Among the advantages of being
is not having to take “no” for an answer—at least if that “no” comes in the form of a customer canceling its order for Broadcom’s chips.
As a supplier of key components across several product families such as smartphones, servers, telecommunications equipment and data storage, Broadcom has amassed enough muscle to enforce noncancelable orders for its customers. The company began touting this seemingly customer-unfriendly policy last year, as it became clear that demand for chips across multiple industry groups was outpacing the world’s production capacity. And Broadcom reminded investors of the policy during a call late Thursday to discuss its fiscal first quarter results.
Why the reminder? The continuing production shortage has raised fears among analysts of double ordering. That is when a chip buyer orders more than they think they will need, to prevent getting caught without crucial components. Such a situation can lead to supply gluts later and canceled orders, as buyers want to avoid building up inventory of expensive chips—some of which can go obsolete in less than a year.
Thus Broadcom’s policy of forbidding order cancellations is designed to act as a hedge against double ordering. But Chief Executive Officer
went further in Thursday’s call, describing a “rigorous, disciplined process” to make sure orders lined up with actual end-user demand. He noted that Broadcom is now nearly 90% booked for this year, adding, “And we believe this is real, because they can’t cancel it.”
That doesn’t completely shield Broadcom from problems posed by the industry’s current production shortage. The company relies on
or TSMC, for a “substantial majority” of the production of its wafers, according to the company’s regulatory filing in December. That means Broadcom is competing for production space against Apple,
—just to name a few. It is also highly exposed to the cyclical smartphone business with its radio-frequency chips; Apple accounted for 15% of revenue in the fiscal year that ended Nov. 1.
But that Apple business should serve Broadcom well this year, given the strength of the iPhone 12 family. Wall Street sees Broadcom growing revenue by 12% for the current fiscal year—more than twice the growth rate for last year. And that is without assuming a large-scale acquisition, something the company is well known for. Broadcom’s ability to tightly manage its supply chain and customer base in a turbulent chip market should keep the production shortage from giving it short shrift.
Write to Dan Gallagher at [email protected]
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