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How will the downturn affect the electronics industry?
Ian Poole reports on how the economic downturn is affecting the electronics and communications industries and the measures some smaller electronics companies can take to weather the storm.
In recent weeks the news has been filled with the gloom of the economic downturn, and now many are openly talking of recession. This will have a significant impact on the electronics industry. Electronics design and development along with electronics manufacture will all be affected. However big questions for the electronics industry remain: when will the bottom be reached; how bad will it be; and when will the recovery start? These questions are difficult to answer. Huge sums have been invested into the banks by governments around the world to shore them up but the banks are still reticent about lending to each other. This means that many of the financial models that were used for making predictions about the economies of countries no longer hold properly. As a result, for all industries, including the electronics industry, it will be difficult to predict the actual outcomes. However in an attempt to gauge how it is affecting the electronics industry, we at Radio-Electronics.Com have performed some of our own investigations. We have tried to see what those in the electronics and communications industries feel about the downturn, and see how it is affecting their businesses now and what the outlook for the future is.
Current situation
Comments varied somewhat according to the size of company, but all felt that the downturn would have a significant effect on their business. Many smaller companies felt that the slow down had not filtered through to them yet. Many projects in larger companies have been authorized and funded and these will, in the main, be continued to their conclusion - feeding work and cash into the smaller companies. This will delay the full effect of the downturn and buffer many of the smaller companies which are further down the “food chain”.
Currently most SMEs (Small to Medium Enterprises) in the UK believe the economy will get worse over the next six months, although around a fifth still believe it will remain the same for them. In addition to this, most believe that the economic climate will be worse for them in the next six months. It is not just the small electronics businesses that are being hit. The larger businesses have already started to see a downturn and this has taken its toll. Recently in the news was Sony Ericsson which reported a loss of £19 million in the third quarter of 2008 (although their profits were up). Nokia were also hit, reporting its quarterly profits down by about 30%. These are just two players in the market, and many others are feeling similar pain, and starting to lay off employees.
What was the cause?
In terms of the economic impact of the financial crisis, it is essentially a banking crisis, however this reflects through to all sections of industry, including the electronics industry. Essentially the problem has arisen from the fact that the banks have over-stretched themselves. This has a significant effect on the industrial sector. In particular, nearly all companies whether in the electronics sector or elsewhere need a ‘line of credit’ to cope with the fluctuations of balancing cash in and cash out. Historically lines of credit have been relatively easy to agree with access to credit agree in advance between banks and companies to cover these fluctuations. The credit crunch however has resulted in these lines of credit being reduced (requiring perhaps several agreements with different banks to achieve the same coverage that could have been achieved by one bank in the past) and the periods over which these facilities were available becoming much shorter - often dramatically so with some large companies with significant credit requirements now having to re-negotiate deals every few days (resulting in significant short-term insecurity in the financial health of the companies concerned). Companies are therefore now much more focussed on the management of cash than was the case in the past. Customers are being pushed to pay on time, and while the temptation is to delay payment to suppliers for as long as possible, the risk - especially for small companies - is that they may run out of cash if they are not paid by their suppliers, resulting in even more problems for the customer. Given that many supply chains rely on suppliers providing unique services or products, the risk is that if one supplier at a critical point in the supply chain goes out of business, then the whole supply chain will collapse, so many large companies are now having to take a look at their supply chain in more detail to ensure that there are no problematic surprises waiting to happen. One of the results of the cash shortage is that, investment in new projects and products is seeing a significant slow-down as cash assets are preserved until credit becomes more easily available. With larger companies investing less, small companies further down the “food-chain” will also suffer, and the whole electronics industry will slow as a result.
Future prospects
It is difficult to judge when the downturn or recession will bottom out. Many of the larger companies believe it will take at least until the middle of 2009, and then recovery will take a further six months before any of the effects start to be noticed. This view is also shared by many smaller companies who expected to see no growth this year, but next year there might be a small amount. However this would be very dependent upon the funding of larger companies, and the way the markets start to move. Accordingly many smaller companies, who are the most vulnerable must look to see how they can prepare for this slow down.
How to avoid the affects of the downturn
Although it is not possible to completely avoid the effects of the economic situation, there are some measures that businesses both within the electronics sector and those outside can adopt to help overcome some of the effects of the downturn.
- As cashflow is a major concern for any business focus should be placed on ensuring that invoices are paid on time. This could be an issue with some larger companies seeking to delay payments to improve their cashflow
- Focus on customer service so that existing customers come back for return business
- Don’t cut back on marketing. When costs are tight there is a huge pressure to cut back on marketing, but this approach soon reduces the sales and hence income
- Invest in technology to make the workforce more efficient
- Improve overall cost efficiencies. It is necessary to cut costs my improving efficiency and not reducing service
- Stay focused on long term goals and don’t get diverted too much into short term tactical activities.
Those electronics businesses that emerge from the downturn in healthy state will be in a particularly good position to benefit from the improvement in trading conditions when it occurs. Typically those companies that invest during hard times, are those that are particularly successful later. One of the major points for electronics or any technology companies to be aware of is that when reducing the skill base, good teams of people can be difficult to build when a recession is over. Worse still if the demand for a skill goes across the country, then those electronics engineers may emigrate, and the other effect is that fewer electronics engineers will be trained and this will mean that when trying to expand, it will be more difficult.