Apple sales shock isn't the worst of tech's troubles

BACK on Aug 28 I sounded a warning.

Storm clouds are brewing over the global technology industry. Worryingly, Apple Inc is among the healthiest in the sector.

When I first ran the numbers on a selection of nine companies - a mix of branded electronics, product assemblers, and chipmakers - I concluded that the decade-long tech party looked headed for a nasty hangover.

I've now added September-quarter figures to the same analysis, which includes inventory levels, turnover and cash conversion cycles. The situation is even uglier than four months ago.

Apple's warning this week that it won't meet revenue guidance proves the initial concerns to be true, but it's only a small part of the industry's woes.

The company's Chinese neme-sis Xiaomi Corp could be in trouble. By the end of September, the maker of smartphones had increased inventories 62 per cent since December 2017 and 22 per cent since June 30. Lest you're tempted to dismiss that as a seasonal inventory build, its 5.3 billion yuan (S$1.05 billion) rise in inventory during that period exceeds the 4.9 billion yuan growth in hardware sales.

Apple, by contrast, cut its inventory to the lowest since June 2017. That includes a 19 per cent reduction from a year prior, which is a better basis of comparison since it accounts for the annual pre-release build cycle. This means that despite the shock guidance cut, which sent shares down 10 per cent on Thursday, the Cupertino-based company is relatively better prepared than others in the industry.

Intel Corp and Samsung Electronics Co don't look too bad. Yet Samsung's inventory turnover, cash-conversion cycle and inventory-to-cash metrics are all moving in the wrong direction.

A greater worry is the Taiwanese assemblers Hon Hai Precision Industry Co (aka Foxconn), Pegatron Corp and Wistron Corp. Between them, they cover most major electronics brands including Apple, Sony Corp, Nintendo Co, HP Inc and Dell Technologies Inc. Add Lenovo Group Ltd to that mix and you have a continued rise in inventories that can't be supported by the current global economic environment.

Over the next week the picture for Taiwanese companies will become clearer as they report December monthly sales (due by the 10th of each month), and ergo fourth-quarter revenue.

In November, Bloomberg News's Debby Wu reported Foxconn was telling managers that deep cost cuts are coming. Just recently I was told that its non-Apple smartphone division, FIH Mobile Ltd, laid off whole teams of people in Taiwan, with struggles at the company's HMD Global Oyj-Nokia venture among the reasons. Foxconn executives declined to comment.

Such trimming may not be enough to save tech companies' bottom lines. As my colleague Shira Ovide wrote, Apple CEO Tim Cook offered some lack-lustre strategies for combating the slowdown at his own company. Others in the industry seem equally bereft of ideas.

While inventories and cash-conversion numbers are historical snapshots, they can also be used as leading indicators for net income. Because the tech industry moves quickly, unsold product left on the shelves too long becomes worthless. And if December and March quarter sales aren't enough to justify those escalating stockpiles, massive asset writeoffs will ensue. BLOOMBERG