What are the comparisons between the downturns of 2001/2002, 2008/2009 and 2011/2012? The following chart compares the monthly year-over-year performance of the billings for each period.
The following are some interesting points that can be drawn from the comparison.
The length of the downturns has varied, but they have tended to last just over one year. 2001/2002 was the longest duration of the three downturns at 15 months. 2008/2009 lasted 13 months and 2011/2012 lasted 12 months. For this comparison, the downturn ends when there are at least two consecutive months of positive year-over-year billings performance.
The severity of the downturns also has varied. The 2008/2009 downturn was the most severe, with year-over-year declines between -18% to -40% for nine consecutive months. The 2001/2002 downturns was not as severe, but was longer in duration. During this downturn, there were 12 consecutive months where year-over-year performance declines were between -19% and -35%.
The 2011/2012 downturn, by comparison, has been very mild. Over the 12 month duration, the YOY declines were predominantly between -1% to -7% and one month at -9.9%. The loss in total industry market value will be approximately $1.2 billion. By comparison, the loss in 2009 was $9.6 billion and 2001/2 was $9.4 billion.
In the three industry declines prior to 2001, the years of growth in between the downturns was four, six, and eight years. From the end of the 2001/2 downturn to the beginning of the 2008/9 downturn was 75 months (6.3 years). From the end of the 2008/9 downturn to the beginning of the 2011/12 downturn was 23 months (1.9 years). The decreasing cycle rate may be the result of the increasing inter-dependencies of the world’s economies and our 24/7 processing of the news of all types.
In the 2001/2 downturn, the year-over-year booking decline preceded the billing downturn by two months. In 2008/9, the booking year-over-year decline started one month prior to the billing decline. In 2011/12, they started simultaneously. This again may be from increasing inter-dependencies and quick processing of the events as they unfold.
Although nothing is certain, it is likely that the next downturn is three or more years down the road, given no unforeseen major calamities. The economies of the world and their governments have gone (and are going) through a correction, which should lead to relatively stable times where the growth rates will, in all likelihood, be more modest than they have been after past industry downturns.
Industry Profitability During Downturns
A number of factors influence the profitability of individual companies and the overall connector industry. Certainly, management decisions regarding spending and cost control will contribute to improved results, or at least mitigate losses during bad economic conditions. Other management-controlled profit-influencing decisions are manufacturing footprint, marketing, sales, product innovation, customer service, etc.
The three largest contributors to income statements, however – global economic health, price erosion, and commodity prices – are not controlled by management. Company leadership can react in an attempt only to reduce the downturn in company profits.
A good example of this is the 2008/2009 downturn caused by the housing bubble and the ensuing financial crisis.
Industry Profitability by Quarter 2008 & 2009
The downturn started in 4Q’08 and industry profits plummeted for the next three quarters until management adjusted capacity to more closely match demand. As sales improved in 4Q’09, profitability returned modestly and then soared in 2010 to a net income of 9.5% of sales on a year-over-year increase of 28.4% in sales.
The 2008/2009 downturn had the three profitability killers working against the industry – plummeting demand, high raw material cost, and price erosion.
The current downturn started in October 2011 and has continued through September 2012 for 12 months. October and November have seen year-over-year increases in sales.
As you will note in the next table, profitability has remained strong. First, because the sales decline has been modest compared to 2008/2009. Second, connector prices have been stable. Third, raw material prices have remained flat.
Industry Profitability by Quarter 2011 & 2012
To date, this downturn has caused only single-digit declines in sales, requiring management to make only modest adjustments to cost structures. These adjustments were easy compared to the decisions required in the last downturn, which included plant closings and massive layoffs.
We are hopeful that this downturn was over in September after 12 months of year-over-year declines in sales and that the fourth quarter of 2012 will show growth of 3.5%.
Connector Industry Forecast
We currently project industry sales to end the year at $47,120 million for a year-over-year change of -2.6%. This result is unchanged from last month. We expect fourth quarter sales to be essentially flat to the third quarter. Although fourth quarter sales are historically the highest of the year, we do not believe 4Q’12 will beat the higher than expected 3Q’12 sales due to the general economic softness worldwide.
The following table depicts the projected quarterly results for the last quarter of the year.
Connector Industry Quarterly Sales
Given the stated finish to 2012, Bishop currently projects 2013 to grow 4.2% to $49,100 million, with each quarter seeing slight sequential increases. This forecast is unchanged from last month. The following tables show the projected quarterly sales for 2013.
Connector Industry Quarterly Sales
This forecast assumes the following:
- The European economies begin to stabilize and modest growth is achieved in their GDPs.
- The United States avoids a political stalemate on the budget to escape triggering the automatic budget cuts/tax increases and modest growth is achieved in the GDP.
- With improving economic conditions in the Western economies, China will see its GDP growth stabilize and begin to improve modestly.