How can you protect your business from factors such as tightened credit control and liquidity shortages impacting the electronics industry?
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Our international team of trade experts is here to help. Contact us to learn more about our coverage options for the ICT / Electronics Industry or request a free, no obligation quote that includes credit reports for your largest trade partners.
Electronics and ICT Industry
In 2021 more businesses in the U.S. (55%) than in Canada (48%) and Mexico (37%) reported an increase in administrative costs associated with managing accounts receivable across industries, including ICT/electronics. This was most often seen with businesses that self-insure credit risk. Many businesses that attempted to manage trade credit risk internally watched their payment practices deteriorated as a result, among other factors listed below.
Amidst shifting economic dynamics, the IT industry’s trajectory has strayed from its historical vigor, as fiscal 2023 witnesses a decline in IT spending and a moderated growth outlook, prompting concerns about profitability and resilience in the face of macroeconomic challenges. IT spending has been weaker than originally anticipated in 2023, which is leading to weaker results for many companies in the industry. Although challenging global economic conditions continued to impact the electronics / ICT industry during the first half of this year, the signs are the downturn is now levelling out. Analysts suggest we will see a rebound of up to 4% for high tech goods output as a whole during 2024 and further growth of around 7% is predicted for 2025. But is this picture as bright as some might suggest? Could geopolitical issues surrounding the production of semiconductors create issues downstream? Are parts of the ICT market nearing saturation and is there a risk of oversupply?
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ICT/electronics businesses anticipate that there will not be improvements to business and sales performance from exports in the coming months. To offset additional risk from a significant rise in DSO, businesses will have to request additional payment guarantees from their customers. If multiple countries invest in similar technologies to semiconductor production, this could lead to an inefficient use of resources and oversupply of similar products.
The global chip shortage has lingered and is predicted to last through mid-2022. This trade imbalance passed on from manufacturers could increase the price of electronic products for consumers. The issue of a home-grown semiconductor industry is a hot topic in the US. In a bid to lower the country’s dependency on Taiwan and South Korea for cutting-edge, high-tech chips, the government passed the CHIPS and Science Act in 2022.
Deteriorating customer payment practices have caused 52% of U.S. ICT/electronics businesses to report overdue credit sales. Subsequently businesses that manage their credit risk internally have had to spend more wasted time and resources chasing unpaid invoices.
To ensure optimal liquidity, businesses have leaned on overdraft extensions, further delaying overdue payments to suppliers. Delays have also been fuelled by an increase in costs associated with acquiring assessments of credit quality and trade risk.
One potential consequence of US-China tensions is the possibility of growth in some of the emerging economies in Asia. The US restrictions will impact the production volume of products and industries that require high-end chips, from smartphones, and AI, to EV. With a lack of the necessary components on the market, production may be shifted to other countries, such as Vietnam and India, where production costs tend to be lower. Asia’s semiconductor producers are also vulnerable to further actions caused by US-China trade tensions. For example, in response to US sanctions, China imposed export controls on gallium and germanium, two critical materials in the chipmaking process. While the Asian producers can source the materials from other countries, it is costly in terms of time and money, as China is a main producer of the materials.
Semiconductor production is a strategic priority for Asia, Europe and the US, with legislation and subsidies used in several countries to support growth and reshoring. This unilateral approach to semiconductor development could lead to duplicated efforts. When chips of a new generation come to the market, the old one will become obsolete. If not managed carefully, there could be a potential oversupply of older generation chips. If advanced markets like the EU and the US expand their semiconductor production, it is likely that the higher labor costs and other overheads will result in higher prices for consumers. This could be called a devolution of the economies of scale.
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Benefits to Credit Insurance
Trade credit insurance is a risk management tool that can help protect your company’s commercial accounts receivable from the devastating effects of loss caused by a bankruptcy or protracted default of your buyers. No company wants to face the unknown. At Atradius, we give our clients peace of mind knowing that their policy protects them from a customer’s sudden inability to pay. Especially in an industry that must adhere to high-cost environmental regulations, trade credit insurance can help with cash flow and to ensure companies are financially stable.
Atradius analyzes industry trends and the risk of every buyer to ensure you are working with stable customers. If a previously stable customer starts showing signs of deteriorating payment trends, Atradius alerts you right away so you can take steps to protect and insure your accounts receivable. By evaluating the supply chain from every angle Atradius can alert clients to trouble coming down the pipeline before there is a loss.
Companies in the midst of an intense growth phase may need to put up accounts receivable as capital to receive additional funds from a bank. Having a trade credit insurance policy with Atradius that mitigates your risk means banks are more comfortable loaning the funds you need.
Atradius can offer companies a team of experts to support their trade credit insurance needs. Atradius is a global company with a presence on every continent. With innovative services and practical tools to manage a company’s receivable and build the foundation for solid business growth and success.
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Atradius is here to help. Contact us to learn more about our coverage options or request a free, no obligation quote that includes credit reports for your largest trade partners.