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.