Electronics & the Unending Economic Crisis

There's a direct line between the global economic doldrums and the lackluster results announced by many of the biggest technology companies. The inevitable conclusion reached from reviewing the third-quarter results and fourth-quarter outlooks from companies such as Amazon, Apple, Google, Intel, IBM, Texas Instruments, and STMicroelectronics is that the entire industry is being impacted by slowing demand by consumers, businesses, and government institutions for electronics and IT equipment.

Not even Apple Inc. (Nasdaq: AAPL) has escaped the shellacking. The wonder boy of the consumer electronics world typically beats not just its own forecast, but also the supercharged Street forecast. But on Thursday, the world's biggest consumer electronics company by sales and market capitalization reported results that missed estimates. CEO Tim Cook told investors that rumors about new products especially hurt iPad sales.

I disagree. As I have pointed out in the past, Apple isn't immune to what's happening in the general economy. Alex Gauna, an analyst at JMP Securities, told the Los Angeles Times that Apple "missed expectations for the third time in the last year and a half; that's uncharacteristic of Apple and it's something we're going to have to get used to."

Events outside the industry's control are impacting electronics companies more today than in the past. The industry is still trying to get used to that or even accept it. Belt tightening by companies, consumers, and governments is hurting sales. Here are a few examples drawn from headlines about the general economy, retailers, OEMs, and component suppliers.

• Orders for U.S. Capital Goods Stagnate as Spending Slumps
• Best Buy Says Quarterly Profit Will Fall 'Significantly'
• Amazon's results fail to meet expectations
• Ericsson Profit Drops 43% as Carriers Cut Spending
• Fed Says Economy Still Needs Its Help to Grow
• US economy likely grew slowly last quarter
• Japan approves $5.3 billion stimulus to fend off recession as economy stays mired in deflation
• Avnet reports larger-than-expected dip in sales
• STMicro Makes Plans to Get Leaner as Chip Demand Is Weak
• Texas Instruments Offers Weak Q4 Outlook

Some industry observers see the generally weak third-quarter results as an anomaly that should pass soon. I believe they point to a longer trend for manufacturers. The global economy isn't monolithic, and many places will continue to lag others in demand and growth, pressuring sales and impacting decisions about the allocation of resources.

My position is that those pressure points are here to stay, at least for the next several years. Europe and the US (the presidential election notwithstanding) will continue to struggle for many more years with economic pressures related to debts, fiscal restructuring, and the growing belief that public spending should be drastically scaled back to reduce borrowing and interest payments on government obligations.

In a few months, politicians in China have gone from worrying about an economic overheating to near panic about the possibility of sluggish demand (primarily in foreign markets) crimping employment and wage growth. Many China watchers say the country is hurting as demand for its products declines in Europe, which is battling a crippling fiscal crisis.

Taking all these things into consideration, it's obvious electronics manufacturers will find it harder to predict demand in the coming quarters and possibly the coming years. Thankfully, many companies are already taking steps to counter the dragging impact on their operations. They are monitoring demand more closely and have tamped down on inventory, using a just-in-time program that reinforces the need to have only components required for confirmed sales in stock. These actions have boosted margins and sent profits to record heights, despite flagging sales.

Many companies are watching their own expenses and have been swift to cut costs in anticipation of slowing demand. They've also instituted a more flexible, smarter, and smaller workforce system; employees can be replenished or downsized swiftly in response to changing market conditions. With the economic crystal ball fogging up at unexpected times, more actions like these will be needed in the coming quarters.