From the WSJ:
For a man who sells the chip “brains” that power millions of TVs, cameras and other gadgets, Levy Gerzberg found himself surprisingly unplugged last fall. In just a few short weeks, business virtually stopped.
He still marvels at the speed of the collapse. “I think about it today, and ask, ‘Why did it happen so fast?’ ” says Mr. Gerzberg, CEO of chip designer Zoran Corp.
The reason is now starting to become clear. The world’s complex “just in time” manufacturing supply chains are making it increasingly tough for Zoran, and any other single link in the chain, to know what’s going on just a few links away. Sometimes, Zoran itself doesn’t even know how its own chips are used: One batch it thought was destined for DVD players instead turned up in digital picture frames.
The recession has exposed a harsh side effect of the supply-chain system. Because modern industry rewards suppliers with the leanest inventories and fastest reaction times, when economic crisis struck, tech companies up and down the line contracted as sharply as possible in hopes of being the ones to survive.
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Phred Dvorak/The Wall Street Journal
Quick technology cutbacks blindsided Angelo Grestoni’s machine shop.
Forced to guess at demand for their products in a plummeting market, everyone hit the brakes, hard. An examination of the electronics supply chain — from retailers all the way back to makers of factory machinery — shows that, at almost every stage, companies were flying blind as they cut.
“We’re still not sure what happened,” says Angelo Grestoni, owner of a California machine shop that mills aluminum parts for chip-making machines. He is many steps away from Zoran on the chain, but his clients, too, evaporated around the same time. Today Mr. Grestoni employs 150 people, down from 600 just 18 months ago.
The cumulative result: The tech pullback may have been overdone. In March, Best Buy Co. said it could have sold more electronics equipment in the three months ended Feb. 28, but its suppliers’ deep cuts made it tough to keep shelves stocked. Suppliers “all decided to build a lot less,” says Best Buy merchandizing chief Michael Vitelli.
As the contraction raced down the supply chain, its effects became amplified. Rick Tsai, CEO of chip manufacturer Taiwan Semiconductor Manufacturing Co., has said that, in last year’s final quarter, consumer purchases of electronics gear in the U.S. fell 8% from the prior year. But product shipments fell 10%, and shipments of the chips that go into the gear dropped 20%.
The speed of the cuts are a big change from previous economic slumps. As recently as the early 2000s, companies compiled orders only monthly or quarterly; now they often do it every week. Their quicker reflexes this time kept their inventories from swelling dangerously, as happened last time, supply-chain experts say.
This has consequences for economic recovery. Although U.S. gross domestic product fell 6.1%, on an annual basis, in the first quarter, nearly half of that was due to inventory reductions. Since consumer spending actually grew 2.2%, some factories might need to increase output, economists say.
Production is starting to snap back, at least a little. Taiwan Semiconductor, or TSMC, in March boosted first-quarter earnings, and Zoran last month reported a jump in forecast orders.
Still, “It’s easier to turn the switch off than turn it back on,” says David Pederson, Zoran’s vice president of corporate marketing. Growth forecasts also get muddied because several of Zoran’s customers may be optimistically competing for the same manufacturing contract, he says, and they can’t all win it.
Zoran is the kind of niche firm spawned by the widely dispersed global tech industry: It designs specialized video- and audio-processing chips for products such as cameras, TVs and cellphones. Its customers are mainly little-known Asian companies — rent-a-factories, basically — that manufacture the world’s gizmos on behalf of brand-name giants like Toshiba Corp.
Complexities in the global supply chain make it tough to divine broad market trends, says Randy Bane, an economist for Applied Materials Inc., which makes factory equipment used to build chips like Zoran’s. Applied Materials had a loss of $133 million in its fiscal first quarter and a loss of $255 million in the second quarter, ended April 26 — its first quarterly losses since 2003. It told employees to take four weeks of unpaid leave in the first half of this year, something it’s never done before.
Just a decade ago, the supply chain had far fewer links, Mr. Bane says. Chip sales were driven largely by personal computers, and just a handful of companies were bellwethers for the industry. Today, everything has a chip in it, dramatically multiplying the complexity. Behavior is “much more difficult to predict,” he says.
At one end of the information flow are retailers such as Best Buy. For the U.S. market, it sends orders to its suppliers once a week, along with private forecasts for the coming 52 weeks, based on sales at its 1,000 U.S. stores and broader economic data. Manufacturers scrutinize reports like these to decide what parts they need to order.
The system is geared to respond quickly to changes in consumer behavior. But that puts risk on suppliers’ shoulders.
Take DVD players: Best Buy orders them about six weeks before it wants them on shelves. However, a player’s guts may take twice that long to make — forcing gadget makers and their suppliers further down the chain to guess at demand for the various pieces.
Companies all along the supply chain live in mortal fear of piling up inventory. Profit margins are razor thin, and unsold inventory only loses value as newer technologies hit the market.
Last fall, as the financial crisis struck Wall Street in full force, shoppers at Best Buy became an endangered species. By early October — the deadline to place orders for the all-important Thanksgiving shopping season — Mr. Vitelli, the merchandising chief, abandoned Best Buy’s prior forecasts and slashed orders to electronics giants such as Japan’s Toshiba and South Korea’s Samsung Electronics Co.
Demand was shrinking so rapidly, he says, he wasn’t even sure how deeply to cut. “You actually had to pick a number with no knowledge whatsoever, because nobody knows anything,” he recalls. For the three months ended Nov. 29, Best Buy’s net income fell 77%.
If Best Buy felt ambushed, its suppliers had even less insight into consumer demand. The slashing began.
Two or three links down the chain, chip designer Zoran quickly felt the pain. Even before last fall’s crisis hit, Zoran’s customers were getting nervous, executives say. When Best Buy and other retailers cut their orders in October, it turned into a rout.
“Everyone was looking at others, asking, ‘How much money do they have? Can they survive?’ ” recalls Mr. Gerzberg, Zoran’s CEO.
Manufacturers cut deeply, then cut some more. Shipments of audio-visual products such as TVs and MP3 players fell 19% in November, 21% in December and 58% in January, the Consumer Electronics Association says. Zoran’s fourth-quarter revenue fell 42%, the steepest drop since the company went public in 1995.
“There was a lot of guessing going on,” says Mr. Pederson of Zoran. “Everybody under-bet to a certain extent.”
The effects ricocheted across Asia. In Japan, the economy shrank at an annualized pace of 12.7% in the final three months of last year, the fastest drop in nearly 35 years.
In China, many of Zoran’s factory customers furloughed their workers, says Mr. Gerzberg. In recent months, some 20 million Chinese migrant workers have lost their jobs.
Zoran doesn’t actually make the chips it designs. Instead, it subcontracts with TSMC. Zoran slashed its chip orders — as did many of TSMC’s hundreds of other customers.
TSMC’s chip factories fell quiet, says Rick Cassidy, head of North American operations. In December, its plants ran at an estimated 35% of capacity, the lowest in at least eight years, according to market researcher iSuppli Corp.
In subsequent months, TSMC asked around 20,000 of its workers to take as many as five days of unpaid leave a month. In January and February, TSMC said revenue fell 58% from a year earlier. And it said it will slash its 2009 purchases of factory equipment by some 20% from a year earlier. Across Taiwan, plunging demand for electronics led to record declines in Taiwanese industrial output.
“Usually the guy at the rearmost end suffers the most,” says Morris Chang, TSMC’s chairman.
In Santa Clara, Calif., those cuts came as a rude shock at the offices of Applied Materials, which builds factory equipment used to etch circuits and bake chemicals onto semiconductors.
As recently as last summer, Applied’s in-house economist, Mr. Bane, had expected second-half business to grow. Instead, it laid off 2,000 workers and asked all remaining 12,000 employees to take unpaid leaves.
Mr. Bane gives presentations on what’s happening in the market to some of Applied’s immediate suppliers — including Mr. Grestoni, the owner of the California machine-tool shop who’s had to lay off hundreds of his employees.
In fact, Applied is one of Mr. Grestoni’s biggest customers. One of Mr. Grestoni’s shops, D&H Manufacturing Co., won Applied Materials’ supplier-excellence award for 2007 and 2008.
The downturn is brutalizing Mr. Grestoni’s business. He’s now sitting on a year’s supply of some products, rather than the typical three months. “We’ve got millions of dollars of inventory we can’t sell, and we’re paying storage fees on it,” he says.
One recent morning, Mr. Grestoni walked by empty rows and stilled machines at D&H. In one section stands six powerful milling machines in which sharp, whirling blades carve blocks of metal. Fifty people used to work there. Today, only one remains.
He paused by a pile of aluminum blocks, each roughly the size of a microwave oven. One has large round holes milled out of the center, for wafer-processing chambers. “In October, we get an order to do six of these,” he says. Then, the customer delayed the order. “You’re looking at 60 grand here.”
Mr. Grestoni expects sales for his three machine shops this year to total less than $50 million, compared with $100 million in a typical year.
There are a few hopeful signs. Best Buy has seen improved sales. Zoran on April 28 said it expects business to pick up in coming months, even though first-quarter sales fell 37%. And TSMC ended its factory furloughs in April.
But Mr. Grestoni is still waiting. “We’ve probably hit the bottom,” he says. “Now the question is, how long are we going to stay here.”
—Ian Johnson and Ting-I Tsai contributed to this article.
Write to Phred Dvorak at phred.dvorak@wsj.com
The Most Important Financial Journalist of Her Generation
On April 27, Lloyd Blankfein, chairman and chief executive of Goldman Sachs, sat down for a meeting at Goldman headquarters with Gretchen Morgenson, reporter, columnist and senior editor of the New York Times. The Wall Street titan and the Pulitzer Prize winner had never met, but this wasn’t the usual polite getting-to-know-you session between reporter and source.
“I feel like I’ve been waterboarded,” Blankfein told her, according to people familiar with the discussion. Blankfein was being dramatic, but he had reason to feel that way. It was Morgenson, after all, who had written the story this past fall that stripped the veil of secrecy from the most momentous closed-door deal in the annals of US finance: the government rescue of fallen insurance colossus American International Group. The September 28 story, “Behind Insurer’s Crisis, a Blind Eye to a Web of Risk,” was the first article published by a major news organization to reveal that the true beneficiaries of the bailout were the institutions to which AIG owed money, known as counterparties (mainly Wall Street investment banks). The 2,700-word piece said, among other things, that an AIG collapse “threatened to leave a hole of as much as $20 billion in Goldman’s side” and that Blankfein attended a meeting at the Federal Reserve on September 15, the same day decisions were made to let Lehman Brothers fall and to save AIG.
Today this is common knowledge; until this story ran, though, it wasn’t. The article was about as bold and valuable as business stories come and involved no small journalistic risks for the Times. Goldman, for instance, was able to wring a correction on the story and still feels wronged today. Treasury Secretary Timothy Geithner, who was then president of the Federal Reserve Bank of New York, called Morgenson and her editor to question the article’s premise, The Nation has learned. The piece has been the subject of endless parsing on financial blogs and, privately, sniping by Morgenson’s peers. Was Goldman really exposed to AIG? And if so, how? Was it fair to mention Blankfein’s presence at the Fed?
It would be too much to say that the story was all in a day’s work for Morgenson. It was extraordinary. But it does open a window onto what makes Morgenson the most important financial journalist of her generation.
At 53, Morgenson is at the height of her career, read and feared in the corridors of power running from Wall Street to Washington. As a reporter and columnist (a controversial dual role), she is enormously productive. During the period following Lehman’s bankruptcy, her byline appeared on major stories on Henry Cisneros and good housing goals gone bad, Merrill Lynch’s collapse, corrupted rating agencies and Washington Mutual’s boiler-room culture, in addition to the September 28 blockbuster on AIG–not to mention weekly 1,200-word columns on everything from rating-agency hypocrisy (“They’re Shocked, Shocked, About the Mess,” October 26) to a convoluted tax deal that imperiled an Indiana electrical cooperative (“Just Call This Deal Hoosier Baroque,” December 21).
She breaks business-press taboos constantly. Her prose is blunt; some even say crude. (“Everybody knows that executive compensation at many companies has been obscene. What everybody does not know is how obscene obscene is now,” she wrote in February 2006 in a not untypical column.) Morgenson doesn’t just cover subjects but sometimes hammers them into submission, as when she banged out more than three dozen stories on Countrywide in 2007 and 2008 and almost single-handedly made CEO Angelo Mozilo the face of a rogue industry. Not coincidentally, on June 4 the Securities and Exchange Commission charged Mozilo with securities fraud, alleging that he misled investors about the increasing risks Countrywide was taking with loans that Mozilo privately called “toxic.”
At this point, it is almost impossible for business reporters and editors not to have an opinion about Morgenson. Supporters cheer her tell-it-like-it-is style; detractors call her simplistic and agenda-driven. In certain Wall Street and business circles, she is flatly detested.
“She rules,” says Aaron Elstein, a senior writer who covers Wall Street for Crain’s New York. “She grasped that the game was rigged way before it was fashionable to do so.” (He was talking about bogus accounting practices, but the remark holds more generally.)
“Unreadable,” snaps a business journalism peer. “She writes like an Escalade running into a concrete barrier. And her relentless and repetitious pounding of simplistic issues is maddening.”
“The consensus view of her among actual business people I know is pure contempt,” says Jim McCarthy of CounterPoint Strategies, a public relations firm that has represented high-profile business-press targets. “Her work has a sort of drive-by, potshot quality to it that leads to habitual mistakes and ideological laziness. She is reflexively opposed to free markets and assumes bad faith in almost every subject or person she examines.”
What both sides miss, and what sets Morgenson apart, is that she combines the blunt writing style with a prodigious fact-gathering ability and an accountability mindset all too rare in the business-press culture. This allows her to go beyond merely reporting and commenting on the public agenda. She helps to set it.
Why Gretchen Morgenson Is So Important – Dean Starkman, The Nation