Will Global Economic Problems Hurt Electronics?

Our collective economic migraine is back, and this time it's hammering even the global regions and business sectors that avoided the worst of the 2008 financial meltdown.

The electronics sector is already feeling the chill. Companies like NXP, Freescale, Philips, HP, and others in the consumer electronics market have already indicated the third quarter and perhaps the entire second half of 2011 may not be as rosy as initially expected. In fact, the current forecast for semiconductor consumption and sales in 2011 is sliding into recession territory.

There are indications the global economy won't grow as strongly as initially forecast in 2012. The latest news from Europe, North America, and even certain parts of the so-far-resilient South East Asia paints a dire picture. Today, major stocks indices globally continued to sink, rolling from Hong Kong to Europe and then North America, as worries persist about plans to bail out Europe and concerns the euro debt crisis was even spilling over into Italy, one of the region's biggest economies.

The financial crisis is worrying enough, but even in manufacturing — this is where electronics OEMs and component vendors need to be watchful — Europe isn't doing that much better, according to the latest survey reports from the region. The Markit Eurozone Manufacturing Purchasing Managers' Index (PMI) for the Eurozone sank to a two-year low in September with even Germany suffering a near slump below the mark that signifies expansion.

If Germany is wobbling, what can anyone say about Spain or Greece? But the historical PMI performance is less bothersome than the new orders index, which is also on a downward trend and pointing to poor expectations for the next few months. Here's how Markit summed up the trend:

    The outlook for the Eurozone manufacturing sector also darkened. Firstly, backlogs of work dropped to the greatest extent since July 2009. Secondly, the forward-looking new orders-to-finished goods inventory ratio fell for the seventh month running.

Just in case you were wondering if this decline was restricted to Europe, here's the nasty news. It's not. The global manufacturing environment is worsening, according to the JPMorgan Global Manufacturing PMI, which also slid below the expansion point of 50 in September. Again, the index fell on a decline in new orders.

“The signs point to weak growth or possible month-to-month declines in industrial production in the next few months,” said David Hensley, director of global economics coordination at JPMorgan, in the statement announcing the PMI result. “The PMI output index has stagnated in recent months as the trend in new orders has switched into reverse gear, exacerbated by declining international trade flows.”

It's easy to imagine the electronics market emerging unscathed from this, but it is highly unlikely, and the it-can't-happen-here mentality can actually worsen the situation because it will mean corporate managements won't take steps to limit production. And as we know, this industry is susceptible to excesses and volatility. It overproduces components in times of roaring sales and cuts savagely when demand drops, leading to acute shortages as sales rebound.

The data tells me the industry needs to be cautious. As I was wrapping up this blog, a report popped up about the price of crude oil, typically a foreteller of events in the larger economy. The headline was: “Oil drops to lowest price since 2010.” Huge demand to fuel manufacturing growth in countries like China and India helped prop up the price of oil in recent years, driving this above $100 in September 2010, but now prices are trading at about $78 per barrel. If demand is stalling in these two economies, the rest of the world needs to be extra cautious.

And so should electronics makers. The industry has to pay closer attention to forecasts and track actual consumption even more closely. As companies prepare for the traditionally strong December holiday sales, they need to be conservative with sales projections and tailor manufacturing output accordingly. Failure to do this will result in some heavy discounting in the first quarter.

11 comments on “Will Global Economic Problems Hurt Electronics?

  1. Hawk
    October 3, 2011

    I hear you loud and clear Anna but how do you prepare for this unknown? The debris of the financial meltdown that we thought we had cleared away is coming back and demand uncertainty is here again. The industry is being careful but the challenge of the electronics supply chain is finding a way to match your forecast to actual sales. If you overshoot, you end up with too much inventory and, if you didn't produce enough, you lose sales to rivals. How clear, though, is your Crystal ball?

  2. mfbertozzi
    October 4, 2011

    Good point Hawk, unclear crystal ball seems the real problems. For example, if we focus on some important players very experienced in business, as HP, RIM and Nokia, it appears lack of strategy and clear path to follow report as consequence reduction of profit and revenues, then jobs cut then financial crisis in our society. It is a real chain.

  3. Jay_Bond
    October 4, 2011

    I think the bigger picture is not will global economics hurt the electronics industry, but how bad will it affect all key elements of the major economies. With all the uncertainty of the Euro crisis, compounded with an Asian slowdown and a fluttering U.S. economy, it would seem like we are very close to a tipping point. The price of oil is a very good indication that there is a global slowdown. This can be good for consumers who feel less pain at the pump and might be able to spend a little more money buying “want items”, but this may also be sending a signal to companies that were looking to expand hiring, to actually cut workers. Overall we could still be seeing higher unemployment rates globally.

  4. Ariella
    October 4, 2011

    Ah, if only we did have a crystal bowl, Hawk. It seems to me that Anne's argument is that, as we do not have a crystal clear view of the future, businesses should err on the side of caution — going for the lower estimate of production in order to minimize the risk of unsold inventory.

  5. elctrnx_lyf
    October 4, 2011

    these are very difficult times to any company. This is purely result of wrong demand estimations. There is too many companies too many products but too few people who really want to buy them. I would suggest the companies should keep investing if they believe in their products and technology. Only then the ball keeps rolling otherwise its only an end.

  6. Anna Young
    October 5, 2011

    @ Ariella, thanks for the clarifications. That is exactly my point. Industry need to pay closer attention to the forecasts, track actual consumption to minimize  overproduction.

  7. Anna Young
    October 5, 2011

    @ Hawk, I wish there was a crystal ball to predict and direct the path to follow in this instance(Lol). The data speaks loud and clear. JP Morgan Global Manufacturing PMI clearly stated, “The global manufacturing environment is worsening” It suggests to me that the industry needs to exercise caution when projecting forecasts and actual production.There is no clear cut route to resolving the current situation.

  8. Anna Young
    October 5, 2011

    @ Elctrnx_Iyf, You're absolutely correct – it is a very difficult period for businesses. It is a matter of balancing the demand and supply.

  9. Anna Young
    October 5, 2011

    @ Jay_Bond, I agree there might be further global unempolyment situation in 2012. The world political leaders are worried about the gobal impact of this overwhelming financial crisis. Banks, industries and busnesses are worried. The forecast is that Europe will move into recession early next year. It is indeed a worrying time overall.

  10. Kunmi
    October 5, 2011

    Companies are really fighting the unknowns. The global economy is already down the hill and everything is being affected. This will hurt electronics and its supplies because consumers will be placing their priorities and eliminate what they consider non-essential at a particular time. I do not think any crystal ball can reflect any sudden recovery. Coming down the hill his more faster than climbing up the hill. The recovery process will be slow but it will surely come.

  11. Adeniji Kayode
    October 6, 2011

    @Kunmi, I quite agree with you that in a time like this, electronics really show itself as a seroius liability, sp people start to set their priorities right. They suddenly become an econimist and start to economise their limited resources, then the list start from food and run down to the least important which would have been a more priority if not for the recession.

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