NEW YORK, Nov. 7, 2012 (GLOBE NEWSWIRE) -- Growth rates in the high-tech industry have dropped to just 1% and the market value of the industry is underperforming broad market indices -- a dramatic shift for the once high-flying industry. As a result, many companies in the industry will need to radically change their operating models, including moving to "asset-light" operating models and cutting overhead by as much as $50 billion in total. Poorer performers face the biggest challenge, and need to cut up to 30% of their overhead (or sales, general & administration) costs, if they hope to compete in today's slow- or no-growth environment. That's all according to a comprehensive analysis of nearly 1,200 companies in the 10 sectors of the $5.5 trillion global high-tech industry published today by AlixPartners, the global business-advisory firm.
Reduced Industry Growth, Profitability, Shareholder Returns
After years of double-digit annual revenue increases, the high-tech industry has experienced a dramatic cooling of top-line growth rates, says the study. Based on the reported second-quarter performance of 90% of the companies included in AlixPartners' analysis, industry revenues grew just 1% over the 12 months through June 30, compared with an average 10% growth rate for the period 2009 to 2011. Meanwhile, three sectors that make up 20% of the overall industry – consumer electronics, telecommunications equipment and semiconductors – saw revenues drop by 4%, 6% and 3%, respectively.
Profit margins in the industry have also been squeezed over the past year, notes the study. Operating-income margins have shrunk by nearly 6% across the industry since 2010, with declines of approximately 50% in consumer electronics, 30% in semiconductors, 20% in telecommunications equipment, 15% in contract manufacturing and 6% for telecommunications operators. Telecom operators, says AlixPartners, generate approximately half (47%) of industry operating profits on the back of only about one-third (34%) of industry revenue. However, notes the study, if margins in this sector continue to erode, the trend could likely have a substantial impact on overall industry profitability – and result in mediocre shareholder returns.
The study finds that while the high-tech industry as a whole is outperforming broad market indices in terms of market capitalization (excluding dividends) this year through August 31, if just one company, Apple Inc., is excluded, market-cap growth for the industry grew just 6% over that same period. That trails both the NASDAQ Composite Index and S &P 500 averages for that period, which have grown 16% and 8%, respectively. The study also finds that for period 2011 through August 31 of this year, companies in the most-profitable quartile (defined by earnings before interest, taxes, depreciation and amortization, or EBITDA) in their sectors were 73% more likely to outperform the S &P 500 average than those in the bottom EBITDA quartiles.
Needed: 'Asset-Light' Models and Reductions in Overhead Costs
In order to combat these combined challenges to revenue growth, profitability and shareholder returns, many companies urgently need to reduce costs, including overhead costs, and adopt "asset-light" operating models, says the study.
Regarding asset utilization, the study finds that while average industry ROCE (return on capital employed) has remained steady, at about 11%, over the last five years, companies with leaner asset models, including many software and Internet companies (where sector ROCE levels are currently 22% and 17%, respectively) continue to show higher overall returns. In contrast, "asset-heavy" sectors, such as consumer electronics and computer hardware (with ROCE levels of 5% and 8%, respectively), continue to be challenged. The study notes that the most successful tech players are aggressively outsourcing manufacturing and supply-chain operations, thus reducing capital employed, often with the added benefit of also reducing risk and exposure to technical discontinuities.
"The technology industry is increasingly polarizing, and becoming a 'winner-takes-all' industry," said Karl Roberts, managing director at AlixPartners and co-lead of the firm's global Telecommunications-Media-Technology (TMT) Practice. "Apple and a few other top-performing companies are generating the lion's share of market-cap growth for the entire industry. Underperforming companies will need to dramatically change their business models, including adopting 'asset-light' operating structures, in order to be winners and not losers going forward."
The study also finds that overhead costs as a percentage of revenue have jumped by as much as 17% since 2010 in sectors such as semiconductors (up 17%), computer hardware (up 14%) and consumer electronics (up 4%). Overall, says AlixPartners, companies in the high-tech industry need to trim overhead costs by as much as $50 billion if the industry hopes to overcome today's challenges. That represents the equivalent of about 5% of current industry overhead costs, or the equivalent of about 1% of industry revenues. Moreover, AlixPartners finds that poorer performers, such as many companies in the less-profitable consumer-electronics and telecom-hardware sectors, may need to cut overhead by as much as 30% if they hope to be cost-competitive going forward.
"If technology companies are going to prosper in the difficult market conditions they face today, they're going to need to significantly streamline and optimize their operations, and take a hard look at optimizing overhead costs," said Roberts. "High overhead costs may have been permissible when the industry was booming, and they may still be absorbable by some high-flying individual companies today, but for many, if not most, companies that's no longer the case."
Significant Regional Differences
Regionally, the study shows that the European market is enduring the slowest rate of sales growth among the four major regions studied, just 3% compounded over the period 2009 through 2011, compared with the global industry average of 10% during the same period. In contrast, compound industry revenue over the same period in Asia-Pacific, MEA (the Middle East and Africa) and North America averaged 12%, 12% and 14%, respectively.
Regional differences may get even wider in the future, says AlixPartners, in part because North American companies are displaying greater focus on the more-innovative, profitable technology spaces, while Asian players continue to "commoditize" more traditional areas, such as consumer electronics. According to the study, Asian-based companies generated nearly half (49%) of industry revenue in 2011 but only about 37% of industry EBITDA. North American companies generated 33% of industry EBITDA last year on 30% of industry revenues; for European companies, the comparable numbers were 22% and 17%, and for rest-of-world companies, they were 8% and 4%.
Meanwhile, AlixPartners says North American companies today command a much higher market share globally for three of the industry's four most-profitable sectors -- software, Internet and semiconductors, at 79%, 68% and 60%, respectively. The firm finds that European companies are commanding a relatively high market share in the telecom-services sector, at 33%, while Asian companies have a relatively high market share in four of the six least-profitable sectors -- consumer electronics, contract manufacturing, multi-sector technology and computer hardware, at 92%, 82%, 74% and 62%, respectively.
Meanwhile, says the study, North American high-tech companies in general, with an average EBITDA margin of 23% in 2011, and European companies, with an average EBITDA margin of 27% last year, were significantly more profitable than Asian companies, which recorded an average EBITDA margin of just 15% in the same time period.
The industry also continues to feel the strain of high leverage and debt levels, says AlixPartners. Debt-to-equity levels in such sectors as consumer electronics (led by recent multi-billion-dollar debt issuances by Sony Corp. and Sharp Corp.) and contract manufacturing (led by Hon Hai Precision Industry Co.'s recent $8 billion offering) have been climbing sharply. By the same token, interest coverage is falling in many sectors, says AlixPartners, most notably in semiconductors (where coverage has fallen from about 23 times interest in 2010 to about 18 times interest in the 12-month period ending in July of this year) and consumer electronics (where it's fallen from about 12 times interest in 2010 to under eight times interest today).
As a result, the study finds that companies generating over 85% of revenues in the consumer-electronics sector today face risk of financial distress (the possibility of insolvency within two years, absent aggressive intervention), while the same holds true for companies generating over 70% of revenues in the telecom-operators sector and for companies generating over 65% of computer hardware revenues.
"We anticipate that the current raging 'Battle of Mobile Devices and Operating Systems' will have both near-term and long-term consequences for the industry, particularly for players ranging from semiconductors to telecom operators, telecom equipment manufacturers and consumer electronics. In the current, near-zero growth environment, future winners will need to simultaneously innovate whilst squeezing real value from CAPEX and R &D expenditures and moving to more agile, asset-light business models," said Roberts.
About the Study
The 2012 AlixPartners Global Telecom and Technology Outlook studied 1,173 companies across 10 major high-tech industry sectors: telecommunications operators, telecommunications equipment, semiconductors, Internet, contract manufacturing, computer hardware, consumer electronics, software, multi-sector technology and channel (distribution and retail). Public economic data and forecasts were also used in the study.
AlixPartners, LLP is a global business-advisory firm offering comprehensive services in four major areas: enterprise improvement, turnaround and restructuring, financial-advisory services and information-management services. The firm has offices around the world, and can be found on the Web at www.alixpartners.com.
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