In June 2000, the pricing segment of the EBN Electronics Buyers' Index climbed to a five-year high of 65.3 as a severe shortage of crucial components forced OEMs to pay a premium for supplies, leaving them with razor-thin margins.
Less than a year later, the situation is completely different. In March, the EBI pricing segment fell to 38.6, its lowest level since the survey was instituted in 1988. The pricing advantage has shifted to OEMs, with suppliers now facing the prospects of steeply lower average selling prices in addition to reduced demand as the industry clears the channel of unwanted inventory.
Even so, OEMs are not popping the corks on their champagne bottles. The absence of strong end-market demand for electronic goods has meant equipment suppliers can't celebrate one of the more positive developments they've encountered this year. Also, the flood of negative news has not ceased, and the EBI itself is reflecting some of the pessimism expressed last week on both sides of the electronics supply chain. In March, and for the second consecutive month, the index dangled precariously low at 33.4, its lowest level ever.
"The assessment of economic conditions stayed at a record low level for the second month," said Jim Haughey, EBN's staff economist.
The EBN survey of electronics supply chain executives showed the industry regaining some traction as manufacturers slash capital expenditures, trim payroll, and institute other cost-cutting measures. Although all segments of the index were at or below 40-far from 50, the midpoint between contraction and expansion-most pulled back from the sharp drop experienced in February.
The largest recovery came from the production, new orders, and export orders segments, all of which added several points after sinking to record lows in February. Export orders rose almost 5 points, to 35.3, up from 30.4 in the prior month, while new orders climbed to 31.3, from 27.2, and production rose 10%, to 33.1 from 30.
Despite these increases, economists say the immediate future of the electronics industry, as well as the global economy, remains uncertain. No longer assured of a steady increase in consumer and corporate demand, component suppliers and OEMs are struggling to cut their inventory load by trimming production while putting off plans to add manufacturing capacity.
"I'm in the profits recession camp," said Edward Yardeni, chief investment strategist at Deutsche Banc Alex. Brown Inc., New York. "The current economic slump might become something worse than a rolling recession."
However, the latest survey indicates vendor deliveries have stopped dipping and have even inched up to 40.5 in March, from 40.2 in February. During the same period, component purchases fell, to 40.4 from 42.7 in February and 48.8 the previous month. The quantity of purchased electronics materials improved slightly, to 29.4 from 27.9 in February, while the employment index dropped to 37.2, from 39.3.
A few bright spots
The current negative climate masks additional bright spots for OEMs. The EBI Leading Index, the movement of which precedes the EBI by several weeks, remained above the EBI for the fifth consecutive month, "suggesting that the EBI is likely to rebound quickly," Haughey said. Still, the EBILead fell to 46.2 in March, from 48.9 in February, although the plunging stock market contributed significantly to the decline, reducing the impact of higher orders.
Perhaps more important to the entire economy was the pickup reported in consumer confidence last week by the Conference Board, the New York business membership organization. After declining five months in a row, the Consumer Confidence Index in March strengthened to 117 from 109.2 in February, while the Expectations Index rose to 83.6 from 70.7.
The improved consumer mood, which the Conference Board attributed to the relatively strong employment picture, could quickly translate into stronger purchases of durable goods.
"The rebound in consumer confidence was triggered by an improvement in the economic outlook for the next six months and employment prospects," said Lynn Franco, director of the Conference Board's Consumer Research Center. "The recent weakness in the stock market has done little to dampen either consumers' assessment of current economic conditions or future expectations."
Through their purchases, consumers are already showing continued strong belief in the U.S. economy. Though durable goods orders fell 0.2% in February, the decline turns into a 0.5% increase when transportation equipment is excluded.
"Electronic and other electrical equipment makers reported a strong increase in orders, primarily concentrated in electrical components," West Chester, Pa.-based Economy.com Inc. said in a report. "The $2.2 billion rise in these bookings recovered approximately 60% of the January fall."