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Manufacturing cutbacks causing smart phone shortage

Sprint Nextel hasn't been able to manufacture enough of the HTC EVO 4G smart phones, shown above, to meet demand because of chip shortages. With the recession, chip makers cut back production, but smart phones proved recession-proof.
Sprint Nextel hasn't been able to manufacture enough of the HTC EVO 4G smart phones, shown above, to meet demand because of chip shortages. With the recession, chip makers cut back production, but smart phones proved recession-proof. AP

NEW YORK — The seemingly recession-proof smart phone is suffering from a side effect of the rough economy: Manufacturers simply can't build enough of the gadgets because chip makers rolled back production last year.

The chip shortage means Apple's rivals are having trouble making enough phones to compete with the iPhone, a problem expected to persist through the holidays. Not that the iPhone is totally immune, as the shortage is affecting wireless carriers. Some of them are seeing delays in improving their networks, including AT&T, which has complained that it can't beef up its wireless data network as fast as it would like to deal with traffic from the iPhone.

The shortage also could mean higher computer prices.

There isn't an across-the-board shortage of chips, but rather problems with certain components here and there. If just one of the 20 to 30 critical chips that go into a smart phone is unavailable, the whole production line screeches to a halt.

Sprint Nextel, for instance, couldn't satisfy demand for HTC's EVO 4G, the first phone to use a faster "4G" network, in parts of the country. Motorola said shortages of a wide range of chips, from memory to camera sensors to touch-screen controllers, are contributing to problems supplying enough of the new Droid X phones to Verizon Wireless.

The chips that go into smart phones compete for production capacity with other chips at the gigantic factories run by contract manufacturers such as Taiwan Semiconductor Manufacturing and United Microelectronics. Makers of a vast array of electronics, from TVs to data center switches, also depend on the factories.

The chip-making industry had a tough start to 2009. February sales of $14.2 billion were down 30 percent from the year before, according to the Semiconductor Industry Association.

Although sales sprang back later in the year, manufacturers were spooked and reined in investment in chip factories. Total chip production capacity shrank.

Now the factories are having trouble scaling up production fast enough. The chip factories are running at 96 percent capacity, up from 56 percent at the depth of the recession, according to the SIA.

Research firm Gartner Inc. predicts worldwide investment in the chip industry zooming 84 percent this year, to $47.5 billion.

While investment is recovering, it takes months to set up new production lines and upgrade existing ones. That's why executives see shortages lasting until next year.

Though consumers may have to wait for new phones, they're unlikely to notice price increases. Phone prices are heavily subsidized by carriers.

However, research firm iSuppli warns that prices for PCs could rise this year because of short supplies of memory chips. The prices for these commodity chips are highly volatile.

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