IPC Chief Economist Dr. Shawn DuBravac Shares Industry's Financial Outlook
On March 23, IPC Chief Economist Shawn DuBravac, Ph.D., CFA, spoke with I-Connect007 publisher Barry Matties in an exclusive phone interview immediately following DuBravac’s online briefing to IPC member attendees.
This interview presents a rather detailed look at DuBravac’s situational analysis and projections with respect to the COVID-19 outbreak’s short-term and long-term effects on the global electronics manufacturing industry. DuBravac makes some comparisons to consumer economic pressures and also discusses some of the U.S.-based actions taken by the Federal Reserve to smooth the U.S. economy into, and out of, the economic impact of this outbreak.
Before his role with IPC, DuBravac served as chief economist for the Consumer Technology Association, a U.S. trade association representing more than 2,000 consumer tech companies. DuBravac is also the author of the New York Times bestseller “Digital Destiny: How the New Age of Data Will Transform the Way We Work, Live, and Communicate.”
I-Connect007 continues to deliver original reporting and coverage of the electronics design, electronics manufacturing, and contract manufacturing industries, including up-to-date information from the companies, associations, and supply chains globally. Find the latest news and information at www.iconnect007.com, and on our new topic bulletin board, “Industry Leaders Speak Out: Responses to COVID-19 outbreak,” found here. To read the interview, we have included the transcribed text below.
Transcribed audio interview:
Barry Matties: Today, I'm speaking with Shawn DuBravac. He’s IPC’s chief economist. Shawn is a global tech trends expert and joined the IPC in September of 2019. Of course, back in September, nobody would have predicted that we’re in the condition that we are here today, and—obviously—a lot has changed in the last couple of weeks or so with the COVID-19 outbreak. To help the IPC members have a better understanding of the financial impact on our industry, today Shawn conducted a financial focus webinar for members. Shawn, thanks for taking the time to talk with us today. And why don’t we just get started, if we can, with a brief overview of today’s webinar, please.
Shawn DuBravac: Sure. So one of the things that I have started to do for IPC since joining them is to monitor both what’s happening within and around the industry, as well as what’s happening more broadly in the economy. So leading up to the coronavirus outbreak and COVID-19, we were already monitoring a number of facets of the economy and looking at how the industry is performing in this economy. And so a lot of what we covered in the webinar is just a quick look at where we are today and where we think things will progress over the next year.
Matties: What sort of concerns or questions did the attendees have today in the webinar?
DuBravac: I think if you look at what’s happening, this obviously started as a supply shock. And we saw facilities in Asia that normally will close down for about a week, as it relates to the lunar new year, extend that period and were closed for several weeks in addition to the regular one week delay. The regular one-week lunar holiday is well known within the industry, obviously if you’re in any type of manufacturing, but certainly, within electronics manufacturing, you’re aware of that, and you plan around it.
As that extended to include several weeks, companies began doing what the companies in the supply chain do very well actually, and they respond to these events very well by increasing the information flow within the supply chain, understanding what’s going on, understanding where they might be hindered with regard to further production and what steps they need to take essentially to ensure that they can continue to produce. So they ramped up communications, they started to look for alternative sourcing options, they curtailed business travel, they started to look for alternatives. If the business travel, for example, was related to new product introductions, how they could continue to accelerate new product introductions while not traveling to Asia.And then obviously what has transpired in recent weeks is that initial supply shock has dissolved into a demand shock as well. And as a result of countries across the globe, not just the United States and North America but also throughout Europe, closing down essentially to help fight the spread of the virus, you’ve seen a very significant demand shock go into effect, and that will push us into recession. We’re probably in recession now in the U.S. and throughout Europe. We’re probably quite close to a global recession or at least global growth very near zero. And we expect that to continue through probably about the third quarter, calendar Q3 of 2020. And then we’ll start to see things build out of the recession as we move into Q4 and into 2021, which is in many ways a standard response to an economic shock, to one of these exogenous shocks, and to a recession. And so while every recession is unique, we see the economy respond in very similar ways.
Matties: A lot of people are speculating the speed in which the recovery will happen. Some say it’s going to be slow; others are saying a V-shaped recovery. What’s your expectation?
DuBravac: Well, what you tend to have, certainly what we had after 9/11, what we had in the 2007 to 2009 period, we had a lot of uncertainty. And so we’re all feeling that right now, and you have a lot of uncertainty. You see a wide separation, I’ll call it a diversion, in the forecasts that are being produced because of that uncertainty. And again, the way we tend to measure economic growth is looking at quarter over quarter at an annualized rate. So you start to see that recovery in the back half of the year, the fourth quarter of the year, for a couple of reasons. One is because you’re comparing it to the down quarters of the second quarter and the third quarter. And we do expect to see a very steep decline in the second quarter of the year looking at macroeconomic variables.
So whether we’re looking at the overall economy or even anything else—consumer spending, you name it, unemployment, and all of those will get materially worse in the second quarter. And then as we start to return to normal as businesses reopen, as we presumably have some response to this or at least, if you will, we’ve addressed the initial cause of the decline being the virus here, then you’ll start to see businesses come back, you’ll start to see consumers come back. They won’t necessarily come back to the same levels of output and consumption that they were prior to that. But because they’re coming back and because we’re measuring growth, you’ll start to see some of that recovery begin in the fourth quarter. So it depends on how you’re looking at it. Yes, we see, at least for right now, a relatively short recessionary period that will last probably from about now until the end of the third quarter or so. And then you start to see the economic recovery. But it will take some time before we return to the levels of production that we were enjoying prior to the onset of this recession.
Matties: So when you look at the current situation, what do you feel the most immediate or critical financial concern we should have in our industry?
DuBravac: Well, one of the things that we are seeing now, which is a good sign, is that the Federal Reserve is implementing a number of tools. Obviously, they cut their target interest rates early as this started to materialize into much more than just a supply shock. But they also dusted off their toolkit from the 2007 and 2009 period, and they begin to look at everything that they used then and what they could use now. And they were quick to implement some of those tools. Even this morning, the tools were expanded that they had in place. Some of these, we did not see until the eighth or ninth month of the financial crisis in 2007, 2008. Some of these were not implemented until late in 2008. And so I do see a quick response. We’re using the tools that worked well during that period.
I think those are all very good signs that remove some of the uncertainty, that we’ve seen the Fed respond very quickly, using tools that have worked in our recent past in the last recession, so that’s a good sign. What I am monitoring closely and what I talk to companies about frequently is how their lines of credit are looking. Because if you think about the lines of credit that businesses are using, often they might finance a warehouse or other equipment on any real estate, typically office buildings and in factories, warehouses tend to be financed on five-year balloons.
Every five years, they have to either refinance that loan or pay it off, and often they’re just refinancing it with the current issuer of that loan, be it a bank or someone else. What we saw during the financial crisis was that even a company that was doing well, operating fine, they were still selling product, they were able to make their payments, those loans were being called in. So when they were due at five years, they weren’t being extended. And that left businesses running to find alternative lending sources or being forced in some cases to sell this asset, sell warehouses, sell facilities. And so we watched those types of things very closely because even a company that is operating well and operating fine in this type of difficult environment could run into trouble if they have difficulties on the financing side of it.
Now a lot of what the Fed has implemented is to help address some of those things. And we haven’t heard from any companies yet that are facing these types of challenges, but I definitely am always asking about these types of things and always on the lookout for companies that might be facing any type of financial hardships as a result of this. Somebody should be checking with their bank; they should be ensuring that they have good lines of credit, that those lines of credit are secure, that they’ll be able to tap those if needed, that they’ll essentially have the liquidity that they’ll need should they run into financial constraints that are out of their control. Thus far, it looks like a lot of the manufacturers continue to operate “as normal.” And I say “as normal” in quotes.
Obviously, this is a very strong shock that we’ve seen. And from the beginning, electronics manufacturers and suppliers were impacted by this because they were having to adjust everything as new information was coming out. But at least as of last week, we were hearing from companies that they continue to operate at close to full capacity. In some instances, if they’re within the medical supply chain, they’re seeing new orders come in. Other companies report that they are ramping up production and also inventory builds just in case they run into any operating constraints or issues. For example, warehouses closing down or other things like that.
Transportation is becoming more difficult. They want to be able to turn to additional inventory that they may have on stock to be able to provides and service the sales that they have coming in.So the electronics manufacturing sector, at least for right now, seems to be intact, seems to be operating at close to full capacity here in North America. And what we’re hearing from Asia is that things have quickly come back online and by the end of the month they’ll be at or very near full capacity as well.
Matties: And if that’s any indication what’s happening in Asia, it’s kind of a model timeline for us to consider here in North America and other parts of the world.
DuBravac: I think that’s fair. I think it looks like North America and Europe, to some extent, are four to six weeks behind Asia, with respect to closures and other impacts from the spread of this virus. And so I would expect that Europe and North America would follow that similar timeline. And again, it’s never perfect. There are lots of dynamic situations that are continuing to develop and will develop over those six weeks. For example, in February, about 8% of container shipment capacity was underutilized essentially, was offline. That’s all coming back online this month and making the major container shipping companies anticipate being at full capacity in March, by the end of March. But that period in February where they weren’t at full capacity creates issues. You have the buildup of empty container cargo containers that end up building up outside of the port, or they’re left on train cars and on side rails and other things like that.
And so the transportation network starts to get inhibited to some degree. About half of their freight is carried by passenger flight. So as passenger flights have been canceled out, that has taken a lot of air freight offline. And so companies have had to find other freight options and other things that they could do in place of that now. We are starting to see American Airlines, Delta, and others announce that they’ll be running cargo-only flights. So that should help some of the air freight situation that we’ve seen over the last couple of weeks. But those are all the things that companies will have to be dealing with probably at least for the next two or three months.
Matties: Overall, you’ve mentioned supply chains and shipping and all sorts of aspects around that. What do you think the long-term impact will be? What lessons have we learned?
DuBravac: Well, I think every time we have an event like this, it tests the resiliency of the supply chain. And so in many ways, this is what the supply chain is designed to do, is to respond to shocks somewhere in the system, and to make adjustments in the supply chain within that system so that consumers and businesses that are at the far end of that don’t feel that. And I would argue that the supply chains have done a pretty good job, at least from what I can tell, thus far, at doing that. We had a major supply disruption when you had trying to go offline—essentially, the entire country go offline—from a consumption and a production standpoint for several weeks. And yet you didn’t see a lot of electronics manufacturers in Europe or North America also go offline as a result of not being able to secure the right inputs and components and supplies that they needed to continue to produce. So they were able to adjust to those shocks.
Now, obviously, that’s probably not true in all cases, in absolute cases, but the large number of companies that I spoke with were able to adjust to the shock that they saw and make other arrangements and look for alternative sourcing and alternative productions. And you haven’t seen consumers talking about, or businesses talking about the inability to get certain products. Definitely, you have seen certain orders delayed as it relates to consumer electronics. I know that a certain, and primarily it’s in the consumer electronic space, smartphones and laptop configurations were impacted, but by and large, you haven’t seen entire classes of categories impacted.
Matties: Very good. To close, Shawn, what sort of advice would you offer the industry at this point?
DuBravac: Well, I think the advice I would offer is to remain resilient. Manufacturers should continue to stay online. Obviously, following all of the direction that we’re being given by the CDC here in North America and other similar agencies more broadly. Look to make adjustments within your manufacturing processes if you can, in order to abide by these guidelines. But continue to be resilient. I’ve been very impressed with the companies that I’ve spoken with and the resiliency that they’ve shown to address the issues that they’re confronted with and to make adjustments. And so continue to make those adjustments. Communication flow is extremely important in these types of periods.
So not only should you be communicating with your financial institutions, banks, and lenders, but you should also be communicating up and down the supply chain as frequently as possible with the most accurate information as possible. I think one of the things we always find in these events is that accurate information tends to be highly correlated with current information and the frequency of information. And we always want the most up-to-date information that we can get during these types of periods. So continue to share that information, it’s very important. And that’s really, I think, one of the overarching goals of trade associations during these periods, companies or groups like IPC is to disseminate that information quickly to membership to ensure that members are working off of the same information and the most accurate information that’s available at that time.
Matties: Well, Shawn, we certainly appreciate your time today, and your expertise, and we’ll look forward to some future updates with you. Thank you very much.
DuBravac: Great. Thanks.