Dark Clouds Gather as Tech Stockpiles Hit Pre-Crisis Levels

(Bloomberg Opinion) -- Storm clouds are brewing over the global technology industry. 

A host of hardware companies, including Apple Inc., Samsung Electronics Co., Foxconn Technology Group and Intel Corp., are sitting on inventory stockpiles not seen since the financial crisis a decade ago.

And it comes amid a possible U.S.-China trade war, likely monetary tightening by the Fed, more expensive growth in China’s consumer economy, and a long-standing sense that we’re in a tech bubble.

I selected nine companies — a mix of branded-electronics names, product assemblers and the world’s biggest chipmakers — to paint a picture of the inventory levels we’re seeing right now.

It’s not pretty. 

Stockpiles escalated rapidly over the past year, with inventories surging at Apple and its chief supplier, Foxconn. Intel’s numbers are also high, while weaker revenue at Samsung is exacerbating the problem there.

Samsung is the most complicated to analyze because the company has its fingers in so much of the supply chain: It manufactures the components, assembles devices and sells under its own brand. That makes it difficult to pinpoint precisely which part of the firm’s inventories are most problematic. Yet that also means Terry Gou’s flagship is among the best examples of the industry’s end-to-end challenges.

Data on Xiaomi Inc. is incomplete — it only just listed shares in Hong Kong — yet the fact that its inventories jumped more than 30 percent from a year ago makes it a company to watch. HP Inc. looks to be in the healthiest position relative to others because its figures have expanded at a slower pace. 

Dark Clouds Gather as Tech Stockpiles Hit Pre-Crisis Levels

Basic inventory numbers don’t tell the whole story because rapidly expanding sales can justify building up stockpiles. But recently, revenue expansion has been falling well short of inventory growth in the electronics industry.

Dark Clouds Gather as Tech Stockpiles Hit Pre-Crisis Levels

Another way to look at this is to consider days of inventory outstanding, or its related metric, inventory turnover, which measures how often stockpiles are churned through in a given period. Cash conversion cycle is another method, connecting inventory to operating cashflow.

The cash conversion cycle at Hon Hai Precision Industry Co., the Taipei-listed flagship of Foxconn, has blown out to the widest since 2008; so, too, have days of inventory outstanding. This tells us that Apple’s chief supplier is struggling to sell the stockpiles it has on hand. It’s possible that Hon Hai has been building inventory ahead of an expected boom for the next iPhone, but I’m not convinced that’s the case.

Dark Clouds Gather as Tech Stockpiles Hit Pre-Crisis Levels

At Samsung, inventory turnover is at its lowest in eight years, exacerbated by a decline in revenue last quarter and expectations for anemic growth through the end of the year.

Dark Clouds Gather as Tech Stockpiles Hit Pre-Crisis Levels

There’s one notable exception to this trend. Sony Corp. has exercised renewed discipline in managing its inventories, which has helped days inventory outstanding drop to a decade low. A rebound in the cash conversion cycle may indicate some inefficiency in converting those sales to cash. But with its former CFO now at the helm and the company now relying more on services — and less on hardware — this may not be as big a concern.

Dark Clouds Gather as Tech Stockpiles Hit Pre-Crisis Levels

Last week I examined the rising cost to drive consumer spending among China’s internet giants, an issue that could impact demand. That may be a major headwind for hardware makers globally. No one wants this decade-long tech party to end, but it may be wise for investors to take stock. Literally.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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