The Consumer Electronics Inventory Glut
Automakers aren't the only ones halting production as inventories pile up. The consumer electronics industry is also coming to grips with rising stockpiles of unsold goods that are likely to result in price pressure and falling profit.
Recent evidence of growing inventories came Dec. 15, when SanDisk (SNDK), a maker of memory cards and storage drives, said it will temporarily stop production at two Japanese plants for two weeks through Jan. 12. After that, the factories will resume work at 70% capacity. SanDisk hopes the cutbacks will help it whittle away at the piles of unsold devices in warehouses and on retailers' shelves.
Seasonal Sales Worse than Forecast
The inventory glut that's afflicted chipmakers such as Hynix and Micron (MU) for months has now spread to makers of finished goods including computers, cell phones, and flat-panel TVs. In what's typically the strongest quarter of the year for many tech vendors, recession-weary consumers have cut spending on everything but the essentials. "There's probably too much inventory given sales levels," says Stephen Baker, an analyst at researcher NPD Group.
Not only are rising inventories a sign of dwindling demand, but they're often a harbinger of profit-slashing moves such as price cuts aimed at moving items off shelves and writedowns of goods that aren't expected to be purchased. The glut is sure to worsen fourth-quarter results for manufacturers and retailers that have already been bracing for a slow holiday sales season. The malaise may linger into 2009, analysts say. "January looks really bad," says Randy Giusto, an analyst at researcher IDC. Some tech manufacturers may need to follow SanDisk in tapping the brakes on production, analysts say.
PC makers are likely among the casualties. The percentage of computers shipped this quarter that won't be sold could rise into the double digits, Giusto says. Desktops and traditional notebooks are piling up as many consumers opt for cheaper, smaller netbooks, low-power PCs that sell for as little as $300. "It's possible that traditional notebooks have seen a little bit of a buildup because of demand for netbooks," says Shawn DuBravac, economist for the Consumer Electronics Assn.. IDC this month cut its forecast for computer unit sales growth to 5% from 13.2%.
Desktop and traditional notebook sales at such vendors as Dell (DELL) and Hewlett-Packard (HPQ) may be especially hard-hit. In the December quarter, sales of Apple (AAPL) iMac desktops may decline 9% from a year earlier, says Kaufman Bros. analyst Shaw Wu.
Supply Pileup at Retailers
Oversupply of cell phones from such manufacturers as Samsung and LG could hamper first-quarter sales for the whole industry, says Geoff Blaber, an analyst at researcher CCS Insight.
"As we've moved into the fourth quarter, a lot of the vendors are trying to push volumes into the market to meet targets" set in early 2008 or earlier, before demand for new or high-end phones slumped, Blaber says. The oversupply could contribute about two percentage points to a 12% industrywide decline in the number of phones sold in the first quarter, he adds.
Partly as a result of inventory buildup, annual sales of flat-panel TVs will decline for the first time in 2009, to $21.8 billion from $24.4 billion this year, according to researcher iSuppli. The overall TV market will drop 13.3%, to $27.9 billion in 2009 from $32.2 billion this year.
The TV industry is currently keeping enough inventory to last about eight weeks, in keeping with previous years, says iSuppli analyst Riddhi Patel. But current demand warrants a much smaller supply, lasting about four to five weeks, he says. The pileup could pressure prices for much of next year, making it difficult for lesser-known brands to survive. "Because of this excess inventory, the special prices [you normally see on a Black Friday] will become your normal prices in the second quarter of 2009," Patel says. Normally, retailers won't start offering those prices until months later, in the third quarter.
When Low Prices Aren't Enough
Prices are dropping earlier than usual in other products as well. In PCs, "we are starting to see Black Friday [pricing] on regular weekends already," Giusto says. The problem is, lower prices may not be enough. PC manufacturers may need to take a page from carmakers and tap the brakes on production, Baker of NPD says. "Given the state of the economy, the way of clearing out the inventory is going to be to stop producing rather than lower prices," he notes.
Electronics manufacturers can't afford to let unsold wares gather dust. Many retailers require makers to take back inventories or otherwise compensate them when items don't sell. Many TV models change in February or March. And since prices of components like liquid-crystal display (LCD) panels are plummeting, new models may be cheaper and more profitable to carry than older ones.