NEW YORK, N.Y., Nov. 12, 2013 (GLOBE NEWSWIRE) -- The global consumer electronics industry is a "mature" industry, characterized by a winner-takes-all environment in which two giants -- Samsung and Apple -- are grabbing the lion's share of revenue growth and profit share (and where even those two companies are facing slowing momentum), where 56% of the more than 50 publicly-listed remaining players in the industry have either already fallen into or face possible financial distress, and where two-thirds of industry revenue in this second tier of companies is at the highest risk of distress -- up more than double from 2011. That's according to a new study by AlixPartners, the global business advisory firm.
The AlixPartners 2014 Global Consumer Electronics Outlook finds that, based on the key measures of EBITDA (earnings before interest, taxes, depreciation and amortization) and revenue performance, the consumer electronics sector today indeed breaks down into two main tiers. The first of these the study calls "The Top Two" -- Samsung and Apple -- with the second tier being called "The Rest." It further divides The Rest into two sub-tiers: "The Next Four" -- Panasonic, Sony, LG and Sharp -- and "Everybody Else."
Further, the study finds that a whopping 88% of revenues from companies in The Rest tier are in or face possible financial distress, as defined by an Altman Z-score analysis.
"Mapping players against these categories reveals just how much of a winner-takes-all scenario has arisen in this sector," said Karl Roberts, managing director at AlixPartners and co-lead of the firm's global TMT (technology-media-telecommunications) Practice. "Consumer electronics is now a mature industry, the go-go growth days are most likely in the past and from here on out, consumer electronics companies are going to have to face many of the same tough competitive challenges so many other industries have faced for years."
According to the study, Samsung and Apple together generate almost as much revenue and nearly five times as much EBITDA as The Rest tier combined. For instance, over the 12-month period ending March 31, a period reflecting the full effect of last year's holiday season, they recorded over four times more profit (as measured by EBITDA) than the rest of the players in the entire industry combined. Apple generated $58.5 billion in EBITDA -- more than 2.5 times than that of the rest of the sector's companies combined (excluding Samsung). And Samsung recorded EBITDA of $41.8 billion -- nearly two times that of the rest of the players combined (excluding Apple).
Meanwhile, companies making up The Rest tier saw their revenues in this timeframe drop by 7% (to $364 billion from $388 billion for the same timeframe a year earlier) and their profits contract by 28% (to $22.6 billion from $31.5 billion).
Panasonic, Sony, LG and Sharp Suffering Acutely
The Next Four -- Panasonic, Sony, LG and Sharp -- are suffering acutely: Their combined revenues fell by 8% and their profits dropped by 36% over this period, and the study finds that their profit margins were just 20-35% of those of The Top Two. And all four companies in this sub-tier are in financial distress or are at risk of being so. The Next Four generated 70% of The Rest's revenues during financial-year 2012—but just 50% of the sector's profits.
"As a group, looking at the publically available data, these four large companies are obviously having a significant challenge with negative growth and significant drops in profitability – what we would characterize as profitless revenue," said Michael Weyrich, managing director at AlixPartners and co-lead of the firm's global TMT Practice. "In other industries that have matured, big companies have usually found that their size is often little or no protection against trouble when this is the case."
The Everybody Else sub-tier of The Rest fared better, but not by much. Revenues in fiscal year 2012 remained nearly flat, and EBITDA declined by 16%, reaching an average of 9.7% in the sub-tier. Within this group, finds the study, gaming companies are largely profitable and enjoying some growth. But other companies -- such as those making audio components and equipment, as well as businesses focused on home entertainment and other electronics -- are fighting hard to sustain even meager profits and are experiencing modest to declining growth.
The study's analysis of companies in the Everybody Else sub-tier shows that players based in North America and Europe constitute the least profitable group, recording an average EBITDA of less than 9.7% and the highest overhead costs in 2012. It shows, for instance, that overhead costs in Germany averaged 27.5%, and that those in the US averaged 30.7%.
Meanwhile, companies based in the Asia-Pacific region, which account for 75% of revenues for this sub-tier, had an average EBITDA of just 5.5% in the 12-month period ending March 31, says the study. It also finds that historically dominating Japanese companies are facing harder times than the rest of the industry. Representing nearly two-thirds of the industry's revenue (excluding Samsung and Apple), Japanese enterprises, once the global leaders in this sector, saw their revenues drop by 12% in the period -- nearly twice as much as the entire tier's fall.
In addition to geographic trends, the study sees trends within the sub-tiers. For instance, in the Everybody Else sub-tier, companies that draw revenue primarily from sales of home electronics, set-top boxes, games, and electronic components and equipment have the lowest profitability, finds the study. Meanwhile, companies focused on selling classroom/online education, games and products for diversified consumers have the highest overhead costs, it finds.
Innovation No Longer Enough
The study also warns that product innovation, which has driven much of the success enjoyed by winners in consumer electronics, is no longer enough to drive success in the industry. With consumers' attention spans shrinking, brand loyalty eroding, and product and technology lifecycles shortening, it posits that even the best company can lose the hearts and minds of fickle consumers in just one or two innovation cycles.
As examples of how quickly an innovation lead can be lost, the study points to the examples of Palm, once the dominant player in the personal digital assistant space, sold to Hewlett-Packard for a fraction of its former value; Research in Motion (now known as BlackBerry Ltd.), which once defined the portable messaging space with its smartphone, struggling to determine its next steps and implementing a major downsizing; Nokia, once the leading global mobile handset manufacturer, which has formed an alliance with Microsoft and divested its smartphone business; and Motorola, which has decided to exit the mobile handset sector and divest its mobile handset business to Google.
According to the study, even industry behemoths Apple and Samsung are finding it difficult to sustain the momentum they built in the past. That is largely due to the twin pressures of softening global demand for consumer electronics paired with ever-shortening product and technology lifecycles. Indeed, over the 12-month period ending June 30, Apple's revenue growth cooled to an annualized rate of 14%, one-third of the growth rate over the previous 12-month period, and its operating earnings dropped by an annualized rate of 3%. Meanwhile, for the same period Samsung's revenue grew by an annualized 18%, after rising 30% over the previous 12-month period, though its operating earnings grew at a 68% annualized rate, after rising 67% over the previous 12-month period (all in US dollars).
"If even these two giants are facing these kinds of pressures, how can other players in this troubled sector survive and thrive," said Roberts. "One thing is clear: Underperforming companies must take steps now to strengthen their operations, or else continue their descent into financial stress and distress."
A Roadmap for Action
In the face of all these severe issues facing companies throughout the consumer electronics industry, the AlixPartners study recommends a "roadmap for action," which focuses on four areas particularly critical for companies in this sector:
Pursue product profitability. The study recommends an "unsentimental" review of product portfolios, to reveal which product lines are unprofitable and have limited or no brand equity – the kind of portfolio rationalizations that have generated 20-35% or more EBITDA improvements in other industries.
Seek lowest-cost providers. The study says that companies that haven't already sought out the lowest-cost providers should begin to aggressively outsource production – a move that reduced costs in other industries by as much as 20-30% or more.
Rein in overhead costs. The study notes a high correlation between gross profit and overhead (SG &A) cost, and suggest that companies -- especially those with higher overhead costs than their competitors – carefully review overhead staffing and spending, actions that have resulted in cost reductions of up to 10-25% in many industries.
Partner strategically. Noting a number of recent strategic partnerships (Honhai's prospective 10% investment in Sharp, for example) and acquisitions (Microsoft-Nokia and T-Mobile-MetroPCS, for example), the study predicts further consolidation in this industry, particularly among contract manufacturers and Asian companies looking to gain or improve their access to the North American and European markets, and recommends that industry players think strategically about where they want to fit in what could be a very different-looking industry in the not-too-distant future.
"Large parts of this industry are facing an existential reckoning and need to re-invent themselves for today's very different market and operational challenges," said Weyrich. "That also makes it an industry ripe for a shakeout and significant M &A activity. The best way to avoid being on the wrong end of that is to take proactive and aggressive actions now to improve operational efficiency."
About the Study
AlixPartners' 2014 Global Consumer Electronics Outlook defines companies in the consumer electronics sector as those generating revenues primarily from the following major product categories: home entertainment and electronics; audio components and equipment; gaming devices, software and online services; diversified consumer products; professional and office accessories; electronic components and equipment; education; and security systems and miscellaneous accessories. This definition excludes companies that generate revenues primarily from the following major product categories: personal computers and laptops (except as noted with Apple and Samsung); servers and mainframe equipment; wireless handsets and related services (except as noted with Apple and Samsung); and online retail and commerce (except online gaming services). The study assesses past and future industry performance through an analysis of publically available industry and company financials.
About AlixPartners
AlixPartners is a leading global business advisory firm of results-oriented professionals who specialize in creating value and restoring performance at every stage of the business lifecycle. We thrive on our ability to make a difference in high-impact situations and deliver sustainable, bottom-line results. The firm's expertise covers a wide range of businesses and industries whether they are healthy, challenged or distressed. Since 1981, we have taken a unique, small-team, action-oriented approach to helping corporate boards and management, law firms, investment banks and investors respond to critical business issues. For more information, visit alixpartners.com.