As an increasing number of listed companies release their quarterly results, the full effects of the global slowdown are becoming clear. Whilst a minority of companies – especially in the automotive sector – are still plagued by shortages, most are struggling to clear bloated stocks caused by over-ordering.
Sportswear manufacturer Nike has been the latest to report slowing demand for many of its lines which has led to its inventories increasing by 44%, according to Reuters. Investors worry that to clear this stock there will be a program of mark downs and this, combined with a slowdown in discretionary spend by customers, will result in lower margins. This is also a problem for US retailer, Bed Bath & Beyond. Its gross margin was affected by an accelerated inventory clearance, whilst it also had to contend with an increase in port fees due to the levels of congestion still being experienced.
The yo-yoing inventory levels in the retail sector – both in the US and Europe – have been caused by the classic ‘whiplash’ effect of under-ordering, leading to amplified shortages throughout the supply chain, followed by over-compensation. As a result of the lag between placing the orders and their delivery – several months later – products are piling up even as inflation and interest rate rises cause demand to fade. Inflexible sourcing practices have failed to keep pace with the market. As Richard Hayne, CEO of Urban Outfitters, put it, ‘We got hit by what I guess I would call a ‘sonic boom’ of inventory because we had tried to make earlier and earlier purchases.’
In the consumer electronics sector, weakening global markets have led Apple to tell its suppliers to reduce production volumes of its iPhone14 with implications throughout its supply chain, not least for semiconductor manufacturers. The global demand constraints will be sector-wide and as Nabila Popal, research director at IDC, commented, “High inventory in channels and low demand with no signs of immediate recovery has OEMs panicking and cutting their orders drastically for 2022.” Upstream implications are exemplified by statements from two chip manufacturers: Micron said that it was reducing its capital investment in production in 2023 by 30% and Kioxia (formerly Toshiba Memory) stated that it was also adjusting down production by around 30%. The glut of chips – in some sectors of the market at any rate – is expected to lead to a 15-20% cut in pricing.
The situation in the automotive sector is rather more complicated. Whilst finished vehicle production has been impacted by the same whiplash effects as seen in other industries, many companies are still seeing supply chain shortages, especially of semiconductors. Part of the reason for this is the long lead time taken to design and build chips to meet regulated and certified industry standards. The longer design cycles mean that older style chips are typically used which have lower margins for the chip manufacturers. Hence there is little incentive for them to prioritize their production over more lucrative, faster speed chips. That being said, some auto companies have one a better job at sourcing sufficient chips than others. Mercedes, Volkswagen, Hyundai, BMW and Volvo all say that the problems are in the process of being resolved. Others such as General Motors, Ford, Honda and Bosch (a tier 1 supplier) see shortages continuing into 2023.
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