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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 {complink 379|Apple Inc.} 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.

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.

35 comments on “Electronics & the Unending Economic Crisis

  1. prabhakar_deosthali
    October 26, 2012

    In my opinion, we have too much innovation happening too fast. The speed of innovation should match the speed of economy otherwise the electronic industry would face too much of a non moving products and unnecessary obsolete products leading to too much of the e-waste.

    This has to be a concerted effort by all the biggies together so that no one feels left behind and the rat race is slowed down at least till the global economy recovers.

  2. FLYINGSCOT
    October 26, 2012

    Disposable income for most folks these days is alarmingly low.  Loans are difficult to get.  Fear pervades the markets.  It is only to be expected that companies will not be doing too well.  The question is how pessimistic the markets are vs reality as that is what sets expectations.

  3. Ashu001
    October 27, 2012

    Bolaji,

    Your points regaridng employees here are all well taken and well regarded.

    Just feel Employees need to get Leaner and more Agile too today.

    No Employee can and should be totally dependent on one Single Source of Income.

    Diversify,Diverisfy and Diversify!!!

    Employees need to think smarter,Get more Agile and be prepared to think of their feet today!!!

    Regards

    Ashish.

  4. Ashu001
    October 27, 2012

    FlyingScot,

    Yeah Man.

    I really know what you mean by your Statement here- “No Cash Man!!!”

    I just wanted to change your Statement slightly-

    The question is how Optimistic the markets are vs reality as that is what sets expectations.”

    To get an idea of what Works and what Does'nt(& what is the realistic point of view for the markets) of how Market Perspective differs from Reality check this out.

    http://www.hussmanfunds.com/wmc/wmc120924.html

    John Hussman writes an excellent Newsletter every Fortnight.

    Regards

    Ashish.

  5. Ashu001
    October 27, 2012

    Prabhakar,

    Innovation Happening too fast??? You gotta be kidding me!!!

    How are you gonna put a stop on Innovation???

    We just seem to be going faster and faster and faster and faster….

    Its entirely your decision(as a Consumer or a Company);either you Stick on for the ride or Get off…

    Its like a Wild Bull.

    Fun to ride as long as you can Hold on.

    Then get off!!!

    Regards

    Ashish.

  6. _hm
    October 27, 2012

    Perhaps it may be upcoming US election. Obama or Romney, after election things will move quicker and job market will improve considerably. Most organizations are very cash rich, but they are holding on to it.

  7. Adeniji Kayode
    October 27, 2012

    You are right on that but to attain balance between innovation and the economy is a hard tihing because sometimes innovation is even the major influence on the economy

  8. Adeniji Kayode
    October 27, 2012

    You are right on that but to attain balance between innovation and the economy is a hard tihing because sometimes innovation is even the major influence on the economy

  9. Adeniji Kayode
    October 27, 2012

    You know even if the economy choose to lack behind, innovation may tend to leave it behind I think innovation determines the economy sometimes

  10. Adeniji Kayode
    October 27, 2012

    It was innovation that brought the recession, it is still the same innivetion that will bail us out of it

  11. bolaji ojo
    October 27, 2012

    Ashish, Andy Grove, the former chairman and CEO of Intel, said in a book:

    “The sad news is, nobody owes you a career. Your career is literally your business. You own it as a sole proprietor. You have one employee: yourself. You need to accept ownership of your career, your skills and the timing of your moves.”

    I agree.

  12. Ashu001
    October 28, 2012

    Adenji,

    You are way too optimistic(Regarding Innovation's Potential).

    I have a honest belief 90% of all Innovation achieved today has very little(if any) benefit to mankind today.

    People have waay too much Time on Hand today;That's why they spend it tinkering with stuff which is best left alone!!!

    Regards

    Ashish.

  13. Ashu001
    October 28, 2012

    Bolaji,

    I could'nt agree more!!!

    Andy Grove is absolutely right and on the Ball here!Far too many CEOs talk all kinds of wishy-washy nonsense(in public) which has no practical relevance today.

    But this is stuff which anyone and everyone can and should use.

    Regards

    Ashish.

     

  14. chipmonk
    October 28, 2012

    Ashish :

       The main reason the world economy is going through a prolonged rough patch is because since the late 1980s Wall St profiteers have quite heedlessly facilitated the inducton of vast & cheap Chinese labor into the world economy.

       The first decade of Globalizatiion produced cheap products at Wal Mart Made in China but the next CENTURY would be tough for the developed world    

        Anyone with some familiarity with College Math / Control Theory could have predicted the scenario now unfolding.

      Unless something is done to put the leash back on China and their patrons in Wall St.,  get ready to be eaten alive by the 300 million poor workers in China who too want to live like the Taiwanese or Singaporeans. This will come at the expense of not just the West, but also that of the other resource poor BRIC nation i,e. India.

       You too will soon get a personal lesson in the limits of “Free Market”.

  15. prabhakar_deosthali
    October 29, 2012

    With all  the comments below, I still is of opinion that too much innovation in consumer electronics is wasting a lot of natural resources, money and people's time in unproductive areas.

    What the world needs today's is energy and water which is becoming more and more scarce . We need the world focus on increasing power generation, alternate energy sources, water harvesting and such things.

     

    These gizmos where billions of dollars are being spent by the consumers just because every six months a new generation product is forced into the market declaring the previous product as obsolete although technically it could last for another decade may be.

    Isn't it a madness? isn't it an unnecessary innovation?

     

  16. Shelly
    October 29, 2012

    But most Chinese do the work despised by the developed countries' people, scuh as the US, German; besides, they also expand consumer market. I think the reason resulting in the economic crisis is the mess production and trade. In fact, next year is still a hopeful year, after all, Chinese market is gradully recover, and the US economic growth rise to 2% from 1.5% in the second quarter. 2012 will complete political change.

  17. Taimoor Zubar
    October 29, 2012

    “With all the comments below, I still is of opinion that too much innovation in consumer electronics is wasting a lot of natural resources, money and people's time in unproductive areas.”

    @Prabhakar: I'm not sure if I'd agree with this. Innovation leads to better products at lower prices and this makes more and more people be able to afford these products. In a way, that increases the demand for the products. In the context of low demand, I don't see how innovation is the culprit here.

  18. Taimoor Zubar
    October 29, 2012

    @Bolaji: Isn't the third quarter normally the slowest each year? How does this year's third quarter compare to previous years. I suppose this is directly linked with conusmers expectations: they want to save the money to make their purchases towards the end of the year on Thanksgiving or Christmas where the prices will be significantly lower.

  19. Shelly
    October 29, 2012

    I don't agree with you. If without innovation, then there will be more and more investment in the same industry and no company being wiped out, and the whole economy will face constant maliganant competition, will the economic situation be worse?

    Besides, innovation also creat new job opportunity and energy-saving products.

  20. Houngbo_Hospice
    October 29, 2012

    @TaimoorZ,

    they want to save the money to make their purchases towards the end of the year  

    Does that suppose that the fourth-quarter revenues will the better than the third-quarter of the year. End of the year purchases do impact positively the economy, but chances are that many companies will have to revise down their revenues forecast.

  21. Anna Young
    October 29, 2012

     Bolaji good analysis on the ongoing economic situation and the impact it's created on the electronic manufacturing industry based on the companies third and Fourth quarter report outlooks. I agree, events outside the electronics manfacturing industry is bound to impact the industry like many other busnesses have been too. It's not surprising to note that electronics manufacturing industry are taking steps to adjust to changing times and demand . You're absolutely right, even the major players in the industry  i.e Apple too now realises its not entirely immune. I think these steps are essential.

  22. Anna Young
    October 29, 2012

    “The sad news is, nobody owes you a career. Your career is literally your business. You own it as a sole proprietor. You have one employee: yourself. You need to accept ownership of your career, your skills and the timing of your moves.”

    Good qutotations Bolaji. This is what changing times dictates. Challenging individuals to take ownership of their skills and the timing of moves. This is crucial in the ever changing employment market. 

  23. Taimoor Zubar
    October 30, 2012

    “End of the year purchases do impact positively the economy, but chances are that many companies will have to revise down their revenues forecast.”

    @Hospice: Normally companies make their forecasts for each quarter based on the sales in the same quarter over the previous several years. Yes, the third-quarter slum should have some impact on fourth-quarter estimates, but largely the fourth-quarter predictions rely on the past several years' behavior.

  24. hash.era
    October 31, 2012

    Is it ? Normally its the season where the prices go up.

  25. Taimoor Zubar
    October 31, 2012

    “Is it ? Normally its the season where the prices go up.”

    @hash.era: Normally companies want to clear their stock for next year so there's massive sale on Thanksgiving and Christmas each year. A lot of people wait for this time to make their purchases.

  26. Anand
    October 31, 2012

    electronics manufacturers will find it harder to predict demand in the coming quarters and possibly the coming years.

    @Bolaji, I totally agree with your opinion. Unfortunately the uncertianity is here to stay and I think not only the companies but the employees should also prepare themselves to face this uncertainity.

  27. Anand
    October 31, 2012

    Normally companies want to clear their stock for next year so there's massive sale on Thanksgiving and Christmas each year.

    @Taimoorz, has the sale season started. Are you seeing good discount this time around or companies are conservative about rebates because sales are already down ?

  28. Anand
    October 31, 2012

    Challenging individuals to take ownership of their skills and the timing of moves. This is crucial in the ever changing employment market.

    @Anna, I totally agree with you. This changing employment is very challenging. Only way to tackle this is continuously update the skill-set and keep in sync with current technology. If companies dont care about employees skill-set then employees themselves should plan to update their skill-set.

  29. bolaji ojo
    October 31, 2012

    Managing the risks in the demand-supply chain is part of the challenges facing manufacturers. Uncertainty is now built into the system but winning companies still find a way to mitigate this risk and use it to their advantage. If we agree the global system is now inherently unpredictable, the next set of skills management need is knowing how to take advantage of even this uncertainty.

  30. Anand
    October 31, 2012

    I still is of opinion that too much innovation in consumer electronics is wasting a lot of natural resources, money and people's time in unproductive areas.

    @prabhakar_deosthali, no doubt we need more research in power generation, alternate energy sources, water harvesting etc but that doesnt mean we should stop the innovation in consumer electronics. Let's not forget this sector creates lot jobs for the employees and drive the semiconductor industry.

  31. Anand
    October 31, 2012

    I have a honest belief 90% of all Innovation achieved today has very little(if any) benefit to mankind today.

    @tech4people, I dont think you can term innovation as useless. We can always use these innovations in new places in new ways, we just need to be receptive for new ideas.

  32. Anand
    October 31, 2012

    Besides, innovation also creat new job opportunity and energy-saving products.

    @Shelly, I totally agree with you but what if the innovation is distruptive technology ? It can sometimes destroy existing jobs aswell.

  33. Ashu001
    November 1, 2012

    Anand,

    Its tough to say that every Innovation that has been achieved by Man has either been Useful or Useless.

    But if you sit down and look at the list of patents which Companies(&Individuals) go to great lengths to set up;You realize not everyone of them is really-really useful.

    At no point have I disputed the need for New ideas;but I feel the Biggest reason for the Current Financial Crisis which we are suffering from Globally is this so-called Innovation.

    Sometimes simplicity and sticking to the old way of doing things works out much better(and more sustainable) in the Long-term.

    Regards

    Ashish.

  34. Anna Young
    November 4, 2012

    Anandvy that is exactly my point, employment market conditions and change reminds me of Karl Marx's conflict theory. I perceive this as a time for individuals to take stock of his or her individual 'conflict management skills' and possibly bring it in line with the employment market condition. I believe this the only way to keep abreast of the situation.

  35. hash.era
    January 30, 2013

    Taimoor: Ohh I see. Here its the opposite. They try to grab what ever they can since they know that during this time people are looking to buy things at any cost.

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