With demand for tablets and smartphones surging, Intel (INTC:US) Corp. is betting that supplies of touchscreens will start to run short just as PC makers begin to introduce touch-enabled laptops and other devices.
To ensure that PC manufacturers (INTC:US) don’t get squeezed out, the chipmaker last month said it had agreed to pay four Taiwanese touch-screen makers to secure supplies of the parts.
Intel’s deals reflect the difficulty of getting key components as the tablet market is poised to jump 48 percent to $66.4 billion in 2012, according to researcher DisplaySearch.
Shares of Intel partners Hewlett-Packard Co. (HPQ:US) and Dell Inc. (DELL:US) have sagged this year as they play catch-up with Apple Inc. and Samsung (005930) Electronics Co., which together hold more than half the smartphone and tablet market. With the PC makers adding tablets and similar devices, Intel’s move will prevent suppliers from favoring Apple (AAPL:US) and Samsung in selling screens.
“What’s growing is tablets and smartphones,” said Vinita Jakhanwal, an analyst at IHS ISuppli Corp. “It makes sense to make sure that you put your resources behind growth markets.”
From 2011 to 2016 the market for tablets will grow an average of 42 percent annually, versus 9 percent average growth for notebooks, IHS predicts. In 2015, tablets, with some 314 million shipments, will overtake laptops. The smartphone market will average 22 percent growth to reach 1.27 billion units in 2016, according to the researcher.
With its strength in tablets and smartphones, Apple’s shares have jumped 44 percent this year, while Samsung’s are up 14 percent. By contrast, Hewlett-Packard is down 22 percent and Dell has slipped 14 percent. Intel’s shares are up 10 percent.
Touch screens range in size from 3.5 inches to 27 inches or more. They can cost as much as $100 for smaller devices and $200 for bigger ones, making them one of the priciest elements in a computer, said Linn Huang, an analyst at IDC. Designed to respond to a user’s finger and hand swipes, the screens are increasingly being used in personal computers.
Intel’s projection of a possible dearth of touch-screen parts is at odds with most estimates. Huang, for example, said supply appears healthy because a flurry of smaller companies have entered the market. In addition, production has been getting more efficient.
“There are definitely more touch screens being produced than there are being shipped in to customers hands,” Huang said.
Intel, the largest semiconductor maker, isn’t taking any chances as it plans for the introduction of Microsoft Corp. (MSFT:US)’s Windows 8, the software maker’s first mainstream computer operating system designed around a touch-screen interface.
The new software is aimed at stemming the inroads into computing made by smartphones and Apple’s iPad. It will probably run mainly on devices powered by Intel chips.
On June 5, Intel said it had reached supply agreements with four touch-screen sensor manufacturers: TPK Holding Co. (3673), Wintek Corp. (2384), HannsTouch Solution Inc. (3049) and Cando Corp.
Under the arrangement, the touch-screen makers will provide a certain number of screens to PC makers specified by Intel. While Intel isn’t paying for the screens, it will foot the bill for any unused capacity, meaning that the screen makers can set aside production without any risk. Intel and the Taiwanese companies declined to give details on the money or number of screens involved.
“We believe there’s going to be more demand than current forecasts,” said Bill Calder, a spokesman at Intel. “We’re ensuring our customers get enough supply.”
Intel, whose processors run more than 80 percent of the world’s computers, has struggled to achieve comparable success in the market for chips that run phones and tablets. The company is pushing a new line of thinner and lighter notebook computers -- called Ultrabooks -- to rekindle demand for its chips. It’s also seeking to sell its products to phone and tablet makers.
While touch-screen makers have enough capacity to cope with smartphone growth, according to DisplaySearch analyst Richard Shim, laptop screens are at least three times the size of those used in phones. That means growing sales of touch-enabled notebooks would significantly increase demand. And as touch screens get larger, there’s a greater chance they will have defects, Shim said.
Underpinning Intel’s attempts to help its PC customers are concerns that the success of Apple and Samsung in phones and tablets strengthens their ability to jump to the front of the queue for parts.
“The Intel action is slightly unusual and is indicative of Apple’s power over the technology supply chain,” said Andrew Dailey, managing director at MGI Research in Mill Valley, California. “Intel really understands supply-chain relationships, and the fact that they are going out of their way to do this says a lot.”
Apple Chief Executive Officer Tim Cook said last year that his company would spend $3.9 billion over two years on components. He said Apple had identified a critical part that it would be spending heavily on to secure supplies, though he wouldn’t disclose details. Some analysts, including Katy Huberty of Morgan Stanley, have speculated the money is being used for touch panels like those Intel is now trying to secure.
South Korea’s Samsung, the world’s biggest smartphone maker, is also the largest manufacturer of memory chips and LCD displays. Touch screens are currently assembled separately, then layered on top of the display itself. That cumbersome process is increasingly going to be replaced by a technique where the touch capabilities are built into the display in the manufacturing process, according to Rhoda Alexander, an analyst at IHS.
Increasing integration of components and attempts to lock up supply through advance purchases are reversing the 30-year history of specialization among parts manufacturers, said Horace Dediu, an industry analyst at Asymco. According to Dediu, Apple now buys the machines used to manufacture phones and tablets and installs them in the plants of its contract manufacturers.
“The supply-chain chess game has moved beyond writing these big checks to be sure that you have right of first refusal,” said Dediu.
With the help of Intel -- a company that has $13.8 billion in cash (INTC:US) and generates about $3 billion a quarter -- the PC industry may be able to keep pace with technology and supply.
“It’s very encouraging that you have a heavyweight like Intel to come in and help drive proliferation and adoption of touch technology,” said Freddie Liu, chief financial officer at touch-screen sensor maker TPK. “We welcome such a strategic move.”
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