Editor's note - Viewpoint

Electronic News, May 6, 2002 by Ed Sperling

A year of severe economic pain appears to be coming to a close. If new financial data is to be believed, a recovery of sorts is on track for the second half of the year. But there are plenty of lingering questions that won't be answered until we take the plunge again.

On the plus side, In-Stat/MDR delivered its most up-to-date forecast at last week's Embedded Processor Forum, pointing to an increase in both revenues and units sold starting next quarter and continuing through next year. (In-Stat/MDR is owned by Reed Business Information, the parent company of Electronic News.) While overall quarterly sales growth will be down 5.6 percent for this year, the number is expected to climb to a very healthy 31 percent next year. By next January, the semiconductor industry again will be back on track for the upward growth trend line it has been riding since 1990.

Put into perspective, this is one of the shortest downturns on record. From a macroeconomic standpoint, it doesn't even qualify as a recession because there weren't two successive quarters of losses in the gross domestic product. Hitting closer to home, the electronics industry has experienced downturns in at least one segment or another every couple of years for decades. This one proved to be shorter than most.

That's the good news. The bad news is that while this downturn was short, it was very deep. In fact, some segments, such as communications, came to a dead stop and still haven't shown any signs of movement. The word on the street is that 75 percent of the fiber laid for broadband access is dark, and other markets are still trying to dig out from multiple rounds of layoffs and a drop-off in business that was anywhere from 20 percent to upward of 70 percent.

As they dig out of this mess, the big question haunting many top executives is whether we've established a new pattern which future downturns will be shorter and deeper, or whether future corrections will be sustained periods of less pain as in the past. Two camps have sprung up on this matter, and neither really knows which one is right.

On one side, some executives dismiss this downturn as a fluke. They say that a huge volume of inventory was amassed to satisfy the voracious appetite of the dot-com generation, and when the Internet bubble burst this inventory swept over the market like a flood. It idled manufacturing operations, stalled sales and wiped out billions of dollars of paper profits on the Nasdaq exchange, which in turn rippled across other segments of the electronics industry and the economy as a whole.

The alternative argument is that the downturn was merely a symptom of a much deeper problem involving supply-chain management, and the dot-corn bubble merely disguised it. Their argument is that because we now have tools to manage the supply chain more efficiently, distributors and vendors will consistently overreact. That means they'll cut off supplies too quickly when demand is down-inventory on many distributors' shelves is at the lowest level ever-and they'll add it too quickly when demand for products is on the rise. Consequently, inventory imbalances actually will restrain economic recoveries and artificially pump up demand. And because the supply chain can be fed more quickly than ever before, any sign of demand will lead to rapid excesses in production that will start the inventory glut all over again.

We won't know which argument is right for several more downturns, but you can bet you haven't seen the last of this issue.