Consumers are turning their back on the latest gadgets as the household purse strings are tightened. Manufacturing Digital reports on how the manufacturers are fighting back.
Written by Sarah Butler
The giants of the consumer electronics world are facing a crash potentially more damaging than a pitched battle from Halo 3. After 15 years of passion for futuristic gadgets, consumers’ cutback in spending on expensive and non-essential goods is now having a dramatic impact on an industry made vulnerable by its focus on products which can be superseded within months.
Sony, the maker of Bravia flat-screen TVs and playstation game consoles, was the latest to announce a major restructuring. It expects an operating loss – its first for 14 years – of ¥260 billion ($2.6 billion) for the current financial year which ends this month and will result in shed-ding 16,000 workers worldwide.
Sony is far from alone. Pioneer, its fellow Japanese rival, announced it will end contracts with a third of its manufacturing plants. Microsoft, the world’s largest software company, is cutting up to 5,000 roles, while household names such as Panasonic, Ericsson and Vodafone are all slashing jobs.
Ben Bajarin, Director of the consumer technology practice at California-based consultancy creative strategies, says: “consumers are universally not spending on high cost consumer electronics and when they are buying, they are doing so with cost savings in mind. They are looking to cut service fee costs and energy costs, for example.”
A survey carried out by research company Forrester of more than 5,000 North American adults found that about half would spend less on technology this year.
Those companies without the spare cash to invest in developing the sexiest products or the bulk to compete on price are particularly at risk.
Pioneer, for example, has been forced to pull out of the TV market altogether, cutting 10,000 jobs worldwide as its six percent market share left it unable to compete. The company is expecting to report annual losses of ¥130 billion ($1.3 billion) this year, marking its fifth year in the red.
Opportunity for consolidation
Analysts and industry experts are expecting to see further consolidation in the TV market this year after several years of heavy competition between manufacturers has driven margins to wafer thin levels.
Victor Basta, an investment banker from Magister Artis who specializes in advising the hi-tech industry, says the TV market is likely to suffer the most of all the consumer electronics sectors because it is highly priced, competitive, but also under threat from other areas of the industry.
“TVs are being replaced as people watch things on computers and mobile phones – people are not necessarily sitting in front of TVs to the degree they were,” Basta says. He suggests that less than three providers may survive in the fall out.
Graham Knight, a retailer and highly respected commentator for British trade journal eRT, agrees that smaller players, like pioneer, are likely to be forced out of the market.
“The big players like Samsung have lots of money and see the downturn as an opportunity to purchase and expand,” he says. “They will continue to invest in the latest technology to manufacture LcD screens so that they can produce screens less expensively, be more competitive and it will be very difficult for small players to compete on price.” some researchers counter that the TV market will benefit as consumers attempt to save money by staying at home rather than venturing out. The same logic suggests that computer games and other home entertainment systems are likely to fare well.
Flat screens can also be used for more purposes, as the place to enjoy family-based computer games such as Nintendo’s Wii, or for streaming films and other online content accessed via a computer.
Indeed, Forrester’s research found that 44 percent of consumers were inclined to stick with plans to buy a new TV, a healthy margin more than those intending to buy a PC or digital camera. The latter is seen as one of the most vulnerable markets along with satellite navigation gadgets and mp3 players.
As finances tighten, consumers are expected to opt for a mobile telephone, such as apple’s iPhone or Research in motion’s Blackberry, which can offer all of these services as well as internet access and telecommunications.
Basta says: “mobile phones can replace a large number of other devices. Take navigation, you can do virtually everything a TomTom can do on a mobile now and it can be very cheap to add those services without having to buy another product.”
His comments were born out by figures from TomTom, Europe’s largest maker of satellite navigation devices, which slumped to a fourth-quarter loss of €989 million ($1.3 million) at the end of last year. It revealed in February, that quarterly sales were down 24 percent and it was at risk of breaching loan covenants as it was forced to discount heavily.
However, Forrester’s research found that the technology consumers were most likely to delay spending on was the PC, with almost half saying they had already delayed a purchase and 20 per cent saying they would spend less than they had previously envisaged.
Home computers hit hardest
Analysts predict consolidation, with Lenovo, the Chinese computer manufacturer, and Sony, both seen as vulnerable.
Bajarin says: “We are watching to see what happens with Lenovo and Sony’s PC division. We think they are facing a lot of difficulties in the market place that will cause some difficult decisions in the future. As always in times like this we are looking for consolidation in the supply chain in the components manufacturing.”
Jayson Noland, an analyst at Milwaukee-based RW Baird, suggests that some of the more cash rich players, such as Dell and Oracle, may seek opportunistic buys among smaller struggling companies with interesting innovative ideas.
Such companies, who already have their technology installed with a broad base of customers requiring constant service, are likely to have the steady cash flow required to survive in a tough market. Noland says that Dell is particularly well placed for opportunistic buys.
But if they have money to bet on the future, which kind of technologies will be a winner? netbooks are seen as one of the few parts of the pc market expected to shine this year.
“Netbooks are low cost, do most of what you want them to do, they are small and easy to carry around. For some consumers that’s good enough,” Noland says.
He is projecting that netbooks could grab 10 percent of the pc market this year, up from just three percent last year. Noland says the rise of the cheap and cheerful netbook will eat into laptop sales and Basta suggests they could also hit other hi-tech gizmos of the kind apple specializes in.
“Apple is at risk because it makes most of its money selling gadgets which are discretionary. netbooks at the bottom end are cheaper than an ipod, which is basically just a hard disc with clever software dressed up nicely; so why pay the premium being added?,” he says.
Any such problems have yet to show up in Apple’s results. In January, apple said it saw a nine percent rise in the number of PCs sold in the three months to the end of December, a three percent rise in the number of ipods and an 88 percent rise in the number of iPhones.
At the company’s end of year results in October, admittedly before some of the more doomsday predictions for the global economy emerged, Steve Jobs, chief executive of Apple, told analysts he thought the company would be resilient in the downturn.
Jobs pointed out that Apple has “$25 billion safely in the bank and zero debt. This provides us tremendous stability and the ability to invest our way through this downturn.”
He said that Apple created some of its best new products and businesses in the last downturn, like the Apple retail stores. “This downturn may also present some extraordinary opportunities for companies that have the cash to take advantage of them, like Apple does,” he said.
That seems quite an optimistic scenario for a company focused on design-led gadgetry in a world where unemployment is expected to rise and credit to tighten until the end of this year at least.
Whatever innovations come out this year, the most successful are likely to be less about playful features and more about helping consumers to save money in some way.
Be it energy saving, stripped down technology or gadgets which help get more out of existing technology, such as external hard-drives, consumers are going to be looking for a bargain.
Forrester’s research concluded that those home entertainment manufacturers that make an explicit link between saving money, not going out and good value might see slight growth.
Slight growth might be a shocking new idea for hi-tech companies but those who can achieve it this year will be masters of the new game.