Moody's: Outlook for Asia Consumer-electronics Industry Remains Negative
Moody's Investors Service has maintained the negative outlook it had assigned in October 2011 for Asia's consumer-electronics industry, owing to a mix of macro-economic and sector-specific structural challenges.
The structural challenges include the commoditization and maturation of the markets for digital, audio-visual (AV) products, fierce competition, and the rising demand for smartphones.
Due to challenging industry conditions, Moody's expects adjusted operating margins for the majority of the rated issuers to stay below 3%. The adjusted operating margins of Japanese issuers will be even lower, likely averaging less than 1.5%, because they are more concentrated in low-growth regions and have weaker market positions in key products.
Moody's conclusions were outlined in a new report that expresses the ratings agency's expectations for the fundamental business conditions for Asia's consumer-electronics sector over the next 12 to 18 months.
According to the report, sales of consumer electronics products will remain negative or flat in Europe, the US, and Japan, which together account for approximately 50% of total global sales.
For China, which accounts for about 15% of global sales, Moody's expects annual sales growth to slow significantly to a low- to mid-single-digit percentage level in the second half of 2013 from the current pace of about 10%-15% due to the expiration of a new subsidy program and lower GDP growth.
The demand for digital AV products is likely to remain weak. Revenues from major products such as flat panel display (FPD) TVs will not grow because of increased penetration levels and the continued decline in prices.
In addition, the growing presence of Chinese manufacturers will intensify competition in FPD TVs, further weakening the position of Japanese companies, which are struggling with high-cost structures and a lack of product differentiation.
Meanwhile, smartphones are bucking the overall trend, and demand in this segment will continue to grow. Samsung Electronics will maintain its leading market position and earnings growth in smartphones on the back of continued product innovation, while the positions of other Asian consumer electronic markers will remain weak.
Moody's would consider changing the outlook for the sector to stable if adjusted operating margins for the majority of its rated issuers reach at least 3%. However, for margins to improve, the supply-demand balance and pricing and competitive conditions would also need to improve.