The Economy of 2009: Outsourcing, Free Trade and the Housing Market

With much of the country optimistic over the impact of president-elect Barack Obama's economic policies, custom installers are focusing on the future with intense curiosity and vigor.

There is, nevertheless, a general feeling of trepidation as America's economic woes deepen. These economic issues cut across party affiliations or social status. If there's one truth about the current status of the economy, it's that it doesn't discriminate; it affects everyone.

Likewise, consumer electronics and the custom installation markets are not immune to economic turmoil. Still, both industries are projecting growth over the next several years -- even while consumers pull back on their spending.
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A closer look at the economy reveals outsourcing, free trade, consumer spending and the housing market as issues that concern integrators.

Sizing up the Market

In the Consumer Electronics Association's (CEA) semi-annual "U.S. Consumer Electronics Sales and Forecast" study, they reported the estimated growth of consumer electronics sales to be 5.7 percent in 2009, up from $173 billion in 2008 to $183 billion in 2009.

The association could revise those figures based on the unforeseen events of the fall, but based on comments from CEA president and CEO Gary Shapiro, the trade group expects consumers to continue spending on electronics.

"The CE industry is the backbone of economic activity in this country," Shapiro said upon the release of the data.

"In a tough economy, consumers turn to CE products for many reasons -- from entertaining in the home, to telecommuting to save gas," he said. "Such factors and access to global consumers through free trade help the CE industry flourish while growth rates of other industry have either stalled or declined."

Still, there is some good news on the housing front. Mark Zandi, chief economist for Moody's Economy.com, sees new housing starts declining further for the first half of 2009, but then turning upward again. By 2011, he predicts housing starts will be over 1.7 million units (single-family + MDU) compared to about 800,000 starts in 2008.

Even with that growth, though, installers will face challenges.

Daryl Delano, director of research for EH Publishing and CE Pro, says that it may take up to one year for CE pros to see improvements in the residential sectors.

"I think that we'll likely be about halfway through 2009 before we begin to see much evidence that new construction and custom sales to mainstream customers are coming back," he says.

"There's some disagreement about the specifics, but you'll see everyone [is] looking for horrible numbers for full-year 2008 and bottoming-out or slightly better numbers for full-year 2009." He calls existing home sales, which is the source of much remodeling/retrofit demand, a "relatively bright spot in [what is] overwhelmingly dismal data."

Delano says predicting the economy's effect on the custom industry is difficult because there are no precise barometers.

"The closest we can come to the specifics of the CE market is the retail sales information from the Commerce Department's 'Electronics and Appliance Stores' [data], which was up 3 percent through October of 2008, but about one quarter the average growth rate recorded during the past four years."

Installers themselves aren't very optimistic either. In the 2008 CE Pro Reader Survey, 19 percent of all respondents indicated that they expect their revenues to be "flat or down" in 2009 compared to those of 2008.

Two years ago, the respective expectation was a 7 percent revenue growth.

Meanwhile, the percentage of dealers expecting sales to grow more than 10 percent in 2009 is just 28 percent; last year's survey had 39 percent of its respondents expecting that much growth.

Manufacturers are even more affected by the economic doldrums than dealers. The effects have been most reflected by a drop in exhibitors at both the CEDIA Expo and EHX Fall shows.

Manufacturers Turn to Outsourcing

For many CE manufacturers, economic woes can lead to foreign outsourcing, whereby benefits like cost reductions and tax advantages mitigate losses.

In his expository non-fiction book, "Outsourcing America: The True Cost of Shipping Jobs Overseas and What Can Be Done About It," author Ron Hira estimates that 14 million white-collar jobs (one out of every nine United States jobs) is susceptible to outsourcing.

That trend is very close to home for many CE companies. A study released in February 2008 by Frost & Sullivan deduces that Americans' lust for technology is actually driving the outsourcing trend in this industry.

"The dependence of OEMs [original equipment manufacturers] on EMS [electronics manufacturing service] providers is more predominant in the consumer electronic, communication technology and the computer storage and peripheral sectors," says Kasthuri Jagadeesan, an analyst for the Technical Insights Research group

"The consumer electronics sector generates maximum revenues and drives the need for outsourcing."

San Clemente, Calif.-based audio manufacturer Sonance, however, believes larger economic trends dictate how companies do business. Jeff Haagenstad, vice president of research and development at Sonance, told CE Pro in March 2008 that companies are moving their manufacturing overseas due to "simple economics."

He says that with maintained and monitored relations, overseas production can actually benefit Americans by helping to produce quality, affordable products.

The key, then, is in the overseas relationship, which can be tricky.

Joe Perfito, president of Orlando, Fla.-based Tributaries, says it took time before he found partners that met his qualifications.

"I searched for about a one year before I found a Far East company I believed would be a good partner for Tributaries," he says.

At the time of his companies hunting for partners, Perfito says Tributaries had two domestic manufacturers. "As the company continued to grow, the need for other manufacturers became apparent," he says.

"In some cases it took three years to find a Far East company that had a strong sense of a 'partner' relationship, could ship product in a timely fashion, produce products with a high degree of consistency and could meet our quality standards."

Looking back on Tributaries history, Perfito adds that he can only remember one time in which his company was adversely affected by product that did not meet Tributaries' standards.

"Once, we received the first shipment of coax cable from a Chinese manufacturer," he recalls. "It was discovered that the aluminum Mylar wrap was not bonded to the dielectric, which made it unusable for RF purposes."

Tributaries then made its partner aware of the non-conformity. "They offered us a sizable discount if we kept it and paid for it, but we declined," Perfito remembers.

"They didn't want it back; it was scrapped. Meanwhile, because we had depended on this shipment for an in-stock product, we ended up being out of that particular model for about four weeks."

For a small company, the savings in manufacturing overseas can be substantial. According to Perfito, there is potential for manufacturers to save dealers as much as 20 percent (and consumers as much as 60 percent) by making products outside the United States.

Installers Chime in On Outsourced Products

Installer feedback on the topic varies, but many prefer to use domestic products whenever possible.

"With few exceptions, American-made products are built to the highest standards, they have a long-standing tradition of making reliable products and take lots of pride how they are built and engineered," says Mike Ware, owner of Tempe, Ariz.-based L&M custom Home Electronics.

Free Trade Becomes Front and Center

The CEA has put free trade in the spotlight, sending its National Bus Tour across the country and meeting with a number of manufacturers.

Donald Boudreaux, chairman of the department of economics at George Mason University, says the idea of free trade is to treat every product the same.

"Free trade is the policy of treating goods and services produced abroad no differently than goods and services produced domestically. For example, in the U.S., no higher taxes on Japanese autos because they are produced outside of the U.S.," he clarifies.

"Free trade extends markets; it increases the potential size of the customer base and it increases the sources of supply. A larger customer base makes economical many investments that would otherwise be uneconomical. A larger and more diverse source of supply means less risk of having supply sources disrupted and greater competition among suppliers."

Boudreaux says that a healthy practice of free trade could help stimulate the economy because the alternative:

* reduces the size of the market
* lessens domestic competition
* prevents the American economy from receiving an influx of foreign capital and ideas

Opponents of free trade, however, may be winning the battle over its usefulness right now.

A CNN poll reveals that 51 percent of respondents view free trade as a threat to the American economy, up from previous years.

CNN personality Lou Dobbs, a leading free trade opponent, has blamed the Bush administration for some of the country's economic failures and debated the CEA's Shapiro on the topic.

A recent study from Global Sources and the CEA found that China's electronics revenues are expected to reach the $100 billion mark in 2009. Eventually, the study estimates, China will overtake North America as the top electronics revenue generator.

China, according to the Economic Policy Institute (EPI), a non-profit think tank, has for the past six years been a main contributor to America's manufacturing problems.

"Essentially, what we do in [the EPI Briefing Paper originally released in May 2007] is find that exports create jobs and imports destroy them," says Josh Bivens, an economist with EPI.

"Look at the jobs and net in and net out. We've seen a huge increase with exports from China and in the paper what you see is a huge displacement [of jobs] in America. The trade deficit in general has risen enormously. Roughly from 1997 to 2007 the deficit share rose from 2 percent to 6 percent in GDP [gross domestic product]. That translates to millions of jobs."

Carlos M. Gutierrez, the U.S. secretary of commerce, says that U.S. manufacturing deficits have turned around into a surplus because of the administration's free trade policies.

Boudreaux counters anti-free trade arguments by saying that free trade is one of the most misunderstood concepts in economics.

"Whenever a rich country such as the U.S. runs a trade deficit or more precisely, a current-account deficit, all it means is that foreigners find the country an especially attractive place to invest," he says.

"Investment creates jobs here at home by keeping interest rates lower and it also signals foreign confidence in the U.S. economy."

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BY Robert Archer
Source：CEPro