Today’s economic forecast depends on your frame of reference

14 January 2010

Susan Mucha

I started January with a trip to Northern Michigan, which was getting lake effect snow and sub-zero Fahrenheit temperatures. However, the local TV weatherman was cheerfully announcing that the following week would bring a warming spell that would take temperatures back up to the 20s.

Once back in much warmer west Texas where we consider a drop to the 40s to be a hard freeze, I watched our local weatherman discuss that same “warming spell” as continued arctic temperatures in the frigid Midwest.

The US economy is a lot like that weather forecast. Whether it is warming or arctic cold depends on one’s frame of reference.

Most of the manufacturers I’ve talked with recently have seen positive sales trends over the last two quarters. People are being hired. Discretionary spending for items such as training, consulting and capital equipment is increasing. Yet the optimism this drives is tempered with very real fears of a double dip recession driven either by continued housing price declines or a decline in the stock market. Consumer spending was up slightly during the holidays, but joblessness continues nationally in the 10% range. Credit remains both tight and expensive. Health insurance costs continue to rise apparently unchecked by the fear of pending legislation designed to “fix” health care. There are concerns about inevitable tax increases at the local, state and federal level.

The weaker dollar makes US manufacturing more attractive to European buyers, but that weakness is driven by weak fiscal policy. And in the electronics industry, a significant amount of material must be purchased from Asian sources which tends to even out the savings associated with a weaker dollar for all but very labor intensive projects.

In short, attempting to forecast 2010 opens the door to more questions than answers. That said the electronics manufacturing services (EMS) industry seems to be performing consistently with typical cyclical patterns. So I thought rather than rehash statistics which are better found elsewhere, it might be interesting to look at what 2010 will likely bring in EMS trends. Here are the top five trends I expect to see:
1) OEM Supply Base Rationalization – During a deep recession, OEMs tend to postpone supplier realignment plans because of the cost associated with migrating large projects. However, supplier teams often use this time to more carefully analyze cost drivers and strategies. As the economy improves they implement their new sourcing plans. 2010 should be a year of this type of plan implementation.
2) Increased M&A Activity – The combination of tight credit, overcapacity and lowered valuations helped freeze EMS mergers and acquisitions during the recession. Healthy EMS companies will be shopping for fast ways to replace lost sales in 2010 which should drive an increase in acquisitions. Less healthy EMS companies will be looking for buyers.
3) Changes in Business Strategy – When recession looms Tier One players consider all business to be good business and enter market segments they normally avoid. As demand improves, bad fit customers get triaged in favor of higher volume, lower mix business. Bad fit OEMs may get surprised in 2010.
4) Changes in Personnel – While 2009 was the year of downsizing to the point of pain, 2010 may be the year of the job hopper. This recession has been an eye-opener to even the most loyal employees and people who never thought about career planning have been doing a lot more thinking over the last few months. Employees who have been stressed by fear of job loss or simply overworked by too much belt tightening may be shopping for greener pastures. From an employer standpoint it is a good time to make key contributors feel valued.
5) Hair Trigger Forecasting – Given the uncertainty driven by the current economy, it is likely that OEMs will continue to be conservative in forecasting demand. However, should that demand materialize, these same OEMs will expect their EMS provider to turn on a dime and cover the upside. For that reason, I predict 2010 will be year of the stressed out program manager.

While this trends forecast might not seem like something to celebrate, it actually is. All of these potential problems are also opportunities that only occur as a market starts to recover. I think all of us welcome the opportunity to get back to a heavy workload driven by increases in demand and business growth. While economic prosperity is still a stretch goal, this should be a year of return to normalcy for companies who have proactively focused on being ready for recovery.

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