Front End | Electronic Components Supply Network Cash always remains king
As governments, banks, organisations and individuals scramble to manage what looks sure to become a credit squeeze over the next few years due to the rapid increase in the cost of borrowing, the old adage “Cash is King” will apply more than ever. In this article Adam Fletcher, chairman of the Electronic Components Supply Network (ecsn) makes some informed predictions about the likely effect the tightening of purse strings may have on his members in the short-to-mid-term.
P
eople in the UK have enjoyed easy access to personal and business credit at very low interest rates for almost thirty years, but these halcyon days are rapidly coming to an end. Credit will still be available but the cost of borrowing it (the interest rate) is escalating and rapidly approaching the long-term historical average in the range 5%-to-6%. The International Monetary Fund (IMF) is already forecasting that UK Gross Domestic Product (GDP) will decline (by 0.3%) in 2023. But some economists believe that the IMF is being too pessimistic and are forecasting growth, albeit in the very low single digits. Either way things are not looking good. The UK’s historical average growth rate is close to 3%.
By their very nature fluctuations in the macro-economic environment impact all parties in an economy but unfortunately, not equally. Those individuals, organisations (including banks) and governments with the most exposure to debt finance will take a larger financial hit as they will need to call upon additional cash sources to finance their debt repayment. The role of Central Banks is to monitor and manage the economic health of their respective economies. Post the Covid pandemic they sought to stimulate global economic growth by decreasing interest rates close to 0% and pumping cash into their economies via “quantitative easing”. These measures did effectively ‘save’ the global economy by triggering a short period of high GDP growth, but it couldn’t be sustained and in the longer term it triggered a sharp increase in global inflation. To be fair, Central Banks have limited tools with which to control inflation
12 July/August 2023
and usually default to cooling their over- heated economies by driving up the cost of borrowing. A recession destabilises a nation states finances, which may require further investment and stimulus to return its economy to growth. Politicians know that their election/re-election prospects will not be helped if a prolonged recession causes their electorate to lose their homes or livelihoods and make desirable consumer goods unaffordable. Even as I write monetary policy experts around the world are seeking ways to increase interest rates enough to slow the global economy and reduce inflation, whilst not sending it spiralling into recession. Ironically, some economists believe that a recession is not only inevitable but desirable because they see it as a ‘lesser evil’ than rampant inflation.
Impact on the electronic components market
In the first half of 2023 the UK electronic components market out-performed many of its peers, returning strong ‘Bookings’ and ‘Billings’ figures compared to the same period last year. OEM customers are continuing to hold significantly elevated in-house inventories to ensure they can meet their customers’ needs. Not surprisingly given the current economic and geo-political turmoil, customers still have a lingering scepticism about the ability of their supply network to deliver in a consistent and timely manner. Conversely, they’re very wary of breaching agreed payment terms, which might result in shipment delays. In the past three years debtor days have fallen to @40 days when the historical industry average is @65
Components in Electronics
days. Payment terms will however extend as manufacturer lead-times continue to stabilise and confidence in the supply network’s ability to deliver ‘on-time’ increases. We’re already seeing an increase in debtor days from the low point of @40 days to @60 days, and it seems likely this will extend to nearer @90 days for a short period as customers’ credit gets squeezed.
Impact on manufacturer authorised distributors
In the UK market manufacturer authorised distributors support 99% of all customers for electronic components, who themselves serve a very wide and diverse range of end-markets. Many UK OEMs are highly reliant on the ‘buffer inventory’ that their supply partners hold on their behalf and on their ability and willingness to speedily ship it to meet dates defined by the customer’s JIT delivery system. This strategy means that manufacturer authorised distributors have to effectively manage the entire ‘Inventory Pipeline’ on behalf of both their customers and the components manufacturers they represent. Manufacturer authorised distributors are continually having to balance their inventory purchases against both fluctuating manufacturer lead times and changes in customer requirements, whilst at the same time avoiding overstocking, reduced inventory turns and potential ‘channel stuffing’ by components manufacturers desperate to move their inventory on. Customers unilaterally deciding to delay settling their invoices as agreed also significantly increases authorised distributors need for increased cash.
…and on component manufacturers
Manufacturers of electronic components have responded to recent customer demand profiles and the need to maintain their market position by ramping up their investment in new manufacturing capacity. This strategy is not without its risks however, as the ‘headline’ market growth statistic that prompted their investment could well be significantly higher than the ‘real’ growth because of the high inventory levels recently put in place by both authorised distributors and their OEM customers. Component manufacturers could face further economic woes in 2H’23 if and when customers attempt to de-stock.
A credit squeeze and escalating borrowing costs force all organisations to conserve cash and review the performance of their assets, particularly their ‘near cash’ assets which in our industry include inventory (raw materials, work in progress, finished goods) and payables. Customers expect the maximum level of pre- and post-sales service during a credit squeeze, but manufacturer authorised distributors need to protect their liquidity by holding the lowest sensible inventory levels and managing their customers’ demands for extended payment terms. It’s a delicate balancing act, particularly when customers see manufacturer lead-times decline and are looking to wind down their in-house inventory accordingly.
Concluding thoughts The inter-dependent nature of the electronic components supply network mandates that all parties are afforded due
www.cieonline.co.uk
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