The costs to produce capacitors have become the focal point for many original equipment manufacturers and contract electronic manufacturers worldwide in the first and second quarters of 2008.

Introduction:

In the first and second quarters of 2008 Paumanok Publications, Inc. Industrial Market Research conducted a significant amount of research to help capacitor customers create models that showed the variable and fixed costs associated with the production of capacitors by type. The interest level among automotive, wireless handset, computer and television set manufacturers was keen due primarily to the vision of many of these manufacturers to align themselves with those capacitor vendors who exhibited tight controls over their fixed costs and who showed the greatest knowledge in the potential for their variable costs (raw materials and labor) to encroach upon margins.

The Ideal Cost Structure:

When the annual reports and 10-K statements of the top 10 global manufacturers of capacitors are reviewed an ideal model emerges (see chart below). Basically to summarize, the ideal model for costs to produce shows that 40% of capacitor costs are fixed; 50% are variable and 10% is margin before taxes. The variable costs include engineered raw materials and labor charges, each of which can change in very short periods of time and can have an adverse effect on profitability and financial soundness of the capacitor vendor. The fixed costs are largely associated with recurring engineering costs associated with plants and equipment, research and development, capacitor selling costs and administration.

All Capacitors are not Created Equal:

The problem with the ideal model as shown above is that it can vary based upon the type of capacitors produced and the volume of production of the finished capacitors in question (economies of scale).

Capacitors are broken down into two broad categories: electrostatic, which includes ceramic capacitors and film capacitors; and electrolytic, which include aluminum and tantalum electrolytic. Other capacitors based upon niobium, glass, carbon or silicon are specialty product lines and are generally reviewed by Paumanok separately.

Ceramic capacitors generally have the lowest costs to produce because of their reliance on abundant, low cost barium salts and titanium oxides as ceramic precursors. Ceramic capacitors also have the largest economies of scale and represent 90% of all capacitors produced; therefore, millions of parts can be produced from 1 pound of engineered raw material (i.e. barium titanate). However, the production equipment costs can be extremely high (especially in a high capacitance BME MLCC operation), as the ceramic process requires a variety of machines not found in the production process for other types of capacitors, including, but not limited to- batch and tunnel kilns; doctor blade extrusion equipment, extended dryers, termination dippers, optical test machines, tape and reel machines.

Film capacitors, the other electrostatic capacitor type, are primarily composed of either metallized polypropylene or metallized polyester, which are also materials in abundant supply and have comparably low prices per pound. The variable with film however, is that as the film gets thinner, the prices can increase rather sharply making film vulnerable to encroachment by ceramics in specific markets that require higher capacitance and high voltage (i.e., in UL rated safety capacitors for example). Equipment on the other hand, is relatively inexpensive and the production process does not require as many steps as that of ceramic capacitors. The primary piece of equipment used in film capacitor manufacturing is the film capacitor-winding machine. Other machines, such as electrode spray machines, wrap and fill and lead attach machines are also comparably inexpensive when compared to equipment used in the production of electrostatic ceramic capacitors. Also, the economies of scale for film capacitors are small in comparison to ceramics, so the number of capacitors that can be produced from 1 pound of raw material can be measured in the thousands as opposed to millions of pieces that can be created from 1 pound of barium titanate ceramics.

Aluminum electrolytic capacitors employ many raw materials in their construction and also have many corresponding pieces of machinery. The largest cost factor associated with aluminum capacitors is the etched anode and cathode foils used in their production. But other costs include liquid electrolytes, the aluminum can, the rubber bong stopper, the electrode metal tabs and the lead wires. Individual machinery costs tend to be low in comparison to ceramics once again and more in line with that of film capacitors (both film and aluminum capacitors require winding machines); however, the number of process steps and associated machinery is greater than that of film capacitors. Aluminum foil costs are comparably low in comparison to tantalum, and aluminum, like film and ceramics, are in abundant supply, which keeps prices relatively stable over extended periods.

Tantalum capacitors have low economies of scale, high raw material costs and high equipment costs as well as the most process steps (72-step process). Also, tantalum is not as plentiful as plastic film, ceramic or aluminum dielectric; and is the only dielectric where capacitor anodes account for its largest application globally. Therefore, tantalum capacitors have been historically vulnerable to changes in “variable costs.”

Focusing in on Variable Costs to Produce Capacitors:

It has been well documented that costs will differ among manufacturers of capacitors, even within the same dielectric. In many instances the fixed costs will vary among manufacturers of the same dielectric and this is the direct result of some companies spending a higher percentage of revenues on research and development, SG&A or because of their manufacturing footprint and productivity profile. Higher spending on these fixed costs is usually determined based upon the attempt to establish a competitive advantage among like manufacturers (on SGA for example) or because of the investment in new capacitor technology (such as high capacitance ceramics or conductive polymer electrolytics).

The variable costs however, will usually determine the overall profitability of an industry as a whole, and are therefore areas of keen interest among the customer base. In 2007 and 2008 price increases were noted for raw materials consumed in capacitors across the board. Paumanok’s research on film capacitors noted increases in metallized PET and metallized OPP film prices because these materials are petroleum based. In metals we noted increases in palladium prices, nickel prices, titanium and aluminum foil prices and increases in prices for a variety of additives (bismuth, neodymium, etc.). These raw material price increases resulted in an industry wide push to either raise prices or at least keep them unchanged from previous contracts from the year before. This prompted many customers to get a better understanding of the costs to produce capacitors, and that resulted in this MarketEye article.

Vertical Integration of Supply Chains:

One of the primary areas where costs to produce can differ among manufacturers in the same dielectric is in the company’s captive capability to produce their own engineered raw materials. It is extremely important for capacitor customers to understand, because it can create such a huge disparity among costs to produce among manufacturers of similar parts. In each of these capacitor segments, there are merchant market vendors of engineered raw materials (e.g. Ferro, JFE Mineral, Sakai, Johnson Matthey, Cabot, HC Starck, Becromal, Solvay and many, many more). However, certain capacitor manufacturers have either full-engineered materials production capabilities (Murata) or partial ceramic powder engineering capabilities (KEMET and AVX for example). In film capacitors, for example, the primary production process involves the metallization of the PET or OPP film. Only two of the top film capacitor manufacturers (Panasonic, Vishay/BCC) have the ability to metallize their own plastic film. The remaining vendors must source the merchant market for metallized films, which usually have a 100% mark-up over the thin film feedstock. Aluminum capacitors also have an advanced engineering step, which is the metallization of the anode and cathode foils. The top four aluminum capacitor manufacturers in Japan have this captive capability (which was largely accomplished through the purchase of existing foil etching operations many years ago). What is also interesting is that in China in 2008 there is substantial activity among Chinese manufacturers to captively etch their own foil so they can remain competitive against Japanese producers over time. In tantalum (and this is somewhat ironic) the capacitor manufacturers have almost no control over their engineered material supply chains, due primarily to a combination of tight patents on the sodium reduction process required to produce anode powders, and the extreme difficulty in creating high purity tantalum. So, in tantalum we see very little backward integration of manufacturers into their engineered material supply chains.

Variable Labor Costs:

The other aspect of variable costs comes in labor costs. In any business model, labor costs are usually very high, and a significant portion of the costs to produce. Paumanok notes however, that capacitor manufacturers tend to keep their employees at a minimum by choosing to use sub-contractors around the world. This keeps labor costs in check, but opens up the possibility for quality control issues (one major capacitor manufacturer has 12,000 employees on the books for example, but 31,000 total personnel producing capacitors, the remainder through sub-contractors).

The other labor cost variations among manufacturers are whether or not the plant is unionized or not. Obviously non-unionized plants have lower labor costs when compared to plants with active unions.

Summary and Conclusion:

When considering capacitors and their costs to produce, multiple criteria must be taken into consideration and include the following:

1. Economies of Scale
2. Equipment Costs, Number of Process Steps and Yield Ratios
3. Raw Material Costs
4. Captive versus merchant reliance on Engineered Materials
5. Employees Versus Sub-contractors
6. Union or Non-Union plants.