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What's the best way to cope with recession?

Posted: 26 Jan 2009 ?? ?Print Version ?Bookmark and Share

Keywords:economic crisis? market recession? semiconductor industry?

As electronics sales tumble and companies dust off survival strategies, high-tech market executives, especially those in the semiconductor segment, are confronting a downturn like no other.

Industry experts agree that the current market downturn is not the direct result of any irrational exuberance on the part of electronic manufacturers or their supply chain partners. Unlike in the past, the market did not crater this time because component suppliers built up huge inventories, added too many production plants or relied on wildly inaccurate forecastsall structural problems that earlier in the decade triggered massive corrections within the industry.

The culprit this time is more nuanced and largely external to the electronics industry. While high-tech companies have many options for mitigating the recession's impact, other players like national governments, banks and other fiscal players will this time determine how the recession plays out, analysts said.

"There will be at some point a return to growth, but this is not something we emerge from by introducing an exciting new electronic application, the right investments or by creating surging consumer interest in a product," said Dale Ford of market researcher iSuppli Corp. "To a large degree the future of this industry in the near time is somewhat dependent upon other factors such as governmental actions to stimulate the economy than on an individual industry segment like semiconductor."

That's because the problems facing high-tech started in the real estate sector, gathering force as it hammered financial companies before wreaking havoc on corporate IT equipment and consumer electronics demand. As government officials prepare economic and fiscal stimuli to energize spending, they are also complicating how companies can react to the situation, Ford said.

Government aid
In the United States alone, the Obama administration is considering injecting upwards of $850 billion in new funding for a wide range of projects into the economy. Similar actions are taking place in China, Europe and Japan. In Europe, governments are directly or indirectly taking over control of banking institutions in a so-far futile attempt to force banks to resume lending to businesses.

The tight credit situation will definitely affect how electronic companies respond to the current situation. Many merger and acquisition opportunities would likely go unfulfilled and some companies may fail because lenders are still unwilling to provide financing for transactions that could salvage their operations.

"The inability to access credit is changing the normal behavior pattern. Companies might be looking for growth opportunities but there's just simply isn't the credit to act on it," Ford said. "So, instead, governments are going to be stepping in, putting in bailout packages and distorting normal market behavior."

Even Intel Corp., the world's No. 1 chipmaker by revenue, has been blindsided by the economic weakness ravaging global markets.

Intel announced Jan. 21 it would shutter three assembly test facilities and halt production at two older fabrication plants. Moreover, it will lay off up to 6,000 employees to "align its manufacturing capacity to current market conditions."

While Intel's latest actions had been expected following the announcement of an unusual 19 percent sequential revenue decline in the fourth quarter and a 6 percent fall in gross profit margins, they still indicate how savagely the industry is being hurt by the global recession.

Furthermore, not even Intel can definitively say its latest moves will be the only major layoff and cost-cutting effort before the market turns around. In fact, demand visibility is so murky that Intel has declined to provide its usual quarterly revenue outlook for the first quarter of 2009. Instead, Intel says it will operate with an internal number of approximately $7 billion, down 15 percent from the prior quarter.

Outside forces
This is certainly a unique downturn for the electronics industry, marked by the absence of much talk about the need for a "killer application" that could revive the market. The impact on semiconductor sales has been awful even in the fastest growing regions like China and among the industry's bellwether companies.

China's once sizzling semiconductor sector, which has become the world's No. 1 market for chips, is now forecast to post a decline of about 6 percent in 2009, possibly its first drop since record-keeping began, according to iSuppli.

Again, analysts blamed the expected downturn in the China IC sector on events outside the industry. "China's economy has been increasingly affected by the financial crisis in developed countries since the third quarter of 2008," Kevin Wang, iSuppli's senior manager of China research, said in a report. "Such a downturn [in IC demand] is remarkable for a region long regarded as a vigorous and reliable growth driver for global semiconductor market."

So far, it appears no single company is recession proof. Disk drive maker Seagate Technology was pounded in its latest quarter despite continuing strength in overall demand for its storage products. Seagate executives immediately instituted another round of reorganization that included replacing both its president and CEO. Board chairman Stephen Luczo assumed both positions.

Said Luczo: "In this demand environment and in this macro environment, it's tough to pick a number to say how you want to structure your business for the long term versus the fact that the next 24 months could potentially be quite difficult, and I think most people would agree that the next 12 are certainly not going to be fun."

Other industry players have indicated that global economic weakness is hurting their operations and making it difficult for them to determine the optimum cost structure for their businesses. At Nokia, for instance, Q4 sales tumbled 19 percent and the company is forecasting that mobile device shipments will drop "sequentially to a greater extent than the seasonal sequential decrease in the first quarter of the last few years."

The Finnish company said wireless handsets sales will fall 10 percent in 2009, updating its earlier prediction for a 5 percent y-on-y drop. Nokia's CEO Olli-Pekka Kallasvuo blamed market deterioration on the broader economy.

"In recent weeks, the macroeconomic environment has deteriorated rapidly, with even weaker consumer confidence, unprecedented currency volatility and credit tightness continuing to impact the mobile communications industry," Kallasvuo warned in a statement. "We are taking action to reduce overall costs and preserve our strong capital structure."

Those actions were welcomed by the market, but, ultimately, salvation for the electronics industry may rest purely on actions external to that market.

- Bolaji Ojo
EE Times

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