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The Consumer Electronics Inventory Glut

The Consumer Electronics Inventory Glut

SanDisk suspends production as inventories pile up for makers of computers, cell phones, and TVs, signaling a worse-than-forecast fourth quarter

Olga Kharif, Businessweek

Automakers aren’t the only ones halting production as inventories pile up. The consumer electronics industry is also coming to grips with rising stockpiles of unsold goods that are likely to result in price pressure and falling profit.

Recent evidence of growing inventories came Dec. 15, when SanDisk, a maker of memory cards and storage drives, said it will temporarily stop production at two Japanese plants for two weeks through Jan. 12. After that, the factories will resume work at 70% capacity. SanDisk hopes the cutbacks will help it whittle away at the piles of unsold devices in warehouses and on retailers’ shelves.

Seasonal Sales Worse than Forecast

The inventory glut that’s afflicted chipmakers such as Hynix and Micron (MU) for months has now spread to makers of finished goods including computers, cell phones, and flat-panel TVs. In what’s typically the strongest quarter of the year for many tech vendors, recession-weary consumers have cut spending on everything but the essentials. “There’s probably too much inventory given sales levels,” says Stephen Baker, an analyst at researcher NPD Group.

Not only are rising inventories a sign of dwindling demand, but they’re often a harbinger of profit-slashing moves such as price cuts aimed at moving items off shelves and writedowns of goods that aren’t expected to be purchased. The glut is sure to worsen fourth-quarter results for manufacturers and retailers that have already been bracing for a slow holiday sales season. The malaise may linger into 2009, analysts say. “January looks really bad,” says Randy Giusto, an analyst at researcher IDC. Some tech manufacturers may need to follow SanDisk in tapping the brakes on production, analysts say.

PC makers are likely among the casualties. The percentage of computers shipped this quarter that won’t be sold could rise into the double digits, Giusto says. Desktops and traditional notebooks are piling up as many consumers opt for cheaper, smaller netbooks, low-power PCs that sell for as little as $300. “It’s possible that traditional notebooks have seen a little bit of a buildup because of demand for netbooks,” says Shawn DuBravac, economist for the Consumer Electronics Assn.. IDC this month cut its forecast for computer unit sales growth to 5% from 13.2%.

Desktop and traditional notebook sales at such vendors as Dell and Hewlett-Packard may be especially hard-hit. In the December quarter, sales of Apple iMac desktops may decline 9% from a year earlier, says Kaufman Bros. analyst Shaw Wu.

Supply Pileup at Retailers

Oversupply of cell phones from such manufacturers as Samsung and LG could hamper first-quarter sales for the whole industry, says Geoff Blaber, an analyst at researcher CCS Insight.