Sector barometer; Electronics in Asia: innovation, engine of growth and risk factor
We start this first 2014 Panorama dedicated to our global sector barometer, which assesses credit risk by key economic sectors in three of the world's major regions.
North America remains on track, with companies posting constantly improving results. Their confirmed financial strength stabilises sector risks at relatively comfortable levels. In Western Europe, the return to economic growth may only be gradual, but it is real. Without making any major changes, we note that sector risks tend to stabilise, particularly in the countries most affected by the last recession. Finally, Emerging Asia is now a cause for concern. The economic slowdown in China reveals structural difficulties that impact corporate profitability. Sectors suffering from overcapacity must inevitably restructure and this unavoidable process carries with it higher risks. The risk assessment of the metals industry, which epitomises every possible excess, has deteriorated in this environment.
We then propose a focus on the electronics industry in Emerging Asia, a region that has become in a matter of years the world's workshop for many electronic components. As Japan did previously, emerging countries in Asia have positioned themselves as key sector players. However, the model has its limits, and credit risk now tends to increase, as confirmed by the Coface survey of Chinese companies: medium-sized Asian players depend excessively on large foreign firms. Their margins are shrinking and they have to invest increasing amounts to keep up with rapid change. It is the case for Mainland China but also to a lesser extent for Taiwan and Hong Kong. Asian companies in the sector symbolise the success of emerging economies and are inevitably moving up the value chain. But do they have what it takes to limit the associated increase in risks?