by 
Electronics inventory levels have been falling over the last year as OEMS, contract manufacturers, component suppliers and distributors concerned about conflicting economic signals kept up a conservative management strategy that has kept stocks close to historically low heights.
While industry executives generally say they remain optimistic about the outlook for their various enterprises, the inventory decline also point to a certain amount of wariness regarding several issues related to the larger global economy, regional conflicts and manufacturing weakness in China, according to observers.
Manufacturers kept production at a stable level throughout 2015 and focused instead on efforts to whittle down existing inventories, playing it safe until more reliable guidance emerge about the technology market and regional economies. This strategy has helped to drain inventories worth billions of dollars from the supply chain, giving enterprise balance sheets a lean look. The general industry believe is that inventories are currently at optimal level based on projected sales expectations for the various technology markets.
Brian Krzanich, Intel CEO
“We believe that 2015 ended with I would just call it very healthy inventories,” said Brian Krzanich, CEO of Intel Corp., during a conference call with analysts to discuss the company’s last quarter results. “In fact, one of the things we saw was a slight decrease in the inventory levels as we exited the fourth quarter. What would have been the industry norm would have been a slight increase in inventory. We expect the healthy inventory levels to extend through 2016. There is no sign that anybody is adding inventory or not moving off a cautious position on inventory.”
In the United States, optimism about the direction of the economy has been tempered by worries that the strong dollar could crimp demand elsewhere and result in a decline in foreign sales. Domestic manufacturers were reportedly upbeat in February although the manufacturing sector contracted for the fifth consecutive month, according to a report from the Institute for Supply Management.
“Economic activity in the manufacturing sector contracted in February for the fifth consecutive month, while the overall economy grew for the 81st consecutive month,” the ISM said in its report. “The February PMI registered 49.5 percent, an increase of 1.3 percentage points from the January reading of 48.2 percent. The New Orders Index registered 51.5 percent, the same reading as in January. The Production Index registered 52.8 percent, 2.6 percentage points higher than the January reading of 50.2 percent. The Employment Index registered 48.5 percent, 2.6 percentage points above the January reading of 45.9 percent.”
Mixed signals like the numbers reported by the ISM help explain why electronics industry executives are being extra careful about their available-to-sell inventories. Also, the first quarter of the year has traditionally been a slow one for the industry, hence the lower levels of stocks, observers noted. However, the reluctance to build up higher inventories can also point to fears that demand may remain sluggish through the second quarter of the year.
In the electronics display market, for example, manufacturers cut back on production in the 2015 third quarter and reduced production by more than 2 percent ahead of the end-of-year and holiday season, according to Alex Kang, an analyst with IHS Inc. Panel fab utilization fell during the third quarter to 87.2 percent from 89.6 percent in the preceding quarter, IHS said.
“Panel makers planned to raise their utilization rate and slightly increase inventory level in the third quarter to meet year-end seasonal demand,” Kang said in a report. “But they decided to keep their inventory tight in the third quarter amid the prospect for depressed global demand for consumer electronics at this year’s end.”
Game of Numbers
A review of the balance sheets of the major electronics components suppliers, distributors and OEMs show a clear tendency to cutting or keeping inventories unchanged. At Arrow Electronics Inc. inventory crept higher on a year-over-year basis during the December quarter to $2.5 from $2.4 billion in the 2014 comparable quarter. However, the sequential numbers showed Arrow keeping inventory flat from the preceding two quarters. Avnet Inc., too, raised total inventory on a year-over-year basis, to $2.7 billion from $2.5 billion in its latest quarter but reported a sequential decline from $2.8 billion in the preceding quarter.
Gerry Fay, President, Avnet Electronics Marketing Global
“Our inventory was down 5.6 percent sequentially so I think we're adjusting our inventory based on the market realities that present themselves,” said Gerry Fay, president of Avnet’s Electronics Marketing division during a conference call with analysts. “Inventory was up 10 percent year-over-year and that was really due to much less velocity. Last December [2014] quarter, we hit a high watermark in our high volume fulfillment engagement and the velocity was quite high. So, that's the main difference if you look at our inventory on a year-over-year basis. The balance of the inventory we have, we believe, is appropriate to support core demands and I would expect inventory to be flat to slightly down sequentially.”
On the OEM side, IBM Corp. reported inventory fell at the end of the fourth quarter to $1.55 billion, from $1.61 billion in the preceding quarter and $2.1 billion in the year-ago quarter. The numbers for HP Inc. (NYSE: HPQ) point to a similar trend. The company reported total inventory of $4.1 billion for the fiscal 2017 first quarter ended January 31, 2016, down from $6.6 billion in the year-ago quarter.
The pattern is the same across all product segments. Consumer electronics OEMs as well as industrial and communications equipment OEMs have cut inventories. China’s Lenovo Group Ltd., (OTCMKTS:LNVGY), for example, reported inventory fell to $2.7 billion in the fourth quarter, dropping from a high of $3.2 billion in the fourth quarter of 2014. Lenovo’s inventories have fallen consecutively over the last four quarters.
Data and networking communications equipment maker Cisco Systems Inc. is pushing the same conservative inventory management strategy, understandably given the challenges many Western technology enterprises are experiencing in China where the government is trying to strengthen local suppliers. Cisco’s inventory tumbled more than $500 million year-over-year in the latest quarter ended January 23, 2016, to $1.36 billion from $1.89 billion in the comparable year-ago period. Sales during the two periods remained flat at approximately $12 billion.
“Recently, we’ve experienced one of the most volatile times in the global markets. This volatility led to a slowdown in spending, impacting our business,” said Charles Robbins, CEO of Cisco during the company’s latest conference call with analysts.
The economic uncertainty referenced by Robbins is driving the conservative inventory management strategy at the company and it is also impacting Cisco’s forecast for coming quarters, according to its executives. Since the company’s latest quarter extended into the first several weeks of 2016, it was better able to see signs that technology buyers are still unsure about the outlook for their enterprises, according to Cisco CFO Kelly Kramer.
“When we do our guidance, we look at everything we know at the time, which is our funnel, the momentum we see and everything else,” Kramer said during the conference call. “I’d say that our guidance is prudent. We expanded our range to three points versus our normal two points just because I think it is more volatile than normal.”
Not all OEMs are cutting inventories, however. In the consumer electronics sector, Apple Inc. increased its inventories in the latest quarter, pushing this up to $2.45 billion from $2.35 billion in the previous quarter and $2.28 billion in the year-ago period. Analysts believe the consumer electronics company is likely to keep inventories down in future quarters on the likelihood demand wanes for some of its products.
Intel Corp., (NASDAQ:INTC), the world’s biggest semiconductor manufacturer by revenue, has also been adding to its inventory. The company’s inventory has surged by nearly $1 billion in the last year, rising to $5.2 billion in the 2015 fourth quarter from $4.3 billion in the comparable year-ago quarter.
However, Stacy Smith, CFO of Intel, admitted the company ended the year with more inventory than it wanted even as he acknowledged that “the worldwide PC supply chain is healthy with appropriate levels of inventory.” The reason Intel ended the fourth quarter with higher inventory was because of its acquisition of Altera and due to better-than-expected yields on its 14 nanometer production, he noted. The company expects to reduce inventories in 2016, Smith said.
“We ended Q4 with a little more inventory than I was expecting and a little higher than I would like,” Smith said. “[We had a] little more inventory leaving Q4 than I would like. Altera will cause the inventory levels to go up some, but when you look at it from a business standpoint, I think we will work through the inventory we have, and when we get into the back half of the year, we will bring inventory levels down.”
1 Comment