On the Front Line: Tech Companies Weigh in on Covid-19
by 
It’s the time for finalizing annual corporate budgets but in general the planning for 2016 has been fraught with risks because of uncertainties about the global economy, poor demand visibility, geo-political conflicts in many parts of the world, currency challenges and other problems, many of them beyond the control of electronics executives.
The Organization for Economic Cooperation and Development (OECD) further muddied the outlook this week when it rolled out its economic forecast for 2016, warning it sees “harbinger” of a likely recession in waning global trade volumes.
The OECD predicts the world economy would expand 3.3 percent in 2016, building on a 2.9 percent increase in 2015. However, the volume of global trade is expected to be low, which means the predicted rise in economic growth might be hiding a recession, said Angel Guarría, secretary general of the OECD.
Angel Guarría, Secretary General, OECD
“Global growth prospects have dimmed again,” Guarría said while presenting the OECD Economic Outlook on Monday. “We have become used to a familiar pattern; springtime optimism followed by downgrades in growth forecast as the year progresses. Unfortunately, 2015 is not looking any different.”
The story is not that much different in the electronics world. In fact, pressure has risen in the sector as China’s economy growth slowed. The strong dollar also hampered reported sales growth. Executives throughout the supply chain, including managers at OEMs, component suppliers and distributors, noted while reporting third quarter results that sales could have been higher by several percentage points if the dollar had stayed unchanged from the prior year.
“Our year-over-year organic growth rate moderated after two straight fiscal years of mid, single-digit growth,” said Rick Hamada, CEO of Avnet Inc., while discussing the company’s fiscal 2015 first quarter results. “While some of the slowdown is related to slower growth in our select high volume supply chain engagements at EM Asia, we continue to navigate a global marketplace characterized by mixed regional indicators and the challenges of a stronger U.S. dollar.”
Even OEMs that have the resources to hedge for currency fluctuations weren’t immune. Apple Inc., for example, said its September quarter revenue grew 22 percent, year-over-year, to $51.5 billion, from $42.1 billion, but noted sales would have been up to 8 percent higher had the dollar remained the same, according to CFO Luca Maestri.
“We achieved these outstanding results despite severe and persisting weakness in foreign exchange rates around the world that affected all our geographic segments,” Maestri said, in a presentation to analysts.
As a result of pressure from the strengthening dollar, Apple has had to revise upward the price of its main product, the iPhone, in several areas of the globe, according to Maestri and Timothy Cook, president and CEO of the company.
“We continue to hedge on an ongoing basis and we will continue to provide some level of protection to foreign exchange movement,” Cook said. “In some cases we have realigned prices particularly when we launch new products. We tend to do that in a number of countries where the foreign exchange moves have been particularly extreme, to recover that through pricing.”
Not all players in the electronics industry can so easily raise prices. Suppliers and distributors fall in this category. Their ability to accurately predict sales and overall corporate performance in 2016 has been constrained by the lack of information from direct and end-customers, according to industry executives. To compensate, many of these companies are focusing on factors they can better control, such as selling, general and administrative expenses.
Paul Reilly, CFO, Arrow Electronics Inc.
“We are enhancing our ongoing efficiency efforts,” said Paul Reilly, CFO at Arrow Electronics Inc. “Our plan is to drive $40 million of ongoing annual expenses out of the business. We are principally accelerating the integration of some of our recent acquisitions, increasing automation across multiple functions enabled by our Unity ERP tool, utilizing our enterprise strengths for greater purchasing leverage, and rationalizing our real estate footprint.”
In addition to the rising dollar, executives are also grappling with the troubling effects of China’s weakening manufacturing sector, geo-political wrangling in many parts of the globe, the likelihood of a hike in U.S. borrowing rates and softening demand for PCs and smartphones – both still representing the largest chunk of sales in the high-tech market.
Even the market for connected devices, also known as Internet of Things, hasn’t yet lived up to the inflated expectations of many who believe it will drive volume shipment and growth across the larger economy, observers said. It certainly hasn’t had that much of an impact on the semiconductor market, which analysts said will grow approximately 3.1 percent in 2016, to $354 billion, from an estimated $343 billion this year, according to the World Semiconductor Trade Statistics.
Based on historical antecedent, those numbers are likely to be revised downward, however. The WSTS initially projected stronger 2015 growth for the semiconductor market but lowered this to 2.3 percent in August, from a prior forecast for a 3.4 percent expansion announced in June. Component vendors and distributors often use projected growth numbers like these to determine their own outlook for the year ahead.
Gartner Inc. has similarly had to revise its forecast for the global IT market. The research and consulting firm in mid-year said worldwide IT spending in 2015 would be approximately $3.6 trillion, down 4.9 percent from the previous year and slightly better than its previous projection for a 5.5 percent decline, according to John-David Lovelock, chief forecast for Gartner.
By September, though, Gartner had again revised its numbers. Global IT spending for 2015, it said, would now be $2.69 trillion, down 3.5 percent.
“Appreciation of the U.S. dollar (mainly against the euro, yen and the ruble), along with the relative slowdown of emerging markets (particularly Russia, Brazil and China), had a double impact on IT spending in 2015, and explains the downward revision in the forecast," said Anurag Gupta, research vice president at Gartner, in a statement. "Unsurprisingly, most technology firms reporting revenue in U.S. dollars have taken a negative hit on their quarterly revenue earnings."
Revisions like this sum up why the biggest concern for electronics executives nowadays is the difficult of dealing with too many variables in their projections. They have to take all forecasts with a pinch of salt, including those from research firms, customers, rivals and suppliers.
On the other hand, the companies definitely know the areas of concern lengthened in 2015 and may get even longer in 2016. Here’s a sampling:
- Capital expenditure projections by enterprises are uncertain and subject to frequent revisions
- Cost-cutting has intensified but a slide in revenue growth means determining how much would be enough is more difficult
- Market consolidation in the semiconductor and OEM communities indicate further churn as companies prepare for reduction in the ranks of suppliers, service providers and customers
- After decades of double-digit growth, China’s steaming economy is cooling but nobody is willing to call a bottom to the slide
- A rather messy global geo-political environment featuring power-grabs and religious troubles in several parts of the world combined with the seeming revival of U.S.-Russia rivalry promises to hurt sales in an industry that’s heavily dependent upon international commerce
- Determining which and whether any new technology will drive as much growth as PCs and smartphones is difficult and has huge financial implications
Related posts
