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.
- Currency war/fluctuations:
- Higher economic uncertainty:
- A weaker global economy:
- Supply chain nightmare:
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.”
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.
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.
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.
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.