The electronics industry is being out-marketed by more mature segments of the economy where managers know that tough times call for less-expensive products with fewer features.
While OEMs have kept their focus on developing premium products even during the recession, sharp price declines for houses, cars, and clothing have in the last six months boosted spending for these products. Smaller price drops for electronics have resulted in lower sales.
During tough economic times, consumers have always shifted spending to relatively cheaper products. That category now includes houses, cars, and clothing but not electronics. By paying more attention to consumers' economic situation, electronics industry executives could eliminate this part of the stagnant sales problem.
In recent months, prices for electronic goods have fallen, but the drop is not nearly as much as the historical average of the past several decades. Some of the electronics industry's abrupt loss of price competitiveness is probably temporary. Clothing prices are benefiting from an expensive dollar, which is now weakening, while aggressive discounting has driven down automotive prices.
But some of these losses are permanent. Ironically, other markets have been more successful at using electronics and software technology to reduce their design, production, and distribution costs. In the electronics market, some of the attention on product specs will have to be refocused on cost-cutting and lower prices.
Electronics manufacturers in the capital goods market have also recently experienced smaller gains in price competitiveness vs. other technologies. For instance, EBN's electronics price index for IT systems over the last year has fallen 5% relative to other capital goods, compared with declines of 7% to 8% during most of the 1980s and '90s.
Meanwhile, relatively small increases in home appreciation helped drive up by 20% the value of new houses bought in July from the already high level in February. The gain for existing houses was 11%. Similarly, car and light-truck dollar sales are 3.5% above February's high levels, but prices are off 4.5%. A 6.4% fall in clothing prices has resulted in a 1.8% gain in the dollar amount of clothing purchases.
Compare this to electronics. Computer prices have declined a historically slim 4% after adjusting for the added value in newer systems, but July PC sales were 7.5% below January's. Also, telecom equipment prices have declined only 1% in six months, while sales have fallen 8.8%. Component makers have increased dollar sales a slim 2.2% from six months ago, with prices down only 0.1%, even after allowing for the added value in new IC designs.