The electronics market is sliding into low growth or even negative growth territory with many of the industry’s bellwether manufacturers rolling out fourth quarter revenue guidance that have largely fallen short of analysts’ consensus estimate. And while almost nobody is trotting out the dreaded “downturn” word yet, concerns are building up in the industry over signs end-of-year sales could be sluggish in addition to the poor visibility into medium and long-term demand at end markets.
Forecasts issued so far by many of the electronics industry’s biggest components suppliers and contract manufacturers have stirred fears the market’s serial downturn might be returning although it’s too early to tell if this suspicion is correct. Forecasts provided by bellwether companies like Broadcom Corp., Intel Corp. and Texas Instruments Inc. were less cheery than analysts were expecting and resulted in investors driving down their market value.
Further down the supply chain many components suppliers and electronics manufacturing services (EMS) providers that have announced results indicated sales weakened through the end of the third quarter and noted the soft performance had continued into the December quarter. In some ways this was expected for components suppliers to PC vendors but there were indications also that suppliers to the hotter smartphone and tablet markets are also hurting.
“Although the overall global economy feels like it has more momentum than it did this time last year, there’s clearly still uncertainty given slow job growth, the weak economy in Europe and an unsettled U.S. government budget,” said Thomas Lynch, chairman and CEO of TE Connectivity while discussing the company’s latest quarterly results.
The third quarter financial results that have been announced so far weren’t too far off the mark, though. Component suppliers generally matched or exceeded expectations while many OEMs, distributors and electronic manufacturing services (EMS) companies also beat forecasts. Those estimates had been trending down since July, though, and sales at many firms grew only in the single-digit or were unchanged from the year-ago period as in the case of Intel Corp., which reported flat third quarter revenue of approximately $13.5 billion.
Intel CEO Brian Krzanich in a statement described the market situation as “tough” and said fourth quarter revenue would be approximately $13.7 billion, “plus or minus $500 million,” meaning sales could also be flat from the comparable 2012 quarter. Some companies, including contract manufacturer Flextronics International Ltd., started tamping down expectations at the beginning of the second quarter due to what it perceived as “some softness” in several end-markets, according to Michael McNamara, CEO.
“We’ve been talking about our expectation for a muted seasonality for the past few quarters. Despite more positive data point a quarter ago, we remained cautious in our outlook and our views,” McNamara said during a conference call with investors. “It turns out that our cautiousness was not only prudent, but that many of our customers and suppliers underestimated just how muted the seasonality would ultimately be as evidenced by the earnings reported so far this quarter.”
Forecasts for the fourth quarter were generally tepid, drawing concerns companies were bracing for weak sales during the holiday and end-of-year seasons. At Broadcom Corp. executives are forecasting fourth quarter revenue of $1.79 billion to $1.975 billion, “plus or minus 3 percent,” according to chief financial officer Eric Brandt. This would put Broadcom’s December 2013 quarter sales slightly below the $2.08 billion it reported for the 2012 comparable three month period.
Brandt told investors during a conference call that the company was experiencing “some near term headwinds to sequential growth, including softness in wireless connectivity, intense competition for M3G platforms without our 4G LTE revenue until 2014, softness in broadband access and roughly seasonal decline in our infrastructure business.”
Low Growth or Negative Growth?
Could the weakness extend into the first quarter of 2014 and deep into the first half of the year? That’s a nagging concern for most executives in the electronics supply chain but they don’t see a major storm on the horizon yet. Most executives worry about the “uncertainty” and “volatility” evident in the global economy and are tightly managing their businesses to avoid being caught flatfooted. The concern hasn’t reached boiling point yet, though, because of two factors.
First, inventories remain tight and manageable across the industry and, second, balance sheets across the industry are in reasonably healthy conditions, which puts component suppliers and distributors in a great position to benefit from any unexpected demand surge, according to Gerry Fay, global president of the Electronics Marketing division at Avnet Inc.
“We are in a low growth market,” Fay said in an interview. “The one good thing I can say is that if we get any kind of demand there’s not a lot of inventory in the channel so that would turn into nice growth.”
With many of the leading companies anticipating lackluster finish to the year and fearful about their prospects for 2014. Even Apple Inc., which exceeded third quarter sales forecasts, is predicting an equally strong December quarter, the feeling among industry executives is that a creeping weakness first noticed in July could turn into a rout if the global economy failed to pick up strongly in early 2014.
“We are in a world that has limited visibility,” said Steve Luczo, chairman and CEO of Seagate Technology, during a discussion of the company’s results with analysts. “We are playing in a world that’s relatively flat on unit.”