With the risk of a Greek default, in whichever form it may materialise, consuming much of the discourse in the investment community, it is easy to lose track of some key indicators which could directly impact on consumer electronics demand. The article below offers an overview of some of these factors from across the globe, as well as an analysis of likely implications for the industry.
While investment communities from Frankfurt to New York are reliving post-Lehman Brothers nightmares, watching the rising probability of a Greek credit event, a longer-term problem, with more far-reaching consequences, looms large. Food price inflation is threatening growth across all industries in developing markets, where growth is reliant on the diffusion of technologies like digital TVs and smartphones to lower-than-average-income households. The average percentage of income spent on food in some of the most prospective markets for consumer electronics is significantly higher than in mature developed markets. These households are therefore much more likely to cut spending on electronics as food prices increase than their counterparts in developing markets where food expenditure constitutes a significantly smaller percentage of income.
Food Inflation Impact Potential for CE
Used car prices in the US
According to the Associated Press, used car prices in the US reached a 16-year high in May 2011, with a further peak predicted by analysts in June as consumers are keeping their cars for longer, as new car registrations in developed markets have largely failed to recover to pre 2008 levels, with the exception of Germany where the government stepped in with tax incentives for new car buyers. This is contributing to a supply shortage, with more consumers choosing used cars over new models to save money due to falling consumer confidence in the face of rising fuel and food prices, with this affecting the global market in the first half of 2011. An ageing fleet means growing potential for aftermarket in-car electronics, slowing the decline in demand for aftermarket in-dash media players and speakers caused by increasingly integrated OEM in-car entertainment systems in newer vehicles.
New Cars Registration in Select Developed Markets
Continued weakness in new car sales in developed markets also has the potential to create attractive acquisition targets for aftermarket manufacturers wanting to expand their presence in the OEM manufacturing, thereby hedging against likely demand declines over the forecast period, stemming from the increasing complexity of OEM systems and their integration into the vehicles.
Forecast growth in the global in-car entertainment market
Chinese municipal debt and beyond
Chinese asset prices continue to defy logic and theory as 2011 wears on. June brought the announcement that the Chinese central authorities will take on about RMB2-3 trillion of outstanding municipal debt, while state and private banks will likely be forced to take on some type of write-offs on their municipal debt holdings. All this, along with giving municipalities direct access to the bond market, is aimed at reducing the debt burden on municipalities, avoiding a wave of defaults that could threaten the Chinese and global economy. But, China’s investment-driven growth over the past decade, combined with slow growth in developed markets, led to overinvestment in the economy and explosive growth in the money supply since 2005. This overinvestment now threatens to turn into a debt crisis very reminiscent of the US housing implosion. The Chinese economy needs to shift to consumption-driven growth as investment needs to be slowed while growth needs to be sustained to avoid a credit event. With high inflation, and some manufacturing jobs likely to shift to lower-cost countries like Vietnam and Bangladesh, a significant increase in real consumption spending will be difficult to achieve.
China: Key Indicators
While the consequences of a widespread financial meltdown in China would have a strictly negative effect on global demand for consumer electronics, government efforts to stimulate domestic consumption to avoid said collapse offer significant potential. In an effort to curb inflation and increasing interest rates discourage investment as stated discourage investment, significant interest rate increases over 2011-2012 are likely. In developed markets, this would likely curb spending on big-ticket items like TVs and major appliances but, in China, where the savings rate is already notoriously high, accumulated savings, combined with fears of further inflation, are likely to drive spending of savings on major durables like cars, appliances, and electronics. Government stimulus initiatives like fiscal incentives to purchase durables are also likely in the foreseeable future as the central government tries to further stimulate domestic spending. The combination of high savings, inflationary risks, and government stimulus are likely to drive growth in consumer durables over the forecast period.
Retail Value Sales in China
Russian energy roulette
Sandwiched in between European instability and Chinese risks is the Russian economy, which remains largely dependent on oil and gas production and exports to Europe, as manufacturing lags behind China, Brazil and India in terms of efficiency and costs.
Energy Production in Russia
In an attempt to diversify away from demand in Europe and capitalise on growth in China, Russian company Gazprom and China National Petroleum Company have entered into an agreement for the provision of Russian gas supplies via the yet-to-be built Altai pipeline, starting in 2015. However, the two sides remain far from in agreement on the pricing model for the resource, and Russia is unlikely to get the same price for its Chinese supply that it charges its European customers. Whatever the outcome, the Russian economy will remain dependent on energy exports, making it no less susceptible to another major crisis than it was in 2008, should the commodity bubble implode again.
In the event of energy demand and prices taking a sharp fall, it is very likely that demand for consumer electronics will go through another, possibly more significant contraction than that seen during the previous recession, which had a deep adverse effect on sales of consumer electronics.
Russia: Volume Growth in Key Categories 2009
Can consumer electronics weather another storm?
The overlaying question in the discourse of the possibility of a relapse into another global recession in the context of consumer electronics is: whether consumers will be willing to spend money on new products as their incomes stagnate or decline. Despite rising uncertainty in the market and a slowing general recovery in the US and Western Europe in mid-2011 tech giants like Google Inc, Intel Corp, and Apple Inc have recorded record quarters in terms of profits and revenues. This suggests that consumer demand for electronics is significantly more income-inelastic than the overall consumer demand. The danger going forward is that recent growth in adoption of smartphones and computers accounted for a large part of the global addressable audience, meaning that demand potential from new adopters is far more limited than it was in the last recession. But similarly to the last recession we can expect replacement cycles to extend and consumers to down-trade to cheaper models. Therefore the impact of a recession on demand for consumer electronics is likely to be relatively deeper than that during the 2009 recession, but demand for consumer electronics is likely remain less volatile than overall consumer demand.