Electronics Hardware Sales Weaken on Digitization Efforts

Electronics hardware sales have weakened and the market will remain under pressure for years as enterprises globally redirect IT resources to the more pressing efforts of digitizing operations to remain competitive in a fast-changing economic climate. The digitization of manufacturing and service operations, combined with the harsh realities of an uncertain economic environment, will in 2016 pinch IT hardware budgets worldwide, adding to a decline that began last year as demand for PCs decline and demand for smartphones approach saturation, according to Gartner Inc. The research firm projects a nearly 4 percent decline in hardware sales for 2016, adding to a 6.4 percent drop in 2015, and helping to push worldwide IT spending into negative growth this year despite a surge in outlay for software and digitization programs. “There is an undercurrent of economic uncertainty that is driving organizations to tighten their belts, and IT spending is one of the casualties," said John-David Lovelock, VP of research at Gartner, in a statement. "Concurrently, the need to invest in IT to support digital business is more urgent than ever. Business leaders know that they need to become digital businesses or face irrelevance in a digital world. To make that happen, leaders are engaging in tough cost optimization efforts in some areas to fund digital business in others." Enterprises are transforming operations and infusing them with digital capabilities because of the enormous cost-savings and competitive advantages they can squeeze out of existing businesses in addition to the growing opportunity to expand into new markets, according to McKinsey & Co. The consulting firm said “virtually every type of cross-border transaction now has a digital component,” a development that has both advantages and disadvantages for companies depending on their readiness for the new economic structure. Today, enterprises now have the opportunity to enter markets that were once closed to them simply by leveraging the internet and other digital resources to reach new customers, it said. “Trade was once largely confined to advanced economies and their large multinational companies. Today, a more digital form of globalization has opened the door to developing countries, to small companies and start-ups, and to billions of individuals,” McKinsey analysts said in a report. “In this increasingly digital era of globalization, large companies can manage their international operations in a leaner, more efficient ways. Using digital platforms and tools, they can sell in fast-growing markets while keeping virtual teams connected in real time. This is a moment for companies to rethink their organizational structures, products, assets, and competitors.” The Gartner numbers indicate companies are already trying to make that transition. Gartner projects worldwide IT spending for 2016 will be $3.49 trillion, down slightly from $3.51 trillion in 2015. However, while software sales are projected to climb 4.2 percent in 2016, to $321 billion from $308 billion, in the prior year, sales of devices (defined as PCs, ultramobiles, mobile phones, tablets and printers) are forecast to weaken to $626 billion from $650 billion. Demand for devices also fell in the prior year. “The savings from legacy system optimization and enhancements are being redirected to fund digital initiatives,” said Gartner’s Lovelock. “The need to spend on digital business initiatives in a time when revenue growth does not support runaway IT budgets is forcing more organizations to optimize as a first step. Business processes, as well as IT, are undergoing optimization — digital business requires both." The diversion of a growing portion of IT expenses to the software sector will hurt many enterprises in the electronics industry that are still purely focused on the development and sale of components and finished goods hardware. However, even semiconductor companies that primarily make components are incorporating software and digital programming into their devices, making the enterprises more competitive. That trend is universal, according to McKinsey, which says this is boosting the global economy. “MGI’s analysis finds that over a decade, all types of flows acting together have raised world GDP by 10.1 percent over what would have resulted in a world without any cross-border flows,” the McKinsey researchers said. “This value amounted to some $7.8 trillion in 2014 alone, and data flows account for $2.8 trillion of this impact.” In a separate report this week market data provider IHS Inc. said it expects semiconductor sales growth worldwide to remain tepid over the next several years as the industry transitions away from the consumer segment to newer, digital and more transformative products. It reported semiconductor sales in 2015 fell 2 percent, to $347.3 billion, from $354.3 billion, in 2014. The market will not fully recover for many more years, it said.

Dale Ford, VP & Chief Analyst, IHS Inc.

“Weak results last year signal the beginning of what is expected to be a three-year period of declining to stagnant growth for semiconductor revenues,” said Dale Ford, vice president and chief analyst at IHS Technology, in a press statement. “Anemic end-market demand in the major segments of wireless communications, data processing and consumer electronics will hobble semiconductor growth during this time.” Ford said the expected multi-year weakness in the semiconductor market will begin to reverse around 2020 to 2022 when “new products will come to market that will enable a significant level of growth in semiconductor revenues.” Those new products are more likely to have a digital flavor, according to Dale, in a recent interview. “What I see is a triumvirate of technologies that are developing and which will reach critical mass in that time frame to drive the next wave of growth,” Ford said. “The triumvirate, no surprises, is IoT, the Cloud and 5G. We all know about them and we are seeing shipments already but the real critical mass if you look at the timeline and the development profiles of those three, is projected to be achieved in that 2020 to 2022 timeframe.”