The Electronic Nightmare Before Christmas

Some are barely the size of a sesame seed and cost only a few pennies.

But severe shortages of tiny, often overlooked electronic components are taking a big toll on makers of video games, hand-held computers and other devices popular with consumers.

And the frenzied demand of the holiday season is visible on the horizon.

Latest evidence of the shortages came last week when Sony Corp. announced that a lack of components will force the company to halve initial shipments of its new PlayStation 2 video game consoles, likely to be one of this year’s most sought-after gifts.

The paucity of obscure parts like capacitors and flash-memory chips has been a nagging problem for months, reaching across a broad range of electronics products. Just how much this will affect what consumers see on store shelves is not yet known.

Parts makers say they’re working to meet demand, but they remain far behind with no hope of catching up by the holiday season.

Many component makers “almost don’t want to take calls from some of their main accounts,” said Bob Willis, president of the Electronic Components Assemblies and Materials Assn., an industry group based in Arlington, Va.

Companies that rely on the components are thrilled by strong demand for their products but troubled by the continuing parts shortage that leaves them unable to meet it.

“Given that the market for Palm hand-helds is substantial--it’s like twice what anybody forecast a year or two ago--it’s monumentally difficult to get your hands on all the components necessary to ship a completed product in volumes to match demand,” said Marlene Somsak, a spokeswoman for Palm Inc., based in Santa Clara, Calif.

The company shipped 1.5 million hand-helds in the quarter that ended Sept. 1. But some analysts have estimated the figure could have been up to 40% higher had components been available.

Booming Economy Is a Factor

Sony says it will try to meet demand by shipping out its PlayStation 2 in smaller batches, as soon as parts become available.

“We will be able to supply a flow of products, instead of a huge initial spike,” said Kaz Hirai, chief operating officer for the Tokyo-based electronics giant.

Industry observers say the parts shortage is rooted in the booming economy, which has loaded consumers with cash. The good times coincide with the rapid spread of computer technology to a whole range of products, from in-car systems to wireless phones.

All that has lead to rocketing demand for parts like liquid crystal display screens, semiconductor chips and tiny capacitors and resistors, all vital to most computerized devices.

But parts manufacturers have been wary of increasing production. Just two years ago there was a glut of some parts and prices were so low that most were barely breaking even, Willis said. Most now believe demand won’t soon fade, but it is taking time to get new factories up and running, he said.

That lag does not seem to trouble major retailers, who say they expect brief shortages of certain items, but no serious problems.

“There will always be spot shortages at any given time,” said Bill Cimino, a spokesman for the 618-store Circuit City chain. “But our buyers have been working with the suppliers over the past months, as you might imagine, and we are told that key suppliers will provide us with products for the holiday season.”

Smaller retailers, however, expect problems getting all of the hottest items because electronics manufacturers often reserve scarce shipments for the big chains, said Elly Valas, executive director of the North American Retail Dealers Assn., which represents independent stores.

But Valas said that is a constant every year and is not a major concern.

“Some of our dealers are getting smarter about it and they’re ordering more up front intentionally,” said Valas.

Cimino said Circuit City employees will be encouraged to talk with consumers about the features they’re looking for. The hope is that when certain products are not available, shoppers may buy a similar item that is in stock.

Industry analysts agreed that shortages won’t be a major problem.

Best Buy will initially lose about $20 million to $25 million in sales, while Circuit City will lose about $10 million in revenues because of Sony’s problems, said Doug Gordon of Banc of America Securities. But they will be able to make up the business after the holidays, once the games are delivered, he said.

Some companies are even trying to take advantage of the shortage.

Handspring Inc.’s Visor hand-held devices don’t contain the flash-memory chips that are slowing output of many of Palm’s products.

Not having the chip means Handspring’s devices cannot be upgraded, but company spokesman Brian Jacquet said it hopes consumers will be happy just to see its products on the shelves.

“It’s definitely the type of game where you have to take advantage of the opportunities that are out there,” he said.