Sunday, 5 October 2008

The same the whole world over

(By Richard Holway)
I’m in Japan. We needed to be at Osaka’s main railway station and were told it would take an hour in a taxi from our hotel in the rush hour. In fact the journey took 15 minutes. Our guide explained that traffic had flowed much more freely in the last month or so as the Japanese turned from their cars to public transport as fuel prices escalated. Cars are a pretty crucial part of the Japanese economy; Japanese-owned brands, like Toyota, Nissan and Honda, account for a majority all the world’s cars. And the world is not buying cars right now. Even if consumers could afford them and the running costs, the banks have stopped lending the money to finance them. That’s the reason why the Nikkei has tanked this week. This is not to do with a run on Japanese banks or financial institutions – it’s a direct consequence of the world economic slowdown. A contagion that is spreading to all sectors of the economy in all regions of the world.

Back in 2002, I presented my “IT’s all over” thesis which likened the IT sector to the automobile sector. I pointed out that, in its maturity stage, the automotive sector pretty much tracked 1xGDP growth. I believed that IT would follow a similar course now that it too had reached its maturity stage. Of course, the even more unpleasant consequence of this is that recessions turn GDP growth negative. That’s clearly the case with the automobile sector now and, I would contend, is now the most likely fate for the IT sector in Q4 2008 and 2009.

The other debate I’ve been having in HotViews over the last year concerns the ‘Beer Syndrome’. Ie that in times of economic downturn, consumers stay at home and play with their gadgets. The lead article in my Japan Today newspaper was the launch of the new Nintendo DS console which comes equipped with a camera and other must have features like karaoke. Although, at £95, it would make a perfect Christmas present, it won’t be available in the UK and US until next spring. This was described by one Tokyo analyst as “a truly disastrous bit of planning”. Games consoles are the one continuing bright spot in the retail sector right now; up 5% in 8 weeks to end of Sept 08.

The news that the Sex in the City DVD sold an amazing 920,000 copies in the UK last week and that the latest Kings of Leon CD sold 220,000 copies, also shows that low price ‘retail therapy’ items will sell regardless of (or probably because of) the economic climate. But that’s a rare bright spot.

Higher up the consumer electronics scale, the news is far from good. Sales of flat screen TVs have slumped. At one time, it was believed that Apple would defy any downturn. Not anymore. Rumours abound that Apple too is having difficulty shifting kit. Not helped this week by Wolfson (a significant Apple supplier) warning of a “material reduction in orders”. Everyone seems to be bracing themselves for a really tough Christmas.

As US politicians have been saying all week, the problem is not Wall Street anymore – it’s Main Street. Technology, just like the automobile sector in the past, is now a core and mature part of the economy. IT is now “Main Street”.

My advice for most of the last year has been ‘batten down the hatches – a storm is approaching’.

Now the storm is here.

Footnote – Anyone thinking that any downturn will be short-lived would do well to study Japan. They had their equivalent of the current financial meltdown over 20 years ago. They are still suffering. The Nikkei reach a high of 38,957 at the end of 1989. It closed last Friday on 10,938. The call it the 'Lost Decade'. Let's hope ours doesn't last quite THAT long!

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