A handful of the hottest smartphones are at risk of losing their sizzle due to supply issues, and the overall problem is likely to get worse, not better. The most recent issue is a lack of handset displays, causing HTC to announce a switch from AMOLED screens to SuperLCD on two of the phones it builds, for example. But such component swaps are just stop-gap measures; they don’t address the long-term issue. The real problem is that technology product cycles are starting to outpace parts suppliers’ abilities to quickly produce new components.
Ashok Kumar, managing director and senior technology analyst at Rodman & Renshaw, agrees that this is a potential problem for mobile technology, where products are maturing at increasingly fast rates. “Shrinking product cycles combined with increasing product complexity are bringing a perfect storm” to this supply-chain challenge, he said. If the technology maturity cycle and the supply-chain production cycles aren’t running in tandem, how can a parts supplier keep up with wave after wave of new products?
Part of the issue, Kumar told me, is consolidation among players that supply inventories of key mobile device components. Supply chain risks, Kumar said, increase when just a few main companies provide certain specific components. When fewer manufacturers produce a particular product component, a shortage becomes a much larger issue, introducing choke points into the overall product assembly.
One band-aid solution is to alter the product at some point during its life-cycle, which is starting to happen. LG and Samsung, for example, build the bulk of smartphone displays currently used for handsets and iPads alike. Verizon (s vz) hasn’t stocked HTC’s Droid Incredible for several weeks, reportedly due to a lack of Samsung AMOLED screens.
As a result, HTC will build the phone with a substitute LCD screen from Sony. Samsung is expected to invest $2.1 billion in a new AMOLED assembly line, but it won’t be ready until July 2011, illustrating the differential between technology cycles and production timelines.
I’m sure this type of swap has happened before, but I don’t recall such an action in the smartphone market. And from a customer perspective, this adds a new wrinkle to the situation; the product originally advertised — and reviewed — with certain specifications or features has changed. HTC claims that Sony’s Super LCD (s sny) panel is comparable to the original AMOLED display on the Incredible, but potential buyers may wonder if that’s true. Most consumers don’t care about LCD or OLED displays of course, but once they hear about a change in the display, it could lead them to purchase an alternative device or further scrutinize the product.
More importantly, though, substitutions don’t address future supply constraints. It takes time and money to build new production lines or to make changes to existing lines for large scale production. By the time Samsung’s new AMOLED plant is online, for example, there could be newer and better screen technologies in demand by the Apples (s AAPL), HTCs and Motorolas (s MOT) of the world. And given how quickly mobile technology products are changing, such a scenario of component obsolescence is a real possibility for parts suppliers.
The supply-chain side of the problem is only half of the issue, however. The other side — which component suppliers have little control over — is the accelerating pace of device innovation and the consumer demand such advanced mobile technology brings. For example, in the high-end smartphone space, the current crop of devices really arrived with the first 1 GHz Qualcomm (s qcom) Snapdragon processors in late 2009. Once the CPU became more capable, handset makers started to mature other functions and features: higher resolution cameras with high-definition video recording, larger screens for a better visual experience and faster 3G or 4G radios bringing the web even faster to our handset. As a result, the top-end smartphones of today look nothing like those of just 9 months ago because of the rapid technology cycle, and component manufacturers are being stretched thin as they try to keep up.
This pace of mobile product advancement isn’t expected to slow either, as the smartphone market is ramping up for growth, putting increased pressure on the supply-chain to try and keep up. Top-tier parts manufacturers of today need to adapt or risk losing their market dominance. If the supply chain doesn’t adapt to the technology development cycle, consumers will have fewer products to choose from, or the products that are available aren’t as ground-breaking as prior models. And that would the be worst situation for everyone involved — the smartphones of 2011 would only be as advanced as the parts of 2009.
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