Bracing for black shoots in tech markets

LONDON, US: Pundits have been talking endlessly about the possible green shoots of recovery in the ravaged world economy.

But early shoots are not always green. They might want to consider the problem of black shoots. These false starts are familiar to lily growers, when a temporary rise in soil temperature occurs after a cold period.

In the technology world, recent signs of restocking have been proclaimed as evidence of green shoots. Investors wanted to be persuaded and this has helped propel global tech indices 50 percent higher in the past three months.

But a collection of many of the world's largest wholesalers of technology attending the Global Technology Distribution Council's annual European conference are bracing for tough times rather betting on any early recovery. They are in the black shoots camp, rather than the green one.

These electronics distributors sit between buyers and sellers and are among the best positioned to know whether inventory from computer chips to phones to PCs are moving.

Far from seeing inventory restocking, they are planning ahead for years of slack growth, tight technology budgets and higher credit risks from customers. The industry handles an estimated $300 billion worth of technology products and another $50 billion in electronic components, or more than a quarter of the $1.2 trillion of such goods shipped each year, according to Goldman Sachs.

As middlemen, they have played a decisive role in keeping inventory levels tight, averting the glut of unsold products that have occurred in all prior tech downturns.

At the London meeting, CEOs of the world's biggest distributors said the supply chain was moving again after nearly grinding to a halt earlier this year, but cautioned that this may just be a statistical bounce after the steep plunge late last year. Sales by U.S. distributors fell 43 percent between June 2008 and April of this year, according to data cited by the trade group Global Technology Distribution Council.

What technology sales data suggests so far this year is the end of the destocking phase and the return of production and some sales activity. But at far lower levels than a year ago. Many of the promising restocking anecdotes confuse normal seasonal patterns with actual underlying growth in demand, top distributors say.

"I fundamentally do not believe restocking is going on," says Roy Vallee, CEO of components distributor Avnet, which posted nearly $18 billion in sales last year. He sells billions of tiny parts that get crammed onto printed circuit boards and end up in finished electronics.

"Outside of China's indigenous demand, which is being driven by their stimulus package, where else is demand actually up?" Vallee told me in an interview. "It's certainly not here (Europe), not the U.S, not Japan, so what we have is not restocking. It is a supply chain ordering again but ordering at a lower level than six months ago," he said.

Greg Spierkel, chief executive of Ingram Micro, which with sales of $34 billion last year is the world's biggest hi-tech distributor, says the world is only slowly coming to grips with lower longer-term growth rates. He's not looking for technology spending growth rates of recent years to recover until 2011 or 2012.

To bolster sales, vendors that distribute through the Ingram Micros and Avnets of the world have increased the amount of financing they make available to technology buyers. Despite the availability of such working capital, Spierkel says customers are reluctant to take on new debt. There is also a significant increase in credit risk from customers downstream.

These distributors are adapting for an era of lower sales volumes by cutting staff and overhead costs themselves. No one here is talking about green shoots, only how to help customers eek out more savings on the costs of procurement.

The technology industry is not alone in its exuberance for green shoots thinking. However, as it is considered a leading indicator for many parts of the economy, the evidence of black shoots, of false starts to a wider economic recovery, calls into question green sightings elsewhere.

-- Eric Auchard is a Reuters columnist. The opinions expressed are his own. At the time of publication Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.