by Matt Chanoff, TFI Chief Economist
Imagine an electronics industry where the world’s largest software and networking companies have been taken over by the government, most of the leading semiconductor, computer, and telecommunications companies have gone bust, and every large contract manufacturer is in Chapter 11, sold, or shifting into a new business.
This is exactly the sort of radical transformation that the financial industry has undergone during the past 12 months. The US Government and Federal Reserve have been wild cards in this high-stakes game, launching a series of unprecedented moves, ranging from bail-out to tough love to nationalization. Over the past weekend, Secretary Paulson has quickly assembled a proposal–approximately equivalent to three times the aggregate annual revenue of the entire global CM industry, which will arguably transform the way America does business more than any policy shift since World War II.
Through it all, global electronics spending and demand have been mostly unaffected, leaving a gaping disconnect between our industry and the financial infrastructure on which it (and every industry) relies. Can that disconnect continue? What would it mean for Paulson’s intervention to succeed? To fail?
Don’t expect definitive answers to these questions at the upcoming Quarterly Forum (October 22-23, in San Jose). Do expect a bold effort to make sense of the chaos and predict how it will impact electronics outsourcing and all of our professional lives. Join us for what’s shaping up to be a very lively session.
In the meantime, please share your projections for the most significant impact of the financial crisis on your company and/or professional life in the next 6-12 months. How close to home do you expect the crisis to reach?
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Recessions usually start with one industry and then trickles down eventually to all other industries. As long as employment is high, the technology sector appears to do well. This banking problem can very easily affect all other industries if companies can no longer borrow money and that leads to excessive layoffs. And if companies cannot borrow money, there will be layoffs in the banking sector and in every other industry. There is definitely a major concern that this banking problem will eventually hurt the tech sector and lead to a recession or worse. Let’s hope that our goverment can get it right. Stupid accounting rules like Mark to Market were the obvious culprit leading to banks having to write down assets using worst case scenarios. Bank convenants are then violated and this starts a whole chain of events that aren’t good. If the tech industry is only mildy impacted that will be amazing.
Thanks Glenn,
The hit to hardware and software direct sales to the financial industry is being estimated at 20% in 2009 – down from about $22 Billion to $17.5. On the other hand, consumers have been displacing other purchases to keep buying electronics, and most people expect decent unit sales. So far, we’ve got widely scattered showers, but no deluge.
As for mark to market, sure it causes problems in a liquidity crisis, but isn’t the alternative worse? An accounting rule that allows you to leave bad assets on the books longer might help some banks ride over a temporary loss of confidence, but in a major credit crunch it would incentivize them to ignore reality for longer, leading to a deeper fall when they finally deleverage.