High-tech inventory worries overblown

Inventories throughout the technology food chain are in check and unlikely to balloon out of control over the sluggish months ahead, distribution and other high-tech executives said this week at a JPMorgan Technology Conference in San Francisco.

The comments, made by chief executives and chief financial officers this week at the JPMorgan Technology Conference in San Francisco, come amid growing concerns that an inventory glut in the face of potentially flagging demand will weigh on profits.

While the fourth quarter is great for electronic gadget sales because of Christmas, and firms often spend more on technology toward the end of the year to pad out annual budgets, unsold output can pile up in the intervening months.

"I don't see it as being a huge deal for us today," said Paul Reilly, CFO of electronics distributor Arrow Electronics Inc., when asked at the conference about inventory levels. "There's no real pressure to load up on inventory or lighten up on inventory."

After the implosion of the dot-com and telecommunications investment bubbles of 2000 and 2001, high-tech companies such as Cisco Systems had to write down billions of dollars of inventory for which demand had largely evaporated.

Half a decade on, much of the industry has consolidated, there are fewer players, and companies can now track demand better and manage inventories accordingly, executives said.

"I don't see the inventory issues that plagued the industry in 2001 and 2002," said Peter Hayes, treasurer of contract manufacturer Solectron, which makes electronics such as PCs and cell phones for brand name customers. "Most of the industry has better control over their inventory turns."

Avnet Inc., another major distributor of computer products, semiconductors and other electronics, also doesn't believe growing inventories will lead to a mismatch of supply and demand at the end of the slower summer months.

"We're quite comfortable today, really, across the board," Avnet CFO Ray Sadowski said. "As you look back over a number of cycles, with the bubbles that burst four or five years ago ...a lot of things have changed since then in terms of efficiencies."

Regardless of whether inventory concerns are well founded or the salving comments from industry executives prove correct, contract electronics manufacturers should enjoy even stronger growth as brand names make use of their flexibility and lower costs.

Since the technology bust, companies such as Flextronics International, Solectron, Jabil Circuit and others have slashed thousands of jobs and moved production to Asia and Eastern Europe, where labor costs are far lower than in the US or Western Europe.

"The market's growing probably 10 percent a year," said Michael McNamara, chief executive of Flextronics, the world's biggest contract electronics manufacturer, referring to the overall industry. "We think it's ripe with opportunities."

While growth in more-traditional markets for Flextronics and rivals -- computing and telecommunications infrastructure, for example -- may have cooled, those companies are now targeting new industries that embrace outsourced production.

They are now aggressively going after the still-nascent but fast-growing automotive, industrial and medical markets, in which companies historically have kept production in-house.

"Non-traditional markets are big opportunities as a whole," McNamara said. "You have to be patient and your revenues will come over time."

By: Duncan Martell

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