‘Credit is hard to come by these days – and it is more expensive than it used to be.’
06 October 2008
This is a familiar viewpoint of the equipment supplier, struggling to sell machinery to a nervous market. In fact I have asked a few of the suppliers recently how they are coping and the story, for some, is predictably bleak and yet for others is surprisingly healthy.
Why should this be? Is it simply down to having better products or even better sales representatives? Maybe a better support structure or a global network to support multiple sites? All possible but not really any more relevant now than before credit first started to be crunched last year, and so for the purposes of this comment I will ignore them.
Instead I will switch to an apparently unrelated story (bear with me) about a good friend of mine who was going to spend more money than he ever had done before on a car – a BMW in fact. This was a big deal for him and he drove a hard bargain. First of all, by making it clear that he was willing to walk away from the deal (which he was) he managed to knock several thousands of pounds (it was in the UK) off the list price. But this was not good enough – he was playing hardball. By the time he had finished he had the HiFi (it was before people cared about iPod connections) with 6 CD changer, the alloys and electric windows were part of the deal and I’m pretty sure that the sunroof was thrown in as well. It was a fantastic bit of negotiation on his part and he ended up with a great deal.
And then…
…he took the finance package offered by the garage. My friend might have walked away rubbing his hands, but so did the salesman. All the hard negotiation undone by using a finance package that easily regained the money that the car salesman had apparently lost.
Maybe you can see where I am going with this now. Business confidence is one thing that might stop a manufacturer from buying a new SMT line and that is a different issue, but if that manufacturer didn’t buy because he couldn’t get the credit to do so it seems to me that both manufacturer and supplier are losing out.
Credit in China has always been notoriously hard to come by. You have to have the cash up front if you want to buy something. In a fast expanding economy (although not quite as fast as it was) this generally means that investment, even in large items of expensive machinery, can be accommodated as part of the process of development and expansion.
Where growth is more sluggish, in Europe and in the USA for example, there is more of a problem. Credit plays a critical role in keeping the whole economy moving and without it there is a risk of stagnation.
Ever since the dot.com collapse in the early part of this decade there have been huge pressures on suppliers to be as ‘flexible’ as possible with their prices. These prices have sometimes been perilously close to completely eroding any profit margin – obviously undermining the whole business. I suspect that machine costs at this moment are probably about as close as they can get to their practical limit.
But what about financing. Every penny (or cent) counts these days, particularly if final approval for a machine purchase comes from a bean counter in the buying or finance department rather than from the engineer who is actually specifying the machine. Most equipment suppliers I speak to use a third party financing service as an option for their customers, although many of these customers have their own financing arrangements. But in both of these cases there is a third party involved making money out of money. It is a drain on the resources available to the electronics manufacturing sector. Admittedly it is unavoidable in some cases, but it is also an insurmountable obstacle in others.
Rent to buy options and other more creative financing possibilities have been created to ease the pain, but I think more needs to be done. Or maybe, more realistically, the equipment supplier who does more is the one that will prosper. Most equipment companies will not be in a position to tie up their capital in their customer’s equipment, but is an active customer more valuable than a dormant one? If a direct financing agreement between supplier and customer was based around an interest rate of say 5% - what that capital is ‘costing’ the supplier in interest rate – instead of the 15 or 20% or more that finance companies are building in to their packages then it could save the customer thousands of dollars and may make the difference between a project being feasible or not.
Whether direct financing is a realistic option or not I am not sure, but other forms of financial flexibility may well be the key to survival and may even help undermine the negativity in the marketplace at the moment. But I am sure that expensive credit options, whether for a screen printer or my friend’s BMW, are doing nothing except draining money from the market.
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