Supply chains and the 'weakest link' problem

Why should FPGA users (and vendors, for that matter) care about Nortel Networks Inc.’s Chapter 11 bankruptcy filing? Because there is a hidden message on the fragility of supply chains in 2009, and how that may affect availability of programmable devices from suppliers, and timely completion of subsystems for ultimate delivery to the OEM and channel. This may be the bane of the entire FPGA, ASIC, and ASSP industries over the next two quarters.

Analysts have pointed out since the Jan. 14 filing that the Achilles Heel at Nortel was the breadth of its relationship with Flextronics. Over the course of five years, Nortel became a “virtual OEM” by relying on Flextronics not only for outsourced manufacturing, but for a significant percentage of design engineering and existing product support. The fault here is not Flextronics’, of course, but Nortel’s flagging earnings and soaring inventory, and its reliance on a single pressure-point. In the same way that dependence on one large customer can put a company in trouble, failure to diversify supply chains can put the squeeze on when credit is tight.

A recent financial analysis on Actel, suggesting a shorting due to supply-chain issues, shows that even those who take home EDN design awards face profound supply issues. And Actel need not be singled out. For the remainder of 2009 at the very least, FPGA vendors will have to pay strict attention to foundry suppliers, third-party hardware and software partners, and channel partners for development systems. Their customers will have to watch their own partnerships both upstream and downstream. If the freeze on commercial credit gets more severe in the second calendar quarter, Nortel’s January bankruptcy filing will be seen as an early indicator of a general electronics supply chain problem. Let’s hope Nortel wasn’t the proverbial canary in a coal mine.