October 21, 2005 4:00 AM PDT
Intel chip glut may bring holiday cheer to PC buyers
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in the months of October, November or December, which are big selling seasons for PC makers although generally not as robust for chipmakers.
Too much stock
So why is there an inventory glut? Partly because Intel chipset shortages that the company reported this summer forced PC manufacturers to start stockpiling in order to prepare for the holiday shopping season, Duboise said.
"The oversupply was likely in Pentium 4 processors while the shortages were in Celeron chipsets and probably mobile," added independent PC-industry analyst Roger Kay.
Some of its customers overbought in July, August and September, the Santa Clara, Calif.-based company said during its quarterly earnings report on Tuesday. Intel's chief financial officer, Andy Bryant, said the overbought inventory included "Intel architecture" silicon and that the cost to computer makers--$100 million--equaled about two days' worth of shipments.
The terms "shortage" and "oversupply" refer to two different situations. In a shortage, computer makers are asking for product beyond their allocation and the chipmaker can't supply it. Manufacturers sit with a dead PC chassis if they've already got the other system components, or just unfilled orders if they don't. The latter would be the case with Dell, which builds PCs to fit each order.
In oversupply, computer makers buy beyond their initial build plan, asking for extra parts. If Intel has the product on hand, it ships. If orders for computers never materialize, the computer makers are left with the parts, which they can move next quarter. They then build systems with parts they have rather than cut new orders to Intel.
"While computer makers can order their desktop chipsets from other vendors, the only concern would be on the mobile side, especially if you were a manufacturer that wanted to use the Centrino brand," said In-Stat principal analyst Jim McGregor. Intel's Centrino is a specific combination of a Pentium mobile chip and Intel's wireless LAN technology used in laptops and other mobile devices.
Nonetheless, because PC makers stocked up on chips in the past three months, they now are looking to use them to fill orders for new machines. Discounts are the normal method for getting rid of these chips. And to help PC makers keep their profit margins, Intel will provide "price protection"--that is, cut current prices to keep their own sales up, and then retroactively give discounts on chips bought earlier.
Dell spokesman Jess Blackburn said many factors influence Dell's pricing, noting that the company is "not going to speculate on what we might be doing over the course of the next quarter." PC makers Hewlett-Packard, Lenovo, Gateway, Toshiba and Sony did not immediately respond to requests for comment.
"Bottom line--no one wants to be caught without product during the holiday shopping season," Duboise said.
And there is no guarantee that Intel will cut prices on chips in computer makers' inventories retroactively, Kay said.
"It's up to PC makers to move the stuff, and they may lose money by holding onto them too long, particularly if the parts are marooned on the island of obsolescence by a new generation," Kay said.
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