The global electronics supply chain will this year confront again some of its old demons and dozens of new ones, ranging from natural disasters to man-made misadventures, management blunders, troubled acquisitions and failing to anticipate and respond to changing market conditions. So far, though, nothing on the horizon indicates the electronics industry should be bracing for a major shock to the supply chain in 2014.
As companies prepare their supply chains for what looks set to be a fairly normal economic environment – that is, single to low upper-digit industry growth rate – electronics executives are nevertheless being asked to refresh their crisis management guides and training in case the totally unexpected happens during the year.
Most likely, though, many of the challenges that electronics manufacturers and the supply chain are likely to face throughout this year are the same humdrum types that have dogged the industry for decades. Electronics Purchasing Strategies compiled a list of these factors. Many of them have been used in competitive situations by companies that managed to squeeze out advantages from what might seem to be problems while others, failing to effectively manage the challenges, lost grounds to nimbler rivals. In other words, we found that these so called challenges also contain kernels of opportunities.
Here are the Top 10 Supply Chain Challenges identified by EPS:
- Growing Product Complexity
- Developing Competitive Differentiation
- Rapid Product Obsolescence/Shorter product Lifecycle
- Demand and Supply Volatility
- Pricing, Logistics and other Cost Pressures
- Growing Regulatory Complexity
- Geopolitical, Economics and Other Known Natural Risks
Fortunately for electronics enterprises, the industry is well positioned to weather these challenges. Many companies have improved their leverage over the last years by taking advantage of low borrowing costs to refinance old loans. Having tamped down on costs too, the industry coffers are full with many cash-rich companies still hesitant to hire due to limited visibility into long-term demand. Higher productivity has helped too, giving companies the opportunity to make do with less in all operational areas.
Flush with cash, the leading technology companies have gone on a buying spree but in a different direction. While some mergers and acquisition activities have occurred the focus at the biggest OEMs and software vendors has been on intellectual property, which is proving to be the biggest game-changer for many enterprises. So, as we enter 2014, industry executives know the sector is structurally sound and well-positioned to take advantage of growth opportunities.
They see only moderate sales growth ahead, though. While growth prospects across all segments of the industry are considered good industry executives don’t believe it is going to be an exceptional performance; bellwether companies aren’t predicting double digit revenue hike but they similarly do not see a downturn on the horizon.
Forecasts for the global economy are also generally positive. Most economists aren’t predicting surging growth for the year but they also don’t seem concerned that a downturn is looming or that the financial crisis that dominated segments of the world in the last two years could flare up again. The global economy is forecast to grow 3.6 percent in 2014, faster than the 2.9 percent estimated for 2013, according to the International Monetary Fund’s World Economic Outlook published in October. That forecast isn’t rock solid and this is injecting uncertainty into corporate investment and capital equipment decisions even as executives scour the global market for growth opportunities.
The improved growth forecast by the IMF is welcome news but it comes with numerous challenges due to other changes in the structure and direction of the global economy. First, growth will be uneven and heavily tilted towards the advanced economies in 2014 but structural challenges in even these regions will continue to pose major problems for governments and enterprises, the IMF said.
“Global growth is still weak, its underlying dynamics are changing, and the risks to the forecast remain to the downside,” the IMF report noted “As a result, new policy challenges are arising and policy spillovers may pose greater concern. In particular, markets are increasingly convinced that U.S. monetary policy is reaching a turning point, and this has led to an unexpectedly large increase in long-term yields in the United States and many other economies, notwithstanding the Federal Reserve’s recent decision to maintain its asset purchases. This change could pose risks for emerging market economies, where activity is slowing and asset quality weakening.”
Aside from the possibility of additional financial turbulence, normal fluctuations in demand and supply and continuing turmoil in certain geographies, electronics industry executives remain on the alert about the possibilities for volatile hits to the supply chain in 2014, according to experts. Companies in sectors that are performing well – memory semiconductors, for example – are not keen to add manufacturing capacity unless demand is stronger than it is currently, according to executives.
“In addition to attractive long-term returns on the existing asset base, we would need to see a fundamental and significant upward shift in demand consistently above approximately 40 percent compared to the current CAGR in the low 30 percent range before it would make sense for us to bring on additional wafer output,” said Mark Durcan, CEO of Micron Technology Inc. (NASDAQ: MU), commenting on the memory semiconductor’s strong fiscal 2014 first quarter performance and optimistic outlook for the year. “In the current environment, we believe the best strategy for Micron is to continue optimizing existing capacity for improved gross margins.” (See: Micron: Memory IC Outlook ‘Very Favorable’).