and bring a new material in that's part of our road map, we do a careful analysis of where it comes from because many of our customers ask us the same thing."

There are two main circuits in the industry that serve as a bellwether to the overall cost and production of any gadget.

Tantalum capacitors and power MOSFETs are words one would expect to hear on Star Trek, but they are two of the key components in high-tech devices.

Used to help control power in a computer's main circuit board, the tantalum capacitor is made from a powder of pure tantalum.

Mining tantalum has become a problem as there are only a handful of players that specialise in it after Global Advanced Metals, the owner of the largest operation in Australia, shut down production in 2008 as a result of the economic crisis.

Although there are plans to reopen the mine next year, the closure sent makers of electronic goods scrambling to find enough tantalum capacitors in the market to satisfy the existing demand.

It brought the issue of tantalum production to the forefront of the electronics industry for the first time since 10 years ago, when metal providers deliberately controlled supply to keep prices high.

"These commodities are hard [to get] now," Mr Pierson says. "[Manufacturers] are struggling to keep continuity in place while suppliers are struggling to meet demand."

But it is not just a story of supply shortfalls and rapidly rising mineral costs.

Prices for flash memory, the chips used in portable music players such as Apple's iPods and digital cameras for data storage, have dropped more than 50 per cent in the past year because of oversupply.

Global revenue from shipments of flash memory declined to US$4.1 billion (Dh15.05bn) in the second quarter of this year from $4.3bn in the previous three months, the most recent period for which figures are available, iSuppli says.

Industry experts expect the flash memory market to stabilise in the next few years due to the demand predicted for smartphones and tablets.

"One of the biggest issues is the demand coming up," says Mr Pierson. "Flash memory is being used in extremely high volumes like the iPads and iPhones for storage purpose and that can only help drive the market."

Investors these days want to keep track of the prices of parts used to make electronic gadgets. This gives them insight into handset technology coming on to the market from makers such as Apple, Samsung and Research In Motion.

"Quite often, some of our clients in the financial market might be tracking the performance of semiconductor vendors," says Kevin Keller, a principal analyst at iSuppli. "One of the interesting information bits that we might provide are the semiconductors that are found and not found in a given product.

"If we find that a brand new Apple product is using a Synaptix touch-screen device, for example, that's big news for the financial market."

 

dgeorgecosh@thenational.ae