After many years of cost-cutting, sales diversification and complex reorganizations, the electronics industry ap- pears to be better positioned than ever to withstand the shocks now reverberating through the U.S. economy.
Whereas the last major recession devastated the industry, dooming some companies and leaving many reeling for years, this time it seems unlikely that the storm brewing in the larger U.S. economy will rip apart the electronics ship.
Even though many of the leading electronics companies have been reinvesting profits and acquiring rivals sometimes on a cash-only basis, the balance sheets at many of the companies reviewed by EE Times show low to zero long-term debts, small inventories and swollen coffers--the necessary ingredients for surviving a downturn or slower-growth environment.
It wasn't sheer luck that drove the industry to this point. Over the past five years, electronics manufacturers and their components suppliers have taken critical steps to improve their financial positions.
To avert a repeat of the devastating industry decline of 2001, and in response to major economic and geographic changes in the market, electronics companies have adopted strategies they believe will reduce their exposure to the market's wild growth cycles.
Leading North America-based high-tech firms (including OEMs, semiconductor suppliers and electronics manufacturing services providers) have sold, spun off or shuttered un- profitable or noncore business units, expanded product lines through innovation and strategic acquisitions, primed their supply chains for optimal performance, engaged in outsourcing relationships, and reinvested profits into new products.
Moreover, the industry did not repeat the mistakes made during the late 1990s, when companies overpaid for acquisitions that turned out to be duds when the market collapsed.
These efforts, which continued through the third quarter, have paid off tremendously, leaving many companies nimble and well-positioned to explore new opportunities even as demand begins to falter, according to industry analysts.
Lean inventories
A comprehensive survey of inventory levels conducted recently by analysts at market firm Thomas Weisel Partners LLC indicates that electronics manufacturers intensified efforts to trim supplies as the third quarter drew to a close, contrary to the traditionally vigorous buildup typical of preparations for higher end-of-year sales.
"Total inventory days for the entire [electronics] supply chain declined 3 percent quarter-over-quarter, to 43 days, vs. the historical average quarter-over-quarter increase of 4 percent, but in actual dollars grew 2 percent, on a better-than-average quarter-over-quarter rise in sales," Matthew Sheerin, an analyst at Thomas Weisel, said in a statement.
"EMS companies and semi suppliers, which were swimming in record-high levels in the first quarter, saw the biggest reductions, while the rest of the key segments were up or down slightly," said Sheerin. "This progress should set the stage for recovery in the semiconductor/components cycle in coming quarters."
However, the pressures of a likely market downturn are beginning to build, albeit slowly. Several electronics companies have warned that sales growth could slip starting in the fourth quarter, and many observers see further potential weakness ahead in key segments. One such segment is personal computing, which soared in the third quarter, boosting revenue at leading microprocessor supplier Intel Corp. and rival Advanced Micro Devices Inc.
Some economists say the consumer market could lead the economy into a recession. "The consumer market seems destined for a recession. The confidence surveys are suggesting as much," said Merrill Lynch & Co. Inc. economist David Rosenberg.
Even if the U.S. economy craters in the first half of 2008, the impact on the electronics sector initially might be limited. In fact, while sales might drop off somewhat at these companies, their relatively strong cash position, light inventory loads and low operating costs make it unlikely that the industry would see the same levels of write-offs and adverse effects seen during the 2001 downturn.
That recession caught many companies in the sector by surprise. Loaded down with debt and huge inventories, hundreds of companies across all segments of the industry collapsed; many went out of business, while others took years to recover.
It is different this time around. Corporate accounts across the industry are swollen with profits generated during the growth years; operating costs are at their leanest, partly a result of outsourcing and tighter expense management; and inventories--a key area in which the industry has taken a beating in previous market downturns--are at their lowest levels in years.
The industry is flush with cash. Consider Cisco Systems Inc. At the height of the last industry downturn, Cisco wrote off more than $3 billion in excess inventory that the company had piled up in an attempt to meet roaring de- mand. That demand collapsed, of course, when the Internet bubble burst.
Cisco is not making the same mistake this time around. In its latest quarter, the company reported only $1.3 billion in inventory, despite expectations for double-digit growth expressed by chairman and CEO John Chambers.
Cisco also closed its latest quarter with cash and short-term investments of about $25 billion and only $6.6 billion in long-term debt.
During the last downturn, the company recorded a $2.25 billion excess inventory charge during its fiscal 2001 third quarter. It also posted a $1.17 billion special charge in the prior quarter for "operating expenses and an additional excess inventory charge."
Apple Inc. is faring even better. The company ended the third quarter with more than $15 billion in cash and short-term investments, zero debt and only $346 million in inventory.
Overall, the seven North American OEMs reviewed by EE Times (Apple, Cisco, Dell, Hewlett-Packard, IBM, Motorola and Nortel) collectively had some $98 billion in cash and long-term debt of $37 billion at the end of the September quarter.
Semiconductor companies are also in generally good shape after several years of double-digit sales growth. Led by Intel Corp., the world's No. 1 chip maker, the group of six companies reviewed by EE Times had almost $30 billion in the kitty and only $10.6 billion in long-term debt as they concluded the September quarter.
Even the margin-challenged electronics manufacturing services (EMS) sector appears to be exerting better control over inventories, although the five companies reviewed had cash reserves of only $2.9 billion combined at the end of September.
Inventory for the EMS companies totaled $4 billion--a low level, according to analysts--while long-term debt stood at a reasonable $3 billion.
