EMS@C-LEVEL
As Forbes, Entrepreneur, Fast Company and SCOOP writer, Philip Stoten, continues to talk to EMS (Electronic Manufacturing Services) executives he learns more about their individual and collective experiences and their expectations for their own businesses and for the entire electronic manufacturing industry.
EMS@C-LEVEL
Navigating Financial Trends Amid Political Change - EMS & The Economist, August 2024
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
I ask IPC Chief Economist Shawn DuBravac, what's behind the latest stock market turmoil, as we dissect the sell-off of tech stocks that rocked the market. We explore the compelling factors driving this volatility, such as Yen carry trade and a comprehensive repricing of risk, while considering the broader context of global uncertainties like conflicts and a potentially slowing US economy.
As is traditional on EMS & The Economist, we walk through the latest book-to-bill numbers from IPC Research, as well as other data, like NVR's annual survey and in4ma's half year report produced in partnership with IPC. As well as presenting the numbers, Shawn and I dig into the anecdotes and trends behind them, while exploring some of the external factors driving them.
Switching gears, we delve into the potential impact of the US presidential election on industrial manufacturing, considering new Democratic candidate, Kamala Harris. We explore how her policies might reshape the industrial landscape, especially in the Midwest, and the pivotal role of Vice Presidential candidates and swing states in this narrative. Shawn looks forward to what we might see as the candidates debate each other in the coming weeks.
We also discuss the critical need for stable and clear policy frameworks for long-term business planning, the implications of Federal Reserve decisions, and the necessity of financial support and stimulus opportunities. Stay ahead of the curve as we anticipate our next show and the chance to discuss new data and political developments in the ever-evolving landscape.
EMS@C-Level is hosted by global inspection leaders Koh Young (https://www.kohyoung.com) and Global Electronics Association (https://www.electronics.org)
You can see video versions of all of the EMS@C-Level pods on our YouTube playlist.
Hello, I'm Philip Stoughton. I'm here with Sean Bravac from IPC Welcome to EMS and the Economist Sean, great to see you again. How are you going?
Speaker 2Good, it's good to see you Phil.
Speaker 1Interesting times. I wanted to start with the jitters in the stock market kind of over the last weekend and what we saw. I was kind of curious when I saw it, because the tech stocks have been really high and they've been going up and up and up and there's always a cycle of people taking profit and selling off and I was curious how much of it was that, how much of it was concern over specific numbers? I think Amazon failed to meet expectations. A lot of others met and exceeded expectations and it seems to have bounced back as we've gone through the week. What's your take on that?
Speaker 2Yeah, I think a number of factors drove the sell-off that we saw. That started, obviously, on the Friday before the weekend and then carried on into the Monday. You had a massive sell-off in Japan. Some of that looks like it was probably tied to a yen carry trade, where you're borrowing in yen and buying assets elsewhere and so, as those unwound, you had a sell-off. I think, broadly it was a repricing of risk. If you looked at any measure of volatility, if you look at the VIX index, for example, it was extremely low.
Speaker 2This is something I've been questioning quite heavily in recent months, because you look at the world and it doesn't feel like a risk-free environment. You've got a hot war in Europe. You've got a hot war in the Middle East that is getting progressively worse before it gets better. You've got tensions throughout Asia and then behind that you have a broadly slowing US economy, which has been the bellwether for the global economy. So overall, the global economy is still holding up pretty well, but certainly one of the bigger markets and the market that has helped lead some of that growth and done better than expected was the US market, and so you have that slowing. So, in the face of all of these uncertainties. You still had very low measures of volatility, which is generally our proxy for risk, and so that corrected immediately. We saw volatility shoot up on Monday and volatility doesn't just drop back. So volatility will recede to, you know, to the middle ground, but it will revert to the mean, but that will take time, and so I think some of the volatility that we saw this week is just a residual of that initial repricing of risk.
Speaker 2And clearly one of the you know, one of the matches that helped light this off was the unemployment report, which was a little bit weaker than anticipated. Overall it wasn't a bad report, but it was certainly weaker than we've been seeing. It was weaker than expected. We did see unemployment tick up and I think, more broadly, just caused everyone to recognize hey, you know, maybe the risk of a recession in the US isn't off the table. We've been talking like it wasn't going to happen and that a soft landing was a foregone conclusion and maybe that's not off the table, and so there was a, you know, a broad repricing.
Speaker 2Now I think the markets are looking for news in everything. They're looking at every bit of data that they can get and trying to decipher whether this is good news or bad news. This week we saw unemployment claims did a little bit better than expected and the market rallied on that. Normally this is a pretty volatile number. We get it every week. It changes week to week and we saw the markets rally on that because I think they saw in it a glimmer of hope. So I do think that we've seen a repricing of risk and I think that's going to stay. I think the next 90 days, certainly through the US election, is going to be a very volatile time.
Speaker 1Yeah, I want to get on to politics a little bit later and we'll do a bit of a deep dive into the impact that has on the industry. But one of the big things we saw during the weekend and early into Monday and Tuesday was some tech sell-offs and they kind of seem to be hitting the headlines. Is that just because those kind of big five, big six companies are the biggest companies on the market in the US? Is that why they hit the headlines? Because you know they're all doing pretty well. They have very, very high multiple valuations, which is like OK, can that continue? And there were a couple of big sales, like Berkshire Hathaway selling a chunk of Apple stock, which is kind of the modus operandi of Warren Buffett anyway, so not unexpected. How do you see that relationship between tech stock and what's really going on in the tech and manufacturing sector?
Speaker 2I think there too there's been a couple of factors. We've had a big run-up in the market broadly, but certainly in some of those big tech names you know. Consider NVIDIA, which started the year, you know, around $50 a share. We got as high as you know $120 on a split adjusted basis and then you saw a sell-off. So it came down, dropped 20%, 30%, but it's still double what it was at the beginning of the year. So you've seen a really strong rally.
Speaker 2I think a lot of this was investors taking money off the table. August is a weird time too. You've got a lot of people on vacation and so markets can behave in fits and starts in August, because if you start to get a sell-off where you might get buyers stepping in and providing some of that liquidity, they weren't there and so you just have more pronounced moves. I think some of it is taking money off the table. I think some of it is taking money off the table. I think some of it is, you know, concerns of continuing to grow revenue. That's always a headwind that all of those big companies face. They are very big companies, I mean. You take, for example, alphabet, which in the last quarter earned a billion dollars in just interest. You know that's more money and they earned more in interest than Starbucks earns in revenue. They earn more money in interest than Target earns in revenue. So you've got some very big companies that have some headwinds. There's some antitrust concerns there.
Speaker 2You know, you're not sure how some of those things will play out. So and again, I think it's just the just general unease that's set in around the market and people decided to take a little money off the table.
Speaker 1Yeah, yeah, and I think you're right. You know when you're, when you're heading off on vacation. Maybe, if you're not going to keep an eye on the market, cash is the cash is the safest place. Cash is the safest place and I think also the cost of money and the availability of a good cash rate actually makes that a more attractive safe haven. So I think there's a bit of that.
Speaker 1There's a whole bunch of data come out within the industry over the last week or so. Obviously, the book to bills and data have come out from IPC on the EMS and the PCB industry. We've seen some data out of the Informa partnership in Europe as to what's been going on in the market there, not just last year but also in the first half of this year, and the NVR report on the EMS 100 is kind of making its way into the market. So we're seeing some data from there, from the data that you've been putting together the book to bills. It still feels we're in a very insecure feeling stage in the market with respect to both EMS, but probably slightly worse in the printed circuit board sector, which is a sector that everybody's really keen to get as much investment back into and bring back to Europe and the US. That's kind of you know. They're kind of two counter positions at the moment. How are you seeing that?
Speaker 2Yeah, I think there certainly there are headwinds for PCB in both Europe and the US and I think some of what's happening there is you have. You know companies have lost pricing power that they had in the aftermath of the pandemic, where they could raise their prices Even as their costs went up. They could raise their prices and pass those on, and there was this period, you know, of call it, 18 to 24 months where they could raise their prices and pass those on. And there was this period of call it 18 to 24 months where companies could raise prices and consumers were willing to pay those higher prices, either because they had excess savings, they had excess funds to do that, or because it was something that they really wanted. A lot of those excess savings now are spent.
Speaker 2Wage rates, which had been going up and and were allowing and you know, not at first, but certainly wage rates caught up here in the U S so that workers were gaining, regaining some of that purchasing power. In that type of environment, if you've got wages rising faster than inflation, then you can afford to spend more on goods. A lot of that now has reversed, so wage growth is slowing. I think companies have lost the ability to pass on higher prices, and so they're getting squeezed because we know material costs are still going up. And so you do go back to that mindset of where can I cut costs? I can't cut it on labor, because labor is tight, wages are still going up. I'm losing workers. I need to retain these workers.
Speaker 2Other material costs had been rising. Energy prices until the last week had been elevated. Now some of that is coming out of the market as concerns of a slower economy emerge, but those had been pushing up costs, and so I do think you have companies looking for other places to buy things like PCBs, where they can get them from Asia at a lower price, and that gives them a little bit of breathing room in their pricing. Again, the data that we're publishing there is North America-specific PCB and EMS book-to-bill, and Europe obviously is doing the same, and then some of these tech categories, like consumer, some of the other segments, have had a natural slowdown. So there's, I think, a number of factors contributing to that, but to me a big one is certainly that of factors contributing to that. But to me a big one is certainly that companies are losing their pricing power and so they're having to look at how do we lower costs.
Speaker 1Yeah, yeah. And when I look at the EMS companies, when I look across the board, at the dynamics of the EMS companies that did well in 2023 and those that did less well and maybe that's carried on into 2024. If you look, even in the top 10, you can see that the top 10 US-headquartered companies they're Flex, Jabil, Sanmina, Celestica all had a reasonably good year, all grew and all were able to deliver decent returns. Where, where there was the most pain was probably with the, with the large Asian companies, and particularly the very, very large ones. You know, you look at a Foxconn that you know went from, I guess, down about 25 billion, but from 222 or something like that, from a very high level, but from 222 or something like that from a very high level. They're both exposed to the geopolitical shift if people are moving out of China but also really exposed to the consumer market. So it's important where you are and what market you're serving at the moment.
Speaker 2I guess yeah, I think it's important where you are geographically, but I think it's also very important which you know, as you noted, which segments you're serving, and if you look at at least the inflation data in the US that we saw last week and we'll get more inflation data next week you saw goods prices are declining, so you know companies are seeing their prices come down, the selling price come down, while the input costs are going up, and you're going to get squeezed there and you're going to have to figure out a way of either lowering your costs or doing something differently, and so I think both of those factors are contributing.
Speaker 1Yeah, and we talked last time we met about this concern that we're addicted to cheap products and that makes any shift in terms of the global footprint somewhat had. You know, three decades of shifting to lower cost environments and chasing low cost labor around the world, so that's going to take time.
Speaker 2And at the same time, I do think there are these long term fundamental structural shifts that are in place and we definitely see the tariffs having an impact on, you know, exports from China. We see Europe looking at more aggressive tariffs as well on China exports for things like EVs and other things. We talked about this, you know, a little bit in the last episode. So that's a clear headwind for exports from China and other countries are winning. For exports from China and other countries are winning. You know, if you look at North America, mexico's winning, other places in Southeast Asia are winning.
Speaker 2We are seeing a lot of investment in plants and facilities go into place throughout North America. So I do think you even see European companies investing in new facilities in the US. So these are long-term, these structural shifts that take time to come online, but I do think that that is happening Now. Whether the whole electronic supply chain will follow, that remains to be seen, but certainly that's something that IPC is advocating for. We believe that it's something governments should look at carefully, that they should support, and that it obviously helps with building more resilient supply chains.
Speaker 2So some of these bigger structural changes, shifts will take some time to you know. Come In the meantime, you're left with how do I produce the lowest price? Good you know for the market that I'm trying to serve.
Speaker 1Yeah, and some of that is the concept of having a low cost environment close by. You know, it's cheaper to produce in Canada, it's cheaper to produce in Mexico and there are trade relationships there that make that work well. In Europe We've got all the Eastern European countries and even North Africa, like Tunisia is a growing region. That's been very successful and you're right there. Ecosystemic changes that need to happen and they take years and they take years and just as it's taken years to cause the damage to the industry and those high cost environments, it'll take years to repair that.
Speaker 1Just switching gears a little bit. We talked a little bit at the beginning about politics, politics. Watching US politics is an incredible show. It's like a really fast moving circus. At the moment We've got a new candidate in Kamala Harris for the Democrats. We've got a new vice president announced. Without digging into how you see that, what do those people need to do to let us know what their strategy is, what their industrial policy is? So when people are thinking about their votes, that might be concerned about the manufacturing industry, they can make smart decisions.
Speaker 2Yeah, so I think that Kamala Harris and her team are still really building out their platforms. We haven't yet seen any really official releases of their, for example, industrial policy or even some of their broader political ambitions and goals. Right now, it feels a lot like they're carrying on some of the what the Biden administration was striving for, some of the things she was talking a lot about during her. You know her, her role as vice president. We should see some debates. There's still some, you know, some discussion about when and where those will happen, but it does look like we will see some debates in September between President Trump and Kamala Harris, and so I do think that we will start to see a more clear view of their policies as it relates to manufacturing and other things. Obviously, some of the other topics that are popular in the US whether it's, you know, immigration or other things those are being widely discussed, but my hope is that, with a debate in September, potentially multiple debates in September, we'll have a richer conversation about what some of those manufacturing policies might look like.
Speaker 1Yeah, At a vice presidential debate. Does that matter? Or is that just, you know, just a, I don't know, a beauty pageant?
Speaker 2Yeah, in the past, you know, we probably would have said it doesn't matter too much. This year might be a little different. There's lots of things that have happened this year that you know weren't on my bingo card, things I didn't think would happen. So we'll see. I think we have. You know, what's interesting is we have two vice president, presidential candidates that have similar backgrounds. They both speak to the Midwest audience, which will be an important audience for the election, but it's also an important audience with respect to manufacturing, and so I think you could see, you know, their perspectives matter with respect to. They're closer to some of those issues than their running mates are. They've lived in those markets, they've served those constituents coming from Minnesota and Ohio and they speak to those Midwest values, but also the Midwest workers. So I think it could be an interesting discussion.
Speaker 1Yeah, it's certainly interesting from a point of view of where they sit and, as you say, those very important swing states. I think what's fascinating is what impact it has on the decisions that electronic manufacturers, and particularly EMS companies, are making with regard to investment, and there's always a bit of a hiatus in investment during a presidential election year we seem to have had elections everywhere. That's significant this year, which has made it even more challenging. When you speak to leadership of those companies, do they just want to know what's happening, rather than saying, oh, I do hope it goes this way or I hope it goes this way, saying, oh, I do hope it goes this way or I hope it goes this way. They just want something that's settled and clear so they can actually plan their business within the framework that's provided to them.
Speaker 2I think that's right. I think. Well, you know, I think it's hard not to have personal desires in the US these days. It's become such a bifurcated environment around politics that you do tend to have strong feelings, it seems like. But I do think that CEOs and executive teams are looking for clarity. They're looking for transparency, long-term projects they've got lifespans of 30, 40, 50 years in some instances. You're going to wait and make sure you're really clear on what the policy environment is going to be like before you start to dig up the ground and start to put up a structure. Also, they probably are looking for is there the opportunity for financial support? Is there opportunity for stimulus? Is there an opportunity? Might we see any?
Speaker 2You know things from a new administration. We're going to end up with a new administration, regardless, given who is running now, and so now maybe Kamala Harris retains some of the existing administration, but either way, you'll have a new president and a new vice president and they'll bring with them their teams and their policies. So I do think that we're waiting for some of that. Recent volatility in the marketplace doesn't help and again, I think that is going to last through at least the first part of November when we have the election, and so at this point I think it makes a lot of sense to to wait.
Speaker 2You also hope that you know by then the Fed has cut interest rates. That's widely expected. The market certainly is expecting aggressive cuts through the remainder of the year, and so maybe the cost of financing gets a little easier, maybe the availability of financing gets a little easier. Maybe the availability of financing gets a little easier. This week we saw the senior loan officer results, and credit is still tight for commercial and industrial projects, and so maybe that gets a little bit better after November, after the Fed has had a few meetings, and so I think companies are waiting for that.
Speaker 1Yeah, those Fed meetings are certainly important and they kind of give an indication to whether we really believe that inflation has been beaten and we are pushing that risk of recession away. By the way, that bifurcation of politics is true everywhere in the world at the moment. That seems to have amplified over the last decade quite substantially, which is in many ways not a good thing and a concerning thing. But I think when I look at the, the EMS industry, the PCB industry and all those that supply the industry, what they like is to be able to plan, and the only way they can plan is if they see stability out there in the market. And what they, what they see at the moment is volatility, and you know, a milestone like the US presidential election kind of perhaps moves us from a more volatile to a less volatile point. So that bodes well.
Speaker 2And we also saw Intel announce major layoffs. So that is that. You know, even taking politics out of it, you see a company with the legacy of Intel and with you know the importance of Intel, announcing major layoffs and that does cause some hesitation, that causes other companies to say, oh, what do they know that we don't know, what are they feeling that we might be feeling. So there is a prudence that sets in around. Let's take a little bit more of a wait and see and make sure that this doesn't ripple into us little bit more of a wait and see and make sure that this doesn't ripple into us.
Speaker 1Yeah, who'd have thought nvidia would be worth something like 20x intel? Yeah, it's, it's, it's absolute insanity, isn't it?
Speaker 2it's, uh, it's um, it just goes to show you the volat, the volatility of the market and, uh, and what's happening out there yeah, and how the market changes, how, how the demand, for you know, technology shifts and and so um, nvidia obviously has been very well positioned to take advantage of the shift to AI in particular.
Future Outlook and Rapid Changes
Speaker 1Yeah, that seems to have helped them. Yeah, and you know, ending on a positive point, I think that really tells us that the fundamentals of the electronics industry you know what's really going on in terms of the long-term demand for electronics is all good. You know, there are no genuine concerns there. There's nobody saying hey, we're going to do this with something that isn't electronics in the future it is. You know. It seems to be a solid sector with a nice growth that beats GDP growth year on year. So, yeah, pretty robust. Sean, thank you. As always, absolute pleasure to chat. Look forward to doing again soon, in a month or so, when we've got some more numbers and, I'm sure, some more political news and so forth. But thanks for your time today, thank you.
Speaker 2Yeah, great to join you. Obviously, the world is going to be drastically different in a month, if the last month is any indication of how quickly things are changing. So I look forward to our next conversation.