Effects of current global slowdown on electronics industry

Ian Poole
Effect of the 2016 economic downturn on the electronics industry
Editor, Ian Poole takes a look at the recent figures from China, oil prices and the economic slowdown on the electronics industry.

In recent weeks there has been much in the news about the slowing world economy. China’s growth slowing, oil prices falling and US interest rates rising.

After the economic crash of 2008 / 2009, global economics were just beginning to get back on track, and now the global economy looks as though it will head back down again, with all the likely repercussions on the global electronics industry.

Recent figures show that China’s economy has started to slow. Its economy began its current slowdown in 2011 after growth of 9.6% in 2011, 7.8% in 2012, 7.7% in 2013, and 7.3% in 2014. (Figures from the World Bank). Forecasts for 2016 also predict their economy to slow further.

These figures are still impressive and many countries would be very happy for their own growth rates to reach these figures, but China has been a major engine behind much of the global economy for many years. Any slowdown in China’s economy will spread out globally.

In addition to this oil prices have been reaching the lowest levels in recent history. There are mixed effects of this. Low oil prices reduce the cost of air travel, heating, general transport and much more. But lower oil prices mean lower revenues. Oil companies can invest less in new exploration, new fields and new infrastructure. This reduces jobs and  lowers the revenues of support industries. Also as governments raise tax on fuel, lower oil prices mean lower taxes, and as a result governments will invest less in a whole variety of projects will reflect into the economy as a whole.

The third major factor is the rise in US interest rates. Not only will this have a negative impact on US industry as investment will cost more, but the debt of many other countries price is in US dollars. This means that the cost of borrowing to them rises, and there is a natural reflection into the overall economy.

In terms of the electronics industry, the health of the global economy naturally has an effect on the electronics industry. As costs go up as a result of interest rates, and demand falls, this is bad news for companies. It will affect the electronics industry as much as any other.

That said, different areas of electronics industry will be affect in different ways. In the last downturn, the effects were delayed in some areas compared to others. Large projects where the investment has already been set aside will continue for the most part. This will have the effect of delaying the impact of the slowdown on some areas of the electronics industry. However new investment may be shelved. Any slowdown or even uncertainty will cause companies and governments to act cautiously, and investing less. This always ripples through into the economy as a whole.

Consumer spending is also another major area of interest. With consumers spending on a whole host of electronic gadgets from mobile phones and tablets to automobiles (which these days contain huge amounts of electronics), any impact on consumer spending will have a major impact on the electronics industry as a whole.

A recent report in the UK, said that the number of profit warnings for FTSE 100 companies had increased in recent months, reaching the levels of the 2008 crash, and this will mean that companies are less certain of the future. They will take on fewer staff, or lay off those they already have. This will dent consumer confidence and reduce their spending as well.

The result of all these effects will mean there is a general downturn. But there is some light at the end of the tunnel for the electronics industry.

Companies wanting to buy electronic components will find they are more widely available. With overproduction in some areas, costs will also fall as well. But to counter this to some extent, many chip manufacturers had already foreseen a downturn - previous predictions for 2016 indicated a flat year and as a result, many chip manufactures would already have started to scale back seeing a lower level of demand. There is always a delay in this process as it takes time to reduce the level of inventory in the supply chain.

Even though there is a general slowdown, there are a number of other drivers that will help the electronics industry. One is that the level of electronics within vehicles is increasing. More automation, more gadgets in cars, and increasing levels of functionality like driver assistance functions, and ultimately driverless cars.

Another are of promise is the Internet of Things. There are predictions of many billions of devices being connected by 2020 - the actual number varies from one report to the next, but the overall trend is for a massive increase.

Forecasts seem to indicate this will start to have a major impact on the electronics industry from about 2017 onwards.

While previous predictions have indicated 2016 would be a flat year for electronics industry growth, it is likely in view of the overall downturn that we will see some reduction in the industry in 2016, but against this the automotive industry along with communications in the form of the Internet of Things is likely to drive growth in some sectors that will reflect into the electronics industry growth as a whole.

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