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Electronics: Recharge Required for a Changing Industry

Once driven by unceasing consumer demand, the electronics industry has been powered down by the recession and the changing habits of buyers and users.

Oct/Nov 09
Electronic devices are continuing to play a larger role in the lives of ordinary Americans and changing the way organizations large and small do business. But even an industry that is revolutionizing life in all sorts of ways can't entirely escape economic reality, and that has put the electronics industry in a position of enduring a broad correction, even as pockets of the industry experience growth.

The Changing Dynamic
Like many industries, electronics was on pace for a respectable 2008 until the bottom fell out in the fourth quarter. According to Dale Ford, senior vice president of iSuppli, an El Segundo, California-based consulting firm, the impact of macroeconomic conditions on the electronics industry is almost unprecedented.

"In the past it's been a factor, but the primary driver of industry cycles was the dynamics of that specific market," says Ford. "PC shipments were dominated more by the introductions of new PC features or new operating systems, or things of that nature. When you went from a multimedia PC to a web-connected PC, that drove the cycle. Those are the types of things that were influenced directly by the players in the PC industry. In this case, the downturn of the PC segment was not driven by anything unique to the PC industry or any particular products or innovation or lack of innovation - it was simply driven by this global macroeconomic environment."

The PC example, Ford says, applies to any number of other industry segments - all of which were unprepared for the phenomenon. "That's why we had such a dramatic impact in the fourth quarter [of 2008], and in the first quarter of this year," he says. "That's why you had companies that had to go into immediate action to cut back production dramatically - to conserve their cash flow, as they had to manage through this very unexpected downturn in the marketplace."

The economic impact on the market occurred on multiple levels. "We see cutbacks in consumer and business pending, price deflation, and composition shifts in core categories," says Chris Ely, senior research analyst for the Consumer Electronics Association (CEA), which reports that the consumer electronics industry, which hit an all-time high industry shipments revenue level of $179 billion in 2008 - a 5.7 percent increase over 2007 - is poised to contract by 7.7 percent in 2009, back to $165 billion. "We feel that consumer demand for technology remains intact," he says, "but there are a lot of different forces impacting market opportunity."

One such force is the maturity of some of the categories, such as flat-screen TVs. Ely said sales have been stronger this year for smaller flat-screen TV models than for the larger ones that have performed better in previous years. His theory is that most people have already bought a bigger flat-screen for their living rooms or primary media rooms, and are now buying smaller ones for bedrooms or other secondary rooms.
MP3 players and digital cameras fall into the same category, according to Ely, as most people who plan on buying themselves one have already done so. "The market opportunity for digital cameras is greatly reduced," he says. "We'll see more as gifts than first-time purchasers."

The Bright Spots
While consumer electronics as a total segment is down, the CEA report points to specific areas that continue to grow.

• Midsize displays. Midsize display shipments are expected to hit about 35 million units, which represents a 14 percent increase, even while displays overall will drop as a category.

• Video games. With shipments expected to hit $23 billion, primarily in software, the CEA sees positive growth for video games. In fact, Ely says the CEA expects growth in software to continue at least through 2013.

• Accessories. Always a consistent performer, even if it doesn't receive a lot of attention, the accessories category is considered a reliable lifeline for the electronics industry even during challenging economic times. "We see the total accessories market slated to generate just less than $8 billion in revenues," says Ely. Of that total, $3 billion consists of wireless phone accessories.

• Smart phones. Smart-phone revenue is expected to grow 3 percent in 2009 - a $21 million portion of the total handset market. Ely predicts smart phones will likely comprise 25 percent of the non-PDA handset market. "Increased demand is sparking some fierce competition among manufacturers and carriers, and that should drag down the pricing for the next year," he says.

• Netbooks. A relative newcomer on the scene, and thus still building off a small base, netbooks are seen by the CEA as doubling this year to 8.4 million units. "We think netbooks are here to stay," says Ely.

• Blu-ray players. While starting from a small base, the CEA expects Blu-ray players to hit six million units, which represents a jump of 112 percent, with revenue increasing 48 percent. Revenues are rising more slowly than overall sales because price decreases are helping to fuel the sales jump. "There's been a learning curve, and I think, for Blu-ray, a lot of people felt you could not play your old DVDs on a Blu-ray player," says Ely. "Now that the word is getting out that, yes, you can, people are feeling more comfortable."The Fallout
While certain product categories continue to show growth, the market's makeup is decidedly changed by the fate of companies that probably would have survived during ordinary economic times or even during a typical cyclical downturn.

"In a cyclical downturn, two things would happen," says Ford. "One is that a company facing cash-flow problems would seek credit to get through. But this time, there was no credit. There was no facility to get cash. So the other option that might have been available was to say, `OK, things are not going well, but we've got some great intellectual property. We'll get bought out by somebody else.' But again, those options were closed off. Others didn't have the facility to get financing to make that acquisition."

The direction of the electronics industry in general was largely mirrored by events in the semiconductor segment, where, according to Jim Feldhan, president of Phoenix-based Semico Research, a fear of inventories brought about a late-year nosedive. "Last year, we actually were on target, almost through the third quarter, to having positive growth," he says. "Of course, with the financial collapse, no one wanted to own any inventory at all, so purchasing basically stopped in October."

What followed, Feldhan says, was four months of declining revenue never before seen in the semiconductor industry. "We've had two or three months, but we've never had four consecutive months, especially in the December-

January time frame," he says. "And the industry really overreacted in terms of cutting inventory."
Feldhan says data from the Semiconductor Industry Association (SIA) suggests 2009 will likely show an overall decline of 12.5 percent in the industry, which is far less severe than some were predicting when the downturn began late in 2008. The SIA's most recent monthly report indicated that worldwide sales of semiconductors in July were $18.2 billion, an increase of 5.3 percent from June 2009 when sales were $17.2 billion.

While sales are still down significantly compared with 2008, the SIA notes that the year-on-year rate of decline has moderated, with the first six months of 2009 seeing an average monthly year-on-year decline of approximately 25 percent, while July 2009 sales were 18.2 percent lower than July 2008. "The fifth consecutive month of sequential increases in semiconductor sales reflects improving demand in the consumer sector," says SIA President George Scalise. "Sales of consumer products such as netbook PCs and cell phones are supporting the modest recovery in demand that is now under way."

Feldhan believes a resurgence in capital expenditures (capex), which had declined between 40 percent and 50 percent each of the past two years, is also helping to fuel a turnaround. "If you keep track of some of the major companies that do invest in capex, like TSMC, Intel and UMC, they've all raised their capex spending for the second half of the year, so they can supply the industry," he says.

According to TechAmerica's annual Cyberstates report, which focuses on employment in the tech sector, total tech employment in 2008 was up 1.3 percent to 5.9 million. But the semiconductor industry fared the worst of all industry segments, losing 10,900 jobs. The best performing segment in the industry - and one that TechAmerica analyst Josh James believes will remain strong for the next several years - is software services, which added 86,000 jobs in 2008. It was the fifth consecutive year in which software services employment grew.

While software services fueled an overall rise in high-tech employment, all three of the other major sectors lost jobs, with high-tech manufacturing losing 23,100; communications services shedding 12,700; and engineering and tech services falling by 26,600.

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