Macroeconomic cycles are real, but are they reliable indicators of EMS growth?

Perhaps the industry’s most frustrating aspect is its cyclical nature. Equipment manufacturers and OEMs cannot escape the desperate ups and downs. While there are natural cycles of consumption and excess, they usually are the result of consumer spending variations that thread through the supply chain and create havoc with the supplier base.

Worst hit are equipment suppliers, whipped by the combination of end-user demand and OEM whims concerning predicted fulfillment. The chain reaction of supply makes this boom/bust scenario chaotic and excessive in terms of forecasting revenue. It is often an accumulative effect in which the tail of the chain – the equipment/manufacturing guys – gets whacked most, while distributors and EMS suppliers are left with excess or deficient inventory.

This is all specific to product industries – PCs, notebooks, LCD monitors/TVs, set-top boxes and video console games, to mention a few. To be sure, OEMs are their own worst enemies – they hedge against upside demand and over-predict against downside supply – to their, and their suppliers’, misfortune. Yet, who cannot claim to be accurate and wise after the fact? As a forecaster, I can honestly say that when we are spot-on, it is sheer luck, and when we are wildly off, we hide until the storm passes.

One hopes time will provide wisdom and sanity. We try to integrate knowledge gained from watching such cycles in our current forecasts. Conservatism seems to pay dividends, yet we have often been wrong. Sometimes we have been astoundingly accurate – shockingly – yet we know that we must attribute it to luck.

A few examples make this point. In 2000, when the market was booming, we precisely predicted EMS market growth, but this was because it was exploding and there seemed no end in sight. When the downturn arrived, it was very embarrassing to revise our forecasts. Similarly, we expected a solid 2009. We lick our wounds and beg for forgiveness and forgetfulness.

Yet, who could know? Cycles exist that seem beyond our awareness. The Foundation for the Study of Cycles (foundationforthestudyofcycles.org) is well aware of this, if you believe in such things as planetary or cosmic/organic cycle studies. It is a fascinating organization, one that examines not just economic cycles, but other systemic movements in nature and life that seem to follow patterns outside our predictive natures. I can’t say that I agree with all its predictions, but I am interested insofar as they help us understand our businesses.

Edward R. Dewey, a Harvard economist and founder of the FSC, made this bold statement: “Cycles are meaningful, and all science that has been developed in the absence of cycle knowledge is inadequate and partial. [A]ny theory of economics, sociology, history, medicine, or climatology that ignores non-chance rhythms is as manifestly incomplete as medicine was before the discovery of germs.”

Cyclic prizes that have been awarded for observing solar and lunar cycles such as El Niño correspond to droughts in Northeastern Brazil, Morocco and the American Southwest, specific markets, economics, and forecast turning points in international business cycles, with some even going so far as to predict the systematic cycles of war, tree ring widths, weather, biophysical science, civil violence, insurance, motivation and yes, corporate lifecycles! It all can become a little esoteric when it comes down to biocybernetics and new option markets, but so it goes.

Back on earth, cycles both exist and (seem to) recur. Electronics seems to be an industry of boom and bust, much to its participants’ consternation. Yet, growth endures and every year we look forward to new gains. In this regard, I can positively predict the EMS and electronics assembly industries and their corollaries will continue to grow, albeit at varying rates. The recession cycles are the most disturbing and unpredictable.

I am not advocating cyclic studies to help us understand the economics of electronics manufacturing; they should be considered in the larger context.

Macroeconomic cycles are real, despite our subtle denial. I wish we were able to harness them better in our work. In the meantime, we will try our best to work with our best knowledge, intellect and intuition to help our clients predict future product demand. Otherwise, suppliers must rely on their own intelligence, and where does that come from? Is it best guess, economic indicators, prognosticators, cyclic studies? We would be silly to promote such a view as cyclic studies; however, it introduces a fascinating dimension to a world that has not been completely proven. 

Randall Sherman is president and CEO of New Venture Research Corp. (newventureresearch.com); rsherman@newventureresearch.com. His column runs bimonthly.