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Who's immune to the global downturn?

Posted: 17 Feb 2009 ?? ?Print Version ?Bookmark and Share

Keywords:downturn global? companies high-tech? economy electronics?

The industry has been asleep at the wheel. More than a year after the U.S. economy officially slid into recession, high-tech companies are suddenly discovering they're not immune to the now-global downturn.

It boggles the mind: The industry that successfully stretched beyond computing to penetrate, develop and market applications for the consumer electronics, communications, data networking, industrial and medical fields!all key segments of today's economy!is stunned to be affected by economic vagaries.

In Q4, revenues at most electronics companies plummeted by double-digit percentage points, an unwelcome development for an industry known for strong closings to every year. Most amazingly, many of the companies reporting financial results expressed surprise at the speed and severity of the decline in customer orders for the final quarter.

Many provided quarterly updates halfway into the period but revised their guidance weeks later, citing a sudden and sharp deterioration of demand. Industry executives said customers slammed the brakes on all but the most necessary orders midway through the quarter.

Why was anyone surprised by this development? And why did the industry continue building inventory in Q3 in anticipation of a blowout finish to the year?

Many executives have noted this recession did not result from their actions or inaction such as the inaccurate and exaggerated forecasts, manufacturing overcapacity, inventory excess and demand mismanagement that in the past have devastated the industry. But the deer-in-the-headlights excuses aren't convincing.

This recession was predictable, and its future direction can be tracked with some certainty. But we need to look back a few years to trace its origin and the eventual impact on the global economy.

Flashing red lights
Since the early part of this decade, the U.S. government has poured hundreds of billions into local and worldwide economies to prosecute the Bush Administration's War on Terror, including the wars in Afghanistan and Iraq. At the same time, low interest rates and easy credit fed a giant surge in consumer purchasing, generating huge revenue and profits for all sectors of the economy.

It was apparent that this level of spending was unsustainable and that consumers would eventually clamp down on purchases. That's when the red lights should have been flashing in corporate boardrooms, well ahead of the real estate and financial implosions that fueled the downturn.

Shockingly, though, electronics executives somehow assumed the industry would remain unscathed, even though the warning signs were clearly visible well ahead of the Q4 sales collapse. Now they have to deal with ballooning inventories at component suppliers that are shuttering plants to reduce expenses and sync up production with dwindling demand.

Because of the severity of the cutbacks in consumer and corporate IT equipment demand, as well as continued layoffs, it can be safely assumed that the economy will need some time to bounce back!possibly three years, worst case, and at least another year in the best-case scenario. It would be irresponsible to assume otherwise.

The economic stimulus actions being launched by governments worldwide, including the $800 billion to $900 billion package under consideration by the U.S. Congress, will help reduce the severity of the recession. They won't reverse several negative developments, however, and they might even lay the foundation for future dislocations in the global economy.

Meanwhile, electronics manufacturers should not assume consumers are eager to resume reckless spending. Economists generally agree that consumers who receive tax rebates will likely use them to pay down debt. The fear of losing jobs is forcing families to increase savings. Any additional income will probably be put aside or used for essential purchases.

Furthermore, the frozen credit markets are not thawing fast enough to give companies and individuals access to funds that could stimulate consumption. And even when credit starts flowing again, gun-shy consumers and businesses are likely to be more careful in assuming debt, which means that companies can!for now!forget about matching record revenue growth rates.

There's a bigger problem down the road: No government, however rich, can continue to pump money into the economy the way Western countries have of late. Many of the larger economies are borrowing heavily to stimulate economic growth temporarily. Eventually, countries will have to figure out how to balance stretched budgets and rein in deficit spending. At that point, global economies and individual businesses will once again experience a withdrawal, a tightening and an eventual recession.

I can't tell you when that will happen, but I am under no illusions that it can be avoided.

- Bolaji Ojo
EE Times





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