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The Slowdown Showdown
July 16, 2008 |Estimated reading time: 3 minutes
It's hard to miss the news stories about the struggling U.S. economy. The grim news is everywhere you turn.
Tougher times at home for U.S. companies mean firms may have fewer local customers looking for their products. The domestic housing downturn that has seen home values decline throughout much of the country has produced some drag on the industry.
Walt Custer, president of The Sea Ranch, CA-based Custer Consulting Group, noted at the 2008 IPC Printed Circuits Expo, APEX and the Designers Summit that the declining market for homes has given consumers less liquidity to spend on electronics, which leads to a decline in sales, fewer imports from Asia and less capital investment from businesses. And insofar as the domestic malaise has affected the world economy, global growth has slowed as well, and public companies now face stockholders concerned about staying profitable in a challenging environment.
However, the electronics industry looks to be in a better position than most to make it through difficult times because of its more limited exposure to distressed sectors, its diversity of markets and the lessons learned during previous economic slowdowns. And ties between the electronics industry and housing market are indirect enough that IPC firms have been spared some of the worst of the carnage. "Because most of the electronics market is not directly tied to the housing market, it has fared better in the current downturn than many industries in the United States," says Sharon Starr, director of market research for IPC.
The OutlookIndeed, the numbers show the current climate isn't as bad as it may seem from the outside. In North America, Starr says, IPC's PCB Statistical Program showed 4.6% year-over-year growth in PCB sales. Moreover, orders grew more than sales over that period, which suggests that the growth rate could climb higher in the coming months. This followed an 8.7% decline in sales in 2007, and though sales levels haven't recaptured their 2006 gains, they appear to be back on track. March 2008, in particular, saw an up tick in sales indices, as semiconductor and PCB shipments rose after a three-month slide and U.S. new orders for electronic products went up.
Good Positioning
Part of the reason the electronics industry is in better shape than others is its presence in niche industries. Military and medical electronics, for example, tend to be better protected from some of the recession's effects. Military electronics are more dependent on world events and political administrations than economic conditions, while the instrumentation and medical assembly markets are reportedly growing at a double-digit pace.
In addition, companies with a global presence have the advantage of geographic diversification. "The electronics market in most Asian countries, for example, is still growing much faster than in North America and Western Europe, although it has slowed in recent years," Starr says.
Pathways to Growth
Technological advances can also fuel growth as firms use research and development resources and marketing skills to develop new products and compete in different business niches as times change. In recent years, advances in flat-panel displays, mobile wireless standards and solar photovoltaic technology have helped smooth the cyclical peaks and valleys, and allow firms to break into new markets and develop new products. For example, Intelis helping to fuel the market for low-end portable computers, known as netbooks, which could expand the PC market and provide a market for its new line of Atom microprocessors. The company, which beat analyst expectations for the most recent financial quarter, helped alleviate investor concern that the weakening global economy would have an adverse effect on demand.
"Much of our sales growth has been in emerging markets - India, China and Eastern Europe - and I don't see them going into recession," Intel president and CEO Paul Otellini said in an April interview with the BBC.
Rules of Thumb
Because of the cyclical nature of the business, companies that have been around for any length of time have memories of previous downturns and best practices that they and other companies used to survive. Starr notes that in the run-up to the 2000-2001 crash, many companies built large inventories under the assumption that demand would continue to rise. They were left unprepared for the sudden slowdown, and the financial burden of these high inventories proved fatal for many.
"Companies have tended to be more cautious since that time, and they have kept inventories at a manageable level even during times of growth," Starr says. "This has enabled them to weather the current downturn better than before."
Mike Berman is a contributing editor for IPC. This article originally appeared on the IPC Web site.