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5 Ways a US Default/Downgrade Could Hit Electronics

Electronics industry executives are notoriously reluctant to comment on events in the larger economy or in the political sphere. That hasn't changed even now, despite heated US debt/budgetary talks and ominous warnings from economists about events in the country.

On Wednesday, President Obama abruptly ended discussions with congressional leaders, reportedly out of frustration. Federal Reserve chairman Ben Bernanke later warned of “calamity” if the country defaults on its debt payments, and Moody's Investors Services threatened to lower its Aaa rating on US bonds. Industry executives are still staying out of the fray.

Silence, however, does not translate into approval, disapproval, or disinterest. Executives know their industry will be disrupted by any economic instability. Below are five potential sources of damage to the electronics industry.

  1. Currency war/fluctuations:
  2. Any sharp movements in the value of a company's reporting currency will have some impact on sales and profits. Companies that report sales in dollars but generate a large portion of sales from foreign countries will report higher sales if the dollar continues to weaken. The reverse will be true for others. Bloomberg News reported today the Swiss franc “strengthened to records against the dollar.” That has scared Swiss banking giants. See also “U.S. Dollar Swings Violently as Moody’s Announces Review of Aaa Rating.”

  3. Higher economic uncertainty:
  4. As I've noted in the past many US companies are sitting on a mountain of cash and are reluctant to spend on hiring or on manufacturing facilities. (See: Cash Hoarders & the Confidence Crisis.) The situation has changed only in one respect since last October when that blog was published; the cash hoard is bigger still. For example, Apple at the end of March had $66 billion in cash and investments, compared with $41.7 billion one year earlier. The figures include $36.5 billion in long-term investments versus $18.6 billion in the prior year. Companies remain constrained by lack of clarity on the future of the major economies in Europe and North America and thus aren't hiring or spending on capacity expansion plans.

  5. A weaker global economy:
  6. Despite its current weakness, the US economy is still the largest consumer market in the world and the engine of global growth. Continued turmoil in the US will undermine global economic expansion at a time other major regional economies are similarly engulfed in fiscal problems. JP Morgan CEO Jamie Dimon reportedly said a US default would be “potentially catastrophic” for the world. I don't know if I would go that far, but I have to concur with Pacific Investment Management Co. CEO Mohamed El-Erian, who said that “we would be in the land of the unpredictable.” For electronics makers this would translate into reduced US government patronage and a cutback in the purchase of IT equipment from everyone else.

  7. Supply chain nightmare:
  8. It's easier to manage through solid growth or even sinking sales when it is fairly anticipated or predicted. The electronics supply chain can't be switched off and on at whim, and the challenges posed by unforeseen demand fluctuations can severely damage companies' ability to meet sales goals. Also, the industry benefits more from broad-based economic expansion than from sector-specific growth. The distortion in demand will be huge if demand is not widespread across the economy.

  9. Recession?
  10. Mark Zandi of Moody's Dismal Scientist is convinced the current impasse over the debt ceiling could “trigger a new recession virtually overnight.” In a report Zandi enumerated the likely problems. My favorite was the potential impact on emerging economies like China and Brazil, which are struggling to contain inflation, fast-appreciating currencies, and overheating demand. Zandi concludes: “While companies aren't laying off workers, they remain reluctant to step up hiring. Firms can't seem to shake off the nightmare of the Great Recession.”

Frankly, hiring in this environment without triple-checking the numbers would be plain silly.

12 comments on “5 Ways a US Default/Downgrade Could Hit Electronics

  1. AnalyzeThis
    July 14, 2011

    Without getting political, it's been very frustrating for me to see how these talks have been playing out thus far.

    Unfortunately, Bolaji, I agree with you on the potential damage that might be done and further agree that hiring in this environment is pretty much a complete shot in the dark. Which is incredibly unfortunate.

    As for the supply chain concerns, this is especially concerning to those of us working in electronics because the outlook on what to expect for this upcoming holiday season seems to change on a daily basis. It's hard for me to speculate on potential product demand because there is just so much uncertainty and so many things that may go wrong, but if I'm too pessimistic and things aren't so bad… well, we lose in that scenario as well.

    Anyhow, I hope this is all resolved very soon because the last thing we need is further economic turmoil.

  2. FLYINGSCOT
    July 15, 2011

    I agree with the blog and subsequent post.  I am in the electronics design and manufacture industry and it appears we have been bobbing up and down not really going anywhere for a long time now.  We too have decent cash reserve in the bank but we are continually trying to reduce costs for fear of things degrading again.  We are not hiring nor travelling that much.  With the recent press articles talking about double dip recessions and country debt mountains etc. I cannot really imagine we will see boom times for several years to come.

  3. Jay_Bond
    July 15, 2011

    It is hard to believe that in a financial crisis our political system can't get along to help solve our problems. They fail to realize the serious ramifications that our country is facing. It seems like their own personal agendas come first before our countries people and businesses. It is a shame that many companies have hiring freezes going on currently. There are many qualified people looking to work, but it makes sense in light of our current situation to hold off and wait.

  4. DataCrunch
    July 15, 2011

    I strongly believe that the US will not default and a deal will be struck.  Both parties understand that there is too much at stake.  We'll know for sure soon enough.

  5. eemom
    July 15, 2011

    This speaks to the sad state of affairs in our country.  It is frustrating and disheartening watching the news with speech after speech from both sides who are clearly not listening to each other and are only interested in their own personal and party agendas.  With campaigns starting, it looks like most are more interested in getting elected than in working through the issues of the country.

    In my heart, I do not believe that we will default.  I feel that this is all positioning for now but when push comes to shove, an agreement will be reached.  If not, the electronics industry will not be the only one to suffer.

  6. Anna Young
    July 15, 2011

    I'm sure the US government and the political parties realises that all eyes are on them and more so, much is at stake if it fails to reach an agreement to resolve the economic situation

    Hence, US government knows better it cannot afford to default on its debt payment.

  7. itguyphil
    July 17, 2011

    O Politics. Once again, this is a exemplary example of how politics gets in the way of real work that needs to get done. And no time like an upcoming election year for the incumbents to put the American population on the edge of their seats while dong there positioning.

  8. mfbertozzi
    July 17, 2011

    Several times in the history, US has played has “engine” to grow in technology and in economy. Internet, globalization, how to move forward towards green are only a few example of financial successes. Right now, what's major lack in reproducing similar “boost”?

  9. Anand
    July 18, 2011

    “Companies remain constrained by lack of clarity on the future of the major economies in Europe and North America and thus aren't hiring or spending on capacity expansion plans”

    I think companies should now concentrate more on countries like China/India. Companies should invest more and more in these markets because they have huge market to tap. I hardly see any Apple products in India (Samsung mobiles have captured the mobile market).

  10. Anand
    July 18, 2011

    @Dave,

      Why do you strongly believe that the US will not default and a deal will be struck ? Both the parties knew what is at stake from beginning, still they are dragging this issue for so long. This doesn't instill hope in me.

  11. hwong
    July 21, 2011

    I think U.S. is still leading in many innovations for the future. However, with the debt that our nation has incurred, things are very uncertain in the future.  How much does other countries still trust us if we are so cash tight?  If Obama/Bernanke is going to cut spending, how will that actually affect the GDP as a whole when people are feeling like they are poor and unwilling to spend money? But if they don't cut, then how big of a debt will we sink more into? It's not an easy question. Even top economist cannot answer you. They can perhaps hypothesize and simulate some potential probabilities. But….we'll have to see how things play out ourselves.

  12. mfbertozzi
    July 21, 2011

    You are right hwong, it is not absolutely easy to discover the solution path and maybe nobody has got a “magic ball”. Anyway events in the history have reported once US started war activities in the early decade of 21st century, business was really impacted and growth experienced at the time of Clinton / Al Gore, stopped. Your are right…we will see.

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