Don't Overbuild: Sales May Lag End-of-Year Forecasts

From my corner of the world, the outlook for the end of the year is weak at best and dismal at worst. Euro-zone nations and the United States are stuck in a financial and economic mess, Japan is still mired in a pattern of lackluster decade-long growth, and recently, oil prices have turned down and fears are rising that even the fast-growing Asian economies could catch the cold drifting over from developed nations.

All these things tell me that electronics manufacturers need to be very wary as they plan for end-of-year sales. The response so far to a poll question on the subject on EBN reflects the concern many have about how the market will perform in the second half of the year. (See: Business Environment.) So far, almost 60 percent of the respondents have said they expect sales in the second half of 2011 would be either weak or fair: About 32 percent of the 73 respondents said they expect weak sales, while 27 percent are expecting sales to be fair. Approximately 29 percent of the respondents are forecasting strong sales, while more than 12 percent were unsure.

I am in the fair-to-weak camp. Sales for the fourth quarter will likely lag expectations, but the first quarter of 2012 will be horrendous if the current economic malaise persists. There are already indications consumers aren't too comfortable with their financial and employment prospects. But the greatest indicator of a likely dismal sales environment is coming from a traditionally reliable corner of the economy. Weak energy prices have been a reliable predictor of economic conditions three to six months ahead and current trends do not bode well for the market.

Crude oil prices jumped in the last several months as the dollar weakened, but prices have started weakening again. This may be good news for motorists, but it is also pointing to the likelihood of below-expectation or even dismal demand in the holiday season, a period many manufacturers use to beef up annual sales.

The danger is that many companies won't believe a derailed train could be heading their way. Production for end-of-year sales is either in full swing or getting cranked up. The current production schedule might be based on forecasts generated in June or even earlier when conditions were rosier and the global economic environment was less turbulent. The forecasts aren't likely to be completely off the mark, but even a few percentage point swing in the wrong direction could cause untold headaches.