Credit Crunch and Its Impact on Electronics Manufacturing in Asia Pacific

Asia Pacific is a manufacturing region which relies on exports as its major source of economic growth. The weakening global macroeconomic environment has reduced the demand for goods from Asia Pacific causing its manufacturing sector to slowdown. In addition, less established manufacturing companies in Asia Pacific are finding it more difficult to secure credit which is important for their survival during the recession.

In the US, corporations are finding it rather difficult to secure credit due to higher lending costs and more stringent requirements by lending institutions. In Asia Pacific, the situation is consistent with what is happening in the US although not at the same scale, perhaps smaller.

The conditions in the US and Asia Pacific are fundamentally different. In Asia Pacific, in general, the recession has caused its manufacturing sector to slow, where as in the United States, the credit situation was caused by subprime borrowing which eventually led to the lack of trust in lending institutions and subsequently global recession. This is reflected in the differences between the stimulus plans implemented by respective governments; the plans in Asia Pacific are almost entirely focused on infrastructure projects (as in China) and providing business tax credits (as in Japan) while in the United States, the focus is more on keeping employment or bailing out ailing companies.

As a result, established manufacturing companies in Asia Pacific may find it relatively easier than less established ones to secure loans from lending institutions; an ability that may help them through the economic crisis better than those in the US. Respective governments’ initiatives in Asia Pacific are also expected to encourage the sales of electronics products in the regional market rather than relying on export markets.

Current state
The electronics manufacturing industry is without doubt being hit by the recession, experiencing lower shipments and revenues, particularly, in the last quarter of 2008. Most manufacturing companies are unable to predict the demand for electronics products fearing the risk of overcapacity and excess in inventories, which will eventually affect their profitability. Companies in the region have been extremely fast to adjust to the recession by laying-off thousands of workers, shutting down plants, postponing investments, and reducing inventory level, among others.

In recent months, however, the electronics manufacturing industry, particularly in consumer electronics, has shown some mild positive signs in Asia Pacific, largely due to stimulus measures by respective governments. This likely recovery may pose a new set of problems to manufacturing companies. As the inventories of these companies are at their lowest levels, they may struggle to obtain the required raw materials to accommodate new sales. Unfortunately, this can potentially create supply shortages, subsequently increasing raw material prices until an optimum level of inventory is reached. In addition, companies will also need to deal with labor shortages. Yet, at the same time, they remain hesitant to increase headcount fearing that these positive signs are just temporary. A more steady market pace for a longer period of time is needed for these companies in order to start hiring again.

Outlook
Frost & Sullivan believes that the respective governments’ initiatives in Asia Pacific have achieved a positive result in encouraging sales of Asia Pacific-manufactured goods in regional markets. The ability of established corporations in Asia Pacific to secure loans has also placed them in a better position to weather the economic downturn.

About the author
CP Liew is a Research Analyst of Asia Pacific Electronics and Security Practice at Frost & Sullivan. For media enquires, email djeremiah@frost.com