The more astute are becoming more and more concerned that a recession is on the way in the US computer and electronics market, and there is particular worry this time around because of all the big companies that emerged in their present form by following leveraged buyouts that leave them having to maintain strong cash flow just to meet the payments on mountains of junk bond debt. In the event of a recession, Prime Computer Inc would be a candidate for the knacker’s yard if the MAI Basic Four Inc bid were to succeed, and it is not clear that it will be very much better off if it is acquired by J H Whitney & Co. Other companies with heavy debt burdens include Unisys Corp, Memorex Telex International NV, Storage Technology Corp and Wang Laboratories Inc and all are doing everything in their power to pay down the junk finance and limit the drain on their resources that high interest payments place. Inventories shrank Can they make it in time? The Quest Index of business activity in the electronics industry fell in June to 50.5, its lowest level in 12 months, according to Electronics Buyers’ News. The index is based on an EBN survey of over 500 purchasing managers of five indicators of activity in the electronics industry: production, new orders, inventories, vendor deliveries and employment. Over 50 means growth in activity, below 50 a decline so at 50.5 the index is teetering on the brink. With business tumbling for the third consecutive month, growth in the industry virtually came to a screeching halt in June, says the paper, but the electronics sector nevertheless continues to do better than the economy as whole. In June, growth slowed in production and employment, inventories shrank, new orders slackened and only vendor delivery, with lead times lengthening, remained positive, the survey shows. The number of purchasing managers buying hand-to-mouth instead of making long-term commitments has jumped significantly in both capital equipment and maintenance, repairs and operations supplies, the report says. In May, 16.5% of the managers polled bought capital equipment 60 days ahead and 32.6% hand-to-mouth; in June, those buying ahead dropped 7 points, to 9.5%, and hand-to-mouthers rose 3 points, to 35.6%. Similarly, from May to June, the number buying supplies 30 days out fell 9.4 points, to 32.6% from 42% and the hand-to-mouthers rose 8.1 points, to 40.6% from 32.5%. With the availability of electronics commodities no problem and prices declining, it’s no wonder that hand-to-mouth procurement is the mindset of today’s purchasing manager, says Richard Jacobs, editor of the National Electronic Distributors Association’s Market Letter. Even though Quest’s production index has slipped, the fact that it is still above 50 suggests that backlogs will keep production strong for at least the next couple of months, adds Jacobs, head of New York-based electronic components consulting firm R A Jacobs Associates Inc, who reckons that electronics will fare rather better than much of the rest of the economy. Further easing of interest rates should keep both capital spending and export potential in the industry healthy due to that sector’s high component content. This should virtually assure that the electronics marketplace will outperform the general economy. But that can still mean the fall will be only from the tenth floor and not the 29th.
