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Asia Trembles as the West Reels

It's common to read that consumers make up 70 percent of the US economy, which is the world's largest and certainly the largest for electronics. I can't confirm the figure, but Robert Reich, the economist who served as Bill Clinton's secretary of labor, repeated it in an item this week. Whatever you think of Reich, he's not known for throwing around numbers willy-nilly. So let's assume the 70 percent figure is at least in the ballpark.

If so, then some of the crowing this week from across the International Date Line is premature. True, booming economies in places like Indonesia, along with the cash-heavy bankers in China, contrast starkly with pictures of London burning and Washington running in circles. It is easy to think this week that Asia really does live in the future. Europe's no better than we are. Over the next 10 years, would you rather be in business in France or in Singapore?

But East Asia is bluffing. If 70 percent of America's economy is in the hands of American shoppers, East Asian electronics suppliers are particularly exposed — more so than resource-based regions like the Middle East — to a second American recession. Put most simply, if Americans don't buy gadgets, then multinational fabrication, assembly, and support operations start to sag.

With lead times measured in months, orders already in the pipeline for the American Christmas shopping season now face dramatically uncertain end markets. And credit, which had fueled a particular boom in high-end consumer electronics — plasma TVs, high-end gaming systems, and $500 smartphones — has evaporated, in some cases with the banks that underwrote the cards.

The doomsday scenario looks something like the one the auto industry faced in 2008. Cars, like electronics, have vast multiregional supply chains, so the collapse of an automaker ripples throughout a region. When Washington bailed out Detroit (a controversial decision at the time), it was to save jobs up and down the automotive supply system.

Electronics, though, is a whole separate order of magnitude. Instead of a domestic industry, it's a vastly international one. Where the auto industry bailout was a US government action to protect a (mostly) domestic supply chain, a crash in US consumption of electronics would have international repercussions. It would go beyond any one government's ability to prop up, and it would touch many more people in dozens more places.

A phone that starts as a PCB in Korea goes to a solderer in China. It then goes for final assembly to Vietnam and then to a big box store in Chicago, where it had better have a customer. And if that customer just saw a news story that the Dow is off 600 points and the country is broke, maybe he or she isn't feeling as strong a need to upgrade this year. If enough people do that and 70 percent of the US economy hiccups, electronics manufacturers will feel it more directly than other highly globalized industries.

So what's Asia's play? The good news is that East Asia has an interest in global recovery. Nations hosting the electronics supply chain need the American consumer to have disposable income. No one knows where the current drama is going, but we can probably bet that the real talk in Asia is about avoiding more damage in the US and Europe.

The electronics supply chain is one of the original globalized businesses. It's no longer clear which end is the tail and which end is the dog, and it's certainly not clear who is wagging whom. But it is, thankfully, clear to everyone that it's all part of the same animal.

8 comments on “Asia Trembles as the West Reels

  1. SunitaT
    August 16, 2011

    “It's no longer clear which end is the tail and which end is the dog”

    Marc,

     Thanks for the post. I agree with you that its no longer clear which end is the tail and which end is the dog. I guess it would take another couple of years or may be another decade to decide this. I see two options. Either US will reover from this recession or China will beat US and will be new number one.

  2. Marc Herman
    August 16, 2011

    Could be. I wonder if we don't tend to devote too much attention to the Pacific. Brazil, for example, is an interesting story amid all this. Rather than a US/EU and China/Asia dynamic, it's a global one. And there are a TON of electronics heading to Latin America, where Brazil is booming, and more heavily wired than generally acknowledged. Thanks for the comment.

  3. Barbara Jorgensen
    August 16, 2011

    Thanks as always for your perspective. I'm not sure it matters anymore which end is wagging what–as you point out, the entire body is shaking, and not always in a good way. Your point about banks, lending and credit is especially important–even if the jobs market and stock market weren't discouraging, BofA's move out of foreign credit card markets should be a red flag. I think consumer spending is in serious jeopardy, but I'd like to be wrong.

  4. garyk
    August 16, 2011

    Once CHINA has taken all the manufacturing out of the free world (Europe and the US) and there is level of people that can't find jobs, who is going to buy all the new phone and gadgets being produced?

  5. Daniel
    August 17, 2011

    Marc, I think it may not be the case for all electronic devices. For Smartphone, US is providing a big market exposure, but basic and other types of phones companies are hardly finding any markets in US or European countries. At the same time basic mobile sector have a major market in Middle East, Asian and African countries. Similarly for other devices like desktop PC, Laptop, MP3 etc have a good market in these countries. But for High end devices, companies may face difficulties to find any market in these countries and they have to target either US or European markets.

  6. jbond
    August 17, 2011

    This is an excellent perspective on the current status electronics vendors are looking at. I agree with Barbara's comment on the whole body is shaking, if one segment falters, it is felt throughout the markets. It is going to be interesting to see how the economy and consumer spending come into play as the major shopping holidays approach. On the bright side, if you have some disposable income I think there are going to be some outrageous deals on electronics in the next few months.

  7. Ms. Daisy
    August 28, 2011

    Excellent question! Chinese goods depend on the consumption level of the US and European consumers. The demand for goods is definitely going on the decline because of the uncertainties in the global economies, wars, and threats of unrest in Europe, and Middle East.

    But the greatest of all is China's open door to all who want to outsource their products and technologies, which in turn leaves those other countries with un-employed citizens. The balance then shifts with consequent decrease in demand and China is stuck with the products.  May be China will export to developing economies its surplus.

  8. garyk
    August 30, 2011

    Nice thought, once CHINA exports to the develevoping counties, who is going to pay the activation fee, phone bill and internet charges?

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