The perfect storm - the fall of the Russian and world markets

Troy was under siege for a long time
Remained an impregnable stronghold,
But the Trojans did not believe Cassandra -
Troy, perhaps, would have stood to this day.
Incessantly, the mad girl
Screamed: "I clearly see Troy, fallen to dust!"
But clairvoyants - however, as well as eyewitnesses -
In all ages, people have been burned at the stake.

The lines from Vysotsky's song are spinning in my head, they are the best fit for the madness that is happening around. Everyone diligently pretends that nothing is happening, life goes on as usual, there will be no changes ahead. We live in the center of an ideal storm that smashes the previous world order to pieces, but from the outside it seems that everything is fine and everything is going on as usual. America's trade war against China began a few years ago and has not subsided for a minute, it is literally a war in which there will no longer be winners, but only losers. Associated losses can be considered the economies of all countries, there will be no exceptions. The pandemic added gasoline to the fire of this war, and it began to blaze so that we would not be able to return to normal life. The governments of different countries have fallen into a trap, any of their actions will be perceived negatively by the population, and there is simply no easy way out of the situation.

The thoughts that will be given in this text were voiced by me at different times, in front of different audiences and people. Someone may consider this a repetition, someone will call me an alarmist who paints apocalyptic pictures of the world. We drive bad thoughts away from ourselves and create illusions that everything will be fine tomorrow. This is a bad habit, but, of course, it is inherent in all people, and this is normal. I always wanted to be able to realistically assess what lies ahead for me, my family and loved ones in order to build a strategy and tactics according to the circumstances. Perhaps, this text is for those who want to look at the situation from different points of view, weigh all the pros and cons, and evaluate the prospects of the market. Of course, it is easier and clearer for me to talk about what is happening through the prism of the electronics market, both global and Russian. But the processes taking place today in the electronics market are quite transferable to all areas, the parallels are not only obvious, they are inevitable.

It is worth starting to talk about these difficult matters from one conversation that took place with me in December last year. Market prospects were vague, no positive expectations. My interlocutor is the owner of a large company that produces electronics in various segments, an adequate and sensible person. But I was struck by what he said about the near future, a rainbow picture was drawn in which we would wake up one day and everything would return to normal. Everything will be the same as before, the availability of goods will return, production cycles will be shortened, prices will fall, and this will give a boost to retail sales.Even bank loans will become more affordable as the market returns to growth. I had only one question - what makes you think so? The answer was stupidly simple - all this cannot continue like this, everything will collapse if it goes along this path. And it was clear that this topic was unpleasant for my interlocutor, causing persistent rejection. Unfortunately, many people who determine the future of the market live in exactly the same illusions, they drive bad thoughts away from themselves.

At a discussion of the financial results of 2020 at Beeline, I asked a question about how the company looks at the shortage of servers, memory for data centers, how they will solve these problems. The answer struck me - we have many suppliers, they compete with each other, and there are no problems with supplies. This is exactly the same illusion that exists in the market, and it is the same for Russia, America or Europe. Over the years, we have become accustomed to living in market conditions, where large buyers dictate their own rules. Do you have money and a request for some product? So, you will get it and, most likely, you will be able to achieve good conditions. The rise of companies such as Amazon, in Russia it can be Wildberries, Ozon and a number of other players, was due to competition between manufacturers, the ability to choose different products. The buyer chooses what and where to buy, he has the widest choice. Do you want to buy a smartphone? Here are offers from a couple of thousand rubles and almost to infinity, there are models from boutiques worth a couple of million. If you don’t want to pay several thousand rubles for an original smartphone case, you can buy something from a third-party company on the same AliExpress. We, as buyers, are spoiled for choice, and the widest range allows companies to build their strategy, get favorable and effective prices. The competition is such that suppliers often lose, but in the end it results in the fact that prices are kept low, do not fly into the sky.

The shortage of goods is an unusual situation, it is inherently utopian for a consumer society. But ahead of us is exactly such a period of time when the deficit will determine the future of any market, the struggle for resources is unfolding before our eyes, and this is not a battle of huge corporations, the existence of small and medium-sized companies is at stake.

Deficiency in the production of electronics and components - politics and economics

When America launched a trade war against China, American politicians were clearly counting on a quick victory. Confident in their own importance and invincibility, they clearly drew pictures like in Hollywood films, where the good guys tense up a little, but in the end they defeat the bad guys and everything turns out to be good. The course taken by the Donald Trump administration is continued by the current administration - to prevent China from obtaining the technologies that will determine the situation in a dozen developed countries in the next 50-100 years. It is important for America to control all the technologies that can transform our world, it seems to politicians that the world has remained the same and this is a feasible task. They are wrong!

In the 1950s, America received great resources and opportunities as the Second World War changed the balance of the international arena. The United States invested resources in new areas of development, in particular, in IT technologies, and received a breakthrough, due to which we now use a huge number of products from this country. The intellectual property is owned by American companies, but most of the goods are made in Southeast Asia and China, which has become the world's factory for everything from matches to cars. China quite consciously adopted America's strategy and for several decades has been building up potential, training specialists, raising scientists, and creating the groundwork for a big breakthrough. And this breakthrough took place, the country ceased to be just a factory, it became the creator of technologies for the whole world. For example, Huawei is the largest telecom company in the world, controlling 5G in every aspect. The threat that China is creating its own competing technologies, and taking off in other areas, has forced America to stay ahead of the curve. A trade war against China is an attempt to stifle a potential adversary, destroying all his chances of succeeding. And in the 80s, America won such a war against Japan, the IT sector was thrown back a decade, a strong competitor disappeared. For China, there was never an option to give up, since the future of the country, the very fact of existence, depends on it. With Russia, the situation is completely similar with slightly different accents.

US sanctions against Huawei and a dozen other Chinese companies are causing international trade to suffer. But it also creates problems throughout the supply chain, destroying established relationships and leading to higher prices for almost all goods. For example, Huawei created its own Kirin processors, which did not look like poor relatives compared to Qualcomm or Samsung products. American tools were used for development, they were taken away under the sanctions regime! It is impossible to produce smartphones without processors, the company was forced to sell the Honor brand, but it is still under sanctions and cannot produce new models of smartphones and other electronics.

The first blow to the market was the sanctions against Huawei, when the company bought components a year in advance, and this is not an exaggeration. Huawei stocked up for a year ahead to cushion the blow, the company released smartphones until recently when Tshirt High Quality %Cotton Made in Turkey she, in theory, could no longer do this. The rise in prices for components was easily explained, since Huawei was at war, and nothing is a pity to win. World prices for many components have risen, but this was only one stroke in this big war.

Look at Huawei's annual report, the consumer electronics segment has fallen in many markets, but revenue remains significant. Also, the company, despite the sanctions and pressure, still grew.

Perfect storm - fall of Russian and global markets Perfect storm – falling Russian and global markets A perfect storm - the fall of the Russian and world markets

The same TSMC that produced the Kirin processors not only received orders from Huawei, the company also financed the development of new technical processes (both 7nm and 5nm) on a parity basis. This made it possible to reduce the cost of production not only for Huawei, but also for Apple. Now there is no such funding, and prices from TSMC have already gone up, as the company has lost a strategic partner due to US sanctions.

The pandemic, the closure of production - all this affected all industries, and had a negative impact. In electronics, production faced two negative trends - low demand from buyers (shops were closed, demand automatically fell), and limited supplies (workers did not go to factories). The imbalance that arose in deliveries due to Huawei continued to grow.

The buyer's market suddenly began to transform into a seller's market. For example, small and medium-sized factories that make electronics almost never stock components because it's expensive. The components were bought for specific projects and the production of certain goods, and in China, the choice was as wide as possible, delivery times were minimal. The resulting imbalance led to the fact that everything changed overnight.

Today there is a demand for goods, but small and medium-sized factories cannot produce them, as they are unable to buy components. Let's take a look at how component delivery times have changed in the first quarter.

Perfect storm - falling Russian and global markets

For your understanding, 52 weeks is actually one year of waiting for production! But the situation is changing so fast that already paid, placed orders are being cancelled. It's not very pretty, but it's a seller's market, not a buyer's. For factories that produce components, there is no point in producing a paid product. Even with the payment of a penalty of 50% of the price of the goods, it turns out that earnings cover everything with a vengeance. Many components have already tripled in price, and the growth continues.

Many manufacturers are in a permanent state of hysteria, as they have no money from the sale of goods and no product itself, which means they are willing to pay any price to get the components. This pushes prices up even more. The bull run will eventually bankrupt many companies, making things a little easier for those who remain, but not bringing prices back.

Pay attention to Samsung, the company has completely refocused on the release of processors for Qualcomm, in many models it abandoned Exynos in favor of Snapdragon. The reason here is solely in the money, since by producing Snapdragon, the company receives them for itself at a low cost, at the same time, the production price for Qualcomm is maximum. This is the growing profit from placing other people's orders, a business that is only possible at the moment. And while Qualcomm's president claims that deliveries until the end of 2021 will be difficult and will not normalize, demand is much higher than supply. This is a seller's market, in this case, one who can produce processors.

It is generally believed that rolling shutdowns of production occur due to the shortsightedness of specific manufacturers. But the range of reasons is much wider, we are faced with a shortage in the production of components, as well as a sharp increase in the prices of raw materials, such as metals. Check out the exchange and see futures for copper, nickel and other metals.

Perfect storm - falling Russian and global markets Perfect storm – fall of Russian and global markets

Even people who are far from economics will understand that if the price of raw materials rises, then it increases the cost of production in the entire chain, including the cost of labor, which will increase sooner or later. Suffice it to say that the cost of plastics has almost doubled in a year, which means that even a doorbell will cost more than it cost just recently, there is no way to avoid it.

Today, the shortage of components is so severe that the production of washing machines and refrigerators, kettles and other small electronics is declining. This is already a fact that cannot be ignored.

The shortage has come for several years, it determines the cost of many, if not all goods, and price increases are inevitable. But here we are faced with another part of the story that creates the perfect crisis - the existence of retail and how it will survive in the not too distant future.

Retail players - we have money, which means there will be goods!

The most dangerous thing is illusions that make you think that everything will get better and life will return to normal very quickly. I really want to believe in this, but life is somewhat more complicated and presents surprises. In 2020, the smartphone market expectedly fell due to the pandemic, but the fall was not too noticeable, less than 10%.

Perfect storm - fall of Russian and global markets

Closed stores, lack of money from people all over the world - all this affected sales. And about the same situation in most segments of electronics. The Russian market has become an anomaly against the background of problems in the world, it has not fallen at all. The reason for this is banal and lies on the surface, large players, for example, MVideo, DNS, MTS, sold many goods with a zero margin, that is, they actually sold them at a wholesale price, at a minus. The reason for the attraction of unprecedented generosity was very simple - companies needed to maintain stores, pay salaries, and service bank loans. During the crisis, they reduced their losses, including by selling goods at a loss (selling with a zero margin is a loss for retail, as there are additional operating costs).

Given the average life of a smartphone is three years, and it continues to grow in Russia and in the world, these were sales in 2021-2022, we did not have pent-up demand. In the first quarter of 2021, we see that smartphone sales sank by 11% in unit terms year-on-year. And the reason, among other things, is that buyers do not need smartphones in such a volume.

It is impossible to ignore another trend, the deficit is growing, which means that prices are rising, they have already increased by 20-30% for new models, and the growth will continue. Devices that are optimal in terms of price / quality ratio from previous deliveries are quickly washed out. Buyers are often not ready to buy anything, they want not only a specific model, but also at a certain cost.

Declining sales lead us to a repeat of 2020, many retail players need money to survive in the market. For example, Svyaznoy almost halved its retail network in 2020, since it was impossible to maintain such a number of stores. The operators that own the largest electronics chains are also cutting the number of stores to improve the economy for those who remain. But falling sales make that nearly impossible. By cutting off a piece of retail and temporarily improving the economy for themselves and those around them, companies cannot solve fundamental issues.

And the first question is the lack of goods. The shortage leads to the fact that in January the store shelves were half empty. Then the shortage of production intensified, prices went up, and retail, acting as a buyer, suddenly faced with the fact that they could not buy goods at comfortable prices. At the prices they expected. A vicious circle - buying at the offered price will obviously alienate buyers, sales will decrease. Lack of goods also will not give sales. But the main thing is that while there are thoughts about the need to buy a product, its cost is growing weekly, and retail simply does not keep up with this price increase. Only big companies that can fix the cost of goods, have a wide range of products and do not have a shortage (Samsung, Apple, partly Xiaomi) win. But the possibilities of these companies are also limited, they cannot replace the entire market. Interestingly, the combined unit sales of these three companies account for nearly 70% of the smartphone market today. The rest of the players are left with a smaller piece of the pie. Consolidation is forced and follows from the capabilities of companies.

Hence the current attractions of generosity, when expensive models are sold at the highest discount. This is exactly the same story as a year ago, you need working capital to support your retail.

Seeing the purchases of goods for the next periods, I can say that the most difficult in Russia will be the beginning of the third quarter, the goods may not be in many positions, and the remaining positions will be expensive. That will also push sales down, and make retailers look for sales at any cost, including selling at a loss. This will kill the market even more, it will start to shrink.

I often come across the gloating that sounds in relation to large retail chains - that's how they should be! The feeling that they did something to the writer, that he comes out with hatred towards them. But the problem here is that tens of thousands of people work in this retail, who remain unemployed, drop out (I hope temporarily) from economic life. And this is where the problems begin for all of us, since it is one thing when the market is stable or growing, it is quite another when it falls. And in Russia, and in the world, all markets are becoming like this this year.

The presence of money at retail does not affect the availability of goods, alas, this is an illusion. Now the supplier dictates the conditions, the situation is completely different than before.

What to do and where to run, is there a way out of this crisis

Current processes are determined by macroeconomics, state policy. For example, to address economic issues related to the pandemic, states have turned on the printing press. Money is depreciating before our eyes, some currencies are faster, some are slower - but this is a global process. And this means that inflation is added to the deficit, the cost of all products will grow, and this process cannot be avoided. My advice is simple - buy everything you need now. It’s definitely not worth buying buckwheat and food for the last time, but if you are planning large or small purchases, then you should take care to purchase everything you need now, tomorrow it will be more expensive. And if you still decide, but they stop the new prices that will appear in the near future, then here's your second piece of advice - fight your toad and buy, the day after tomorrow everything will be even more expensive. Actually, I did just that, bought everything that I had been planning for a long time, and made small stocks of what I use all the time and what I definitely need. There is no panic and there cannot be, this is a rational approach. It’s definitely not worth getting into loans to buy all sorts of things, but if you are planning a large purchase, then it might be worth buying a thing now. Just measure your payment options and financial situation, do not indulge in reckless spending.

The current crisis has come for a long time, at least for 3-5 years, and we need to learn how to live in these conditions. There is no doubt that we will learn how to do this. In the end, the market in Russia began with completely different values, and then it was possible to work. Few people know how to work in falling markets, but this is a skill worth acquiring. The rise of "speakers," "coaches," and sellers of courses on how to become happy or rich indirectly points to exactly the same thing. We have a full-blown crisis in front of us, depression 2.0 is running. Comparison with the depression of the last century suggests itself, but it is inappropriate, we are faced with tasks that are much more difficult, and they are not so trivial.

The only thing you and I can oppose to this crisis is our rationality and cold, sober calculation. There is simply no other recipe for this crisis.

The perfect storm - the fall of the Russian and world markets

Troy was under siege for a long time
Remained an impregnable stronghold,
But the Trojans did not believe Cassandra -
Troy, perhaps, would have stood to this day.
Incessantly, the mad girl
Screamed: "I clearly see Troy, fallen to dust!"
But clairvoyants - however, as well as eyewitnesses -
In all ages, people have been burned at the stake.

The lines from Vysotsky's song are spinning in my head, they are the best fit for the madness that is happening around. Everyone diligently pretends that nothing is happening, life goes on as usual, there will be no changes ahead. We live in the center of an ideal storm that smashes the previous world order to pieces, but from the outside it seems that everything is fine and everything is going on as usual. America's trade war against China began a few years ago and has not subsided for a minute, it is literally a war in which there will no longer be winners, but only losers. Associated losses can be considered the economies of all countries, there will be no exceptions. The pandemic added gasoline to the fire of this war, and it began to blaze so that we would not be able to return to normal life. The governments of different countries have fallen into a trap, any of their actions will be perceived negatively by the population, and there is simply no easy way out of the situation.

The thoughts that will be given in this text were voiced by me at different times, in front of different audiences and people. Someone may consider this a repetition, someone will call me an alarmist who paints apocalyptic pictures of the world. We drive bad thoughts away from ourselves and create illusions that everything will be fine tomorrow. This is a bad habit, but, of course, it is inherent in all people, and this is normal. I always wanted to be able to realistically assess what lies ahead for me, my family and loved ones in order to build a strategy and tactics according to the circumstances. Perhaps, this text is for those who want to look at the situation from different points of view, weigh all the pros and cons, and evaluate the prospects of the market. Of course, it is easier and clearer for me to talk about what is happening through the prism of the electronics market, both global and Russian. But the processes taking place today in the electronics market are quite transferable to all areas, the parallels are not only obvious, they are inevitable.

It is worth starting to talk about these difficult matters from one conversation that took place with me in December last year. Market prospects were vague, no positive expectations. My interlocutor is the owner of a large company that produces electronics in different segments, an adequate and sensible person. But I was struck by what he said about the near future, a rainbow picture was drawn in which we would wake up one day and everything would return to normal. Everything will be the same as before, the availability of goods will return, production cycles will be shortened, prices will fall, and this will give a boost to retail sales. Even bank loans will become more affordable as the market returns to growth. I had only one question - what makes you think so? The answer was stupidly simple - all this cannot continue like this, everything will collapse if it goes along this path. And it was clear that this topic was unpleasant for my interlocutor, causing persistent rejection. Unfortunately, many people who determine the future of the market live in exactly the same illusions, they drive bad thoughts away from themselves.

At a discussion of the financial results of 2020 at Beeline, I asked a question about how the company looks at the shortage of servers, memory for data centers, how they will solve these problems. The answer struck me - we have many suppliers, they compete with each other, and there are no problems with supplies. This is exactly the same illusion that exists in the market, and it is the same for Russia, America or Europe. Over the years, we have become accustomed to living in market conditions, where large buyers dictate their own rules. Do you have money and a request for some product? So, you will get it and, most likely, you will be able to achieve good conditions. The rise of such companies as Amazon, in Russia it can be Wildberries, Ozon and a number of other players, was due to competition between manufacturers, the possibility of choosing different goods. The buyer chooses what and where to buy, he has the widest choice. Do you want to buy a smartphone? Here are offers from a couple of thousand rubles and almost to infinity, there are models from boutiques worth a couple of million. If you don’t want to pay several thousand rubles for an original smartphone case, you can buy something from a third-party company on the same AliExpress. We, as buyers, are spoiled for choice, and the widest range allows companies to build their strategy, get favorable and effective prices. The competition is such that suppliers often lose, but in the end it results in the fact that prices are kept low, do not fly into the sky.

The shortage of goods is an unusual situation, it is inherently utopian for a consumer society. But ahead of us is exactly such a period of time when the deficit will determine the future of any market, the struggle for resources is unfolding before our eyes, and this is not a battle of huge corporations, the existence of small and medium-sized companies is at stake.

Deficiency in the production of electronics and components - politics and economics

When America launched a trade war against China, American politicians were clearly counting on a quick victory. Confident in their own importance and invincibility, they clearly drew pictures like in Hollywood films, where the good guys tense up a little, but in the end they defeat the bad guys and everything turns out to be good. The course taken by the Donald Trump administration is continued by the current administration - to prevent China from obtaining the technologies that will determine the situation in a dozen developed countries in the next 50-100 years. It is important for America to control all the technologies that can transform our world, it seems to politicians that the world has remained the same and this is a feasible task. They are wrong!

In the 1950s, America received great resources and opportunities as the Second World War changed the balance of the international arena. The United States invested resources in new areas of development, in particular, in IT technologies, and received a breakthrough, due to which we now use a huge number of products from this country. The intellectual property is owned by American companies, but most of the goods are made in Southeast Asia and China, which has become the world's factory for everything from matches to cars. China quite consciously adopted America's strategy and for several decades has been building up potential, training specialists, raising scientists, and creating the groundwork for a big breakthrough. And this breakthrough took place, the country ceased to be just a factory, it became the creator of technologies for the whole world. For example, Huawei is the largest telecom company in the world, controlling 5G in every aspect. The threat that China is creating its own competing technologies, and taking off in other areas, has forced America to stay ahead of the curve. A trade war against China is an attempt to stifle a potential adversary, destroying all his chances of succeeding. And in the 80s, America won such a war against Japan, the IT sector was thrown back a decade, a strong competitor disappeared. For China, there was never an option to give up, since the future of the country, the very fact of existence, depends on it. With Russia, the situation is completely similar with slightly different accents.

US sanctions against Huawei and a dozen other Chinese companies are causing international trade to suffer. But it also creates problems throughout the supply chain, destroying established relationships and leading to higher prices for almost all goods. For example, Huawei created its own Kirin processors, which did not look like poor relatives compared to Qualcomm or Samsung products. American tools were used for development, they were taken away in the sanctions regime! It is impossible to produce smartphones without processors, the company was forced to sell the Honor brand, but it is still under sanctions and cannot produce new models of smartphones and other electronics.

The first blow to the market was the sanctions against Huawei, when the company bought components a year in advance, and this is not an exaggeration. Huawei stocked up for a year ahead to cushion the blow, the company released smartphones until recently when Tshirt High Quality %Cotton Made in Turkey she, in theory, could no longer do this. The rise in prices for components was easily explained, since Huawei was at war, and nothing is a pity to win. World prices for many components have risen, but this was only one stroke in this big war.

Look at Huawei's annual report, the consumer electronics segment has fallen in many markets, but revenue remains significant. Also, the company, despite the sanctions and pressure, still grew.

Perfect storm - fall of Russian and global markets Perfect storm – falling Russian and global markets A perfect storm - the fall of the Russian and world markets

The same TSMC that produced the Kirin processors not only received orders from Huawei, the company also financed the development of new technical processes (both 7nm and 5nm) on a parity basis. This made it possible to reduce the cost of production not only for Huawei, but also for Apple. Now there is no such funding, and prices from TSMC have already gone up, as the company has lost a strategic partner due to US sanctions.

The pandemic, the closure of production - all this affected all industries, and had a negative impact. In electronics, production faced two negative trends - low demand from buyers (shops were closed, demand automatically fell), and limited supplies (workers did not go to factories). The imbalance that arose in deliveries due to Huawei continued to grow.

The buyer's market suddenly began to transform into a seller's market. For example, small and medium-sized factories that make electronics almost never stock components because it's expensive. The components were bought for specific projects and the production of certain goods, and in China, the choice was as wide as possible, delivery times were minimal. The resulting imbalance led to the fact that everything changed overnight.

Today there is a demand for goods, but small and medium-sized factories cannot produce them, as they are unable to buy components. Let's take a look at how component delivery times have changed in the first quarter.

Perfect storm - falling Russian and global markets

For your understanding, 52 weeks is actually one year of waiting for production! But the situation is changing so fast that already paid, placed orders are being cancelled. It's not very pretty, but it's a seller's market, not a buyer's. For factories that produce components, there is no point in producing a paid product. Even with the payment of a penalty of 50% of the price of the goods, it turns out that earnings cover everything with a vengeance. Many components have already tripled in price, and the growth continues.

Many manufacturers are in a permanent state of hysteria, as they have no money from the sale of goods and no product itself, which means they are willing to pay any price to get the components. This pushes prices up even more. The bull run will eventually bankrupt many companies, making things a little easier for those who remain, but not bringing prices back.

Pay attention to Samsung, the company has completely refocused on the release of processors for Qualcomm, in many models it abandoned Exynos in favor of Snapdragon. The reason here is solely in the money, since by producing Snapdragon, the company receives them for itself at a low cost, at the same time, the production price for Qualcomm is maximum. This is the growing profit from placing other people's orders, a business that is only possible at the moment. And while Qualcomm's president claims that deliveries until the end of 2021 will be difficult and will not normalize, demand is much higher than supply. This is a seller's market, in this case, one who can produce processors.

It is generally believed that rolling shutdowns of production occur due to the shortsightedness of specific manufacturers. But the range of reasons is much wider, we are faced with a shortage in the production of components, as well as a sharp increase in the prices of raw materials, such as metals. Check out the exchange and see futures for copper, nickel and other metals.

Perfect storm - fall of Russian and global markets Perfect storm – fall of Russian and global markets

Even people who are far from economics will understand that if the price of raw materials rises, then it increases the cost of production in the entire chain, including the cost of labor, which will increase sooner or later. Suffice it to say that the cost of plastics has almost doubled in a year, which means that even a doorbell will cost more than it cost just recently, there is no way to avoid it.

Today, the shortage of components is so severe that the production of washing machines and refrigerators, kettles and other small electronics is declining. This is already a fact that cannot be ignored.

The shortage has come for several years, it determines the cost of many, if not all goods, and price increases are inevitable. But here we are faced with another part of the story that creates the perfect crisis - the existence of retail and how it will survive in the not too distant future.

Retail players - we have money, which means there will be goods!

The most dangerous thing is illusions that make you think that everything will get better and life will return to normal very quickly. I really want to believe in this, but life is somewhat more complicated and presents surprises. In 2020, the smartphone market expectedly fell due to the pandemic, but the fall was not too noticeable, less than 10%.

Perfect storm - fall of Russian and global markets

Closed stores, lack of money from people all over the world - all this affected sales. And about the same situation in most segments of electronics. The Russian market has become an anomaly against the background of problems in the world, it has not fallen at all. The reason for this is banal and lies on the surface, large players, for example, MVideo, DNS, MTS, sold many goods with a zero margin, that is, they actually sold them at a wholesale price, at a minus. The reason for the attraction of unprecedented generosity was very simple - companies needed to maintain stores, pay salaries, and service bank loans. During the crisis, they reduced their losses, including by selling goods at a loss (selling with a zero margin is a loss for retail, as there are additional operating costs).

Given the average life of a smartphone is three years, and it continues to grow in Russia and in the world, these were sales in 2021-2022, we did not have pent-up demand. In the first quarter of 2021, we see that smartphone sales sank by 11% in unit terms year-on-year. And the reason, among other things, is that buyers do not need smartphones in such a volume.

It is impossible to ignore another trend, the deficit is growing, which means that prices are rising, they have already increased by 20-30% for new models, and the growth will continue. Devices that are optimal in terms of price / quality ratio from previous deliveries are quickly washed out. Buyers are often not ready to buy anything, they want not only a specific model, but also at a certain cost.

Declining sales lead us to repeat the situation of 2020, many retail players need money to survive in the market. For example, Svyaznoy almost halved its retail network in 2020, since it was impossible to maintain such a number of stores. The operators that own the largest electronics chains are also cutting the number of stores to improve the economy for those who remain. But falling sales make that nearly impossible. By cutting off bit by bit from retail and temporarily improving the economy for themselves and those around them, companies cannot solve fundamental issues.

And the first question is the lack of goods. The shortage leads to the fact that in January the store shelves were half empty. Then the shortage of production intensified, prices went up, and retail, acting as a buyer, suddenly faced with the fact that they could not buy goods at comfortable prices. At the prices they expected. A vicious circle - buying at the offered price will obviously alienate buyers, sales will decrease. Lack of goods also will not give sales. But the main thing is that while there are thoughts about the need to buy a product, its cost is growing weekly, and retail simply does not keep up with this price increase. Only big companies that can fix the cost of goods, have a wide range of products and do not have a shortage (Samsung, Apple, partly Xiaomi) win. But the possibilities of these companies are also limited, they cannot replace the entire market. Interestingly, the combined unit sales of these three companies account for nearly 70% of the smartphone market today. The rest of the players are left with a smaller piece of the pie. Consolidation is forced and follows from the capabilities of companies.

Hence the current attractions of generosity, when expensive models are sold at the highest discount. This is exactly the same story as a year ago, you need working capital to support your retail.

Seeing the purchases of goods for the next periods, I can say that the most difficult in Russia will be the beginning of the third quarter, the goods may not be in many positions, and the remaining positions will be expensive. That will also push sales down, and make retailers look for sales at any cost, including selling at a loss. This will kill the market even more, it will start to shrink.

I often come across the gloating that sounds in relation to large retail chains - that's how they should be! The feeling that they did something to the writer, that he comes out with hatred towards them. But the problem here is that tens of thousands of people work in this retail, who remain unemployed, drop out (I hope temporarily) from economic life. And this is where the problems begin for all of us, since it is one thing when the market is stable or growing, it is quite another when it falls. And in Russia, and in the world, all markets are becoming like this this year.

The presence of money at retail does not affect the availability of goods, alas, this is an illusion. Now the supplier dictates the conditions, the situation is completely different than before.

What to do and where to run, is there a way out of this crisis

Current processes are determined by macroeconomics, state policy. For example, to address economic issues related to the pandemic, states have turned on the printing press. Money is depreciating before our eyes, some currencies are faster, some are slower - but this is a global process. And this means that inflation is added to the deficit, the cost of all products will grow, and this process cannot be avoided. My advice is simple - buy everything you need now. It’s definitely not worth buying buckwheat and food for the last time, but if you are planning large or small purchases, then you should take care to purchase everything you need now, tomorrow it will be more expensive. And if you still decide, but they stop the new prices that will appear in the near future, then here's your second piece of advice - fight your toad and buy, the day after tomorrow everything will be even more expensive. Actually, I did just that, I bought everything that I had been planning for a long time, and made small stocks of what I use all the time and what I definitely need. There is no panic and there cannot be, this is a rational approach. It’s definitely not worth getting into loans to buy all sorts of things, but if you are planning a large purchase, then it might be worth buying a thing now. Just measure your payment options and financial situation, do not indulge in reckless spending.

The current crisis has come for a long time, at least for 3-5 years, and we need to learn how to live in these conditions. There is no doubt that we will learn how to do this. In the end, the market in Russia began with completely different values, and then it was possible to work. Few people know how to work in falling markets, but this is a skill worth acquiring. The rise of "speakers," "coaches," and sellers of courses on how to become happy or rich indirectly points to exactly the same thing. We have a full-blown crisis in front of us, depression 2.0 is running. Comparison with the depression of the last century suggests itself, but it is inappropriate, we are faced with tasks that are much more difficult, and they are not so trivial.

The only thing that you and I can oppose to this crisis is our rationality and cold, sober calculation. There are simply no other recipes for this crisis.

The perfect storm - the fall of the Russian and world markets

Troy was under siege for a long time
Remained an impregnable stronghold,
But the Trojans did not believe Cassandra -
Troy, perhaps, would have stood to this day.
Incessantly crazy girl
Screamed: "I clearly see Troy, fallen to dust!"
But clairvoyants - however, as well as eyewitnesses -
In all ages, people have been burned at the stake.

The lines from Vysotsky's song are spinning in my head, they are the best fit for the madness that is happening around. Everyone diligently pretends that nothing is happening, life goes on as usual, there will be no changes ahead. We live in the center of an ideal storm that smashes the previous world order to pieces, but from the outside it seems that everything is fine and everything is going on as usual. America's trade war against China began a few years ago and has not subsided for a minute, it is literally a war in which there will no longer be winners, but only losers. Associated losses can be considered the economies of all countries, there will be no exceptions. The pandemic added gasoline to the fire of this war, and it began to blaze so that we would not be able to return to normal life. The governments of different countries have fallen into a trap, any of their actions will be perceived negatively by the population, and there is simply no easy way out of the situation.

The thoughts that will be given in this text were voiced by me at different times, in front of different audiences and people. Someone may consider this a repetition, someone will call me an alarmist who paints apocalyptic pictures of the world. We drive bad thoughts away from ourselves and create illusions that everything will be fine tomorrow. This is a bad habit, but, of course, it is inherent in all people, and this is normal. I always wanted to be able to realistically assess what lies ahead for me, my family and loved ones in order to build a strategy and tactics according to the circumstances. Perhaps, this text is for those who want to look at the situation from different points of view, weigh all the pros and cons, and evaluate the prospects of the market. Of course, it is easier and clearer for me to talk about what is happening through the prism of the electronics market, both global and Russian. But the processes taking place today in the electronics market are quite transferable to all areas, the parallels are not only obvious, they are inevitable.

It is worth starting to talk about these difficult matters from one conversation that took place with me in December last year. Market prospects were vague, no positive expectations. My interlocutor is the owner of a large company that produces electronics in various segments, an adequate and sensible person. But I was struck by what he said about the near future, a rainbow picture was drawn in which we would wake up one day and everything would return to normal. Everything will be the same as before, the availability of goods will return, production cycles will be shortened, prices will fall, and this will give a boost to retail sales. Even bank loans will become more affordable as the market returns to growth. I had only one question - what makes you think so? The answer was stupidly simple - all this cannot continue like this, everything will collapse if it goes along this path. And it was clear that this topic was unpleasant for my interlocutor, causing persistent rejection. Unfortunately, many people who determine the future of the market live in exactly the same illusions, driving bad thoughts away from themselves.

At a discussion of the financial results of 2020 at Beeline, I asked a question about how the company looks at the shortage of servers, memory for data centers, how they will solve these problems. The answer struck me - we have many suppliers, they compete with each other, and there are no problems with supplies. This is exactly the same illusion that exists in the market, and it is the same for Russia, America or Europe. Over the years, we have become accustomed to living in market conditions, where large buyers dictate their own rules. Do you have money and a request for some product? So, you will get it and, most likely, you will be able to achieve good conditions. The rise of companies such as Amazon, in Russia it can be Wildberries, Ozon and a number of other players, was due to competition between manufacturers, the ability to choose different products. The buyer chooses what and where to buy, he has the widest choice. Do you want to buy a smartphone? Here are offers from a couple of thousand rubles and almost to infinity, there are models from boutiques worth a couple of million. If you don’t want to pay several thousand rubles for an original smartphone case, you can buy something from a third-party company on the same AliExpress. We, as buyers, are spoiled for choice, and the widest range allows companies to build their strategy, get favorable and effective prices. The competition is such that suppliers often lose, but in the end it results in the fact that prices are kept low, do not fly into the sky.

The shortage of goods is an unusual situation, it is inherently utopian for a consumer society. But ahead of us is exactly such a period of time when the deficit will determine the future of any market, the struggle for resources is unfolding before our eyes, and this is not a battle of huge corporations, the existence of small and medium-sized companies is at stake.

Deficiency in the production of electronics and components - politics and economics

When America launched a trade war against China, American politicians were clearly counting on a quick victory. Confident in their own importance and invincibility, they clearly drew pictures like in Hollywood films, where the good guys tense up a little, but in the end they defeat the bad guys and everything turns out to be good. The course taken by the Donald Trump administration is continued by the current administration - to prevent China from obtaining the technologies that will determine the situation in a dozen developed countries in the next 50-100 years. It is important for America to control all the technologies that can transform our world, it seems to politicians that the world has remained the same and this is a feasible task. They are wrong!

In the 1950s, America received great resources and opportunities as the Second World War changed the balance of the international arena. The United States invested resources in new areas of development, in particular, in IT technologies, and received a breakthrough, due to which we now use a huge number of products from this country. The intellectual property is owned by American companies, but most of the goods are made in Southeast Asia and China, which has become the world's factory for everything from matches to cars. China quite consciously adopted America's strategy and for several decades has been building up potential, training specialists, raising scientists, and creating the groundwork for a big breakthrough. And this breakthrough took place, the country ceased to be just a factory, it became the creator of technologies for the whole world. For example, Huawei is the largest telecom company in the world, controlling 5G in every aspect. The threat that China is creating its own competing technologies, and taking off in other areas, has forced America to stay ahead of the curve. A trade war against China is an attempt to stifle a potential adversary, destroying all his chances of succeeding. And in the 80s, America won such a war against Japan, the IT sector was thrown back a decade, a strong competitor disappeared. For China, there was never an option to give up, since the future of the country, the very fact of existence, depends on it. With Russia, the situation is completely similar with slightly different accents.

US sanctions against Huawei and a dozen other Chinese companies are causing international trade to suffer. But it also creates problems throughout the supply chain, destroying established relationships and leading to higher prices for almost all goods. For example, Huawei created its own Kirin processors, which did not look like poor relatives compared to Qualcomm or Samsung products. American tools were used for development, they were taken away under the sanctions regime! It is impossible to produce smartphones without processors, the company was forced to sell the Honor brand, but it is still under sanctions and cannot produce new models of smartphones and other electronics.

The first blow to the market was the sanctions against Huawei, when the company bought components a year in advance, and this is not an exaggeration. Huawei stocked up for a year ahead to cushion the blow, the company released smartphones until recently when Tshirt High Quality %Cotton Made in Turkey she, in theory, could no longer do this. The rise in prices for components was easily explained, since Huawei was at war, and nothing is a pity to win. World prices for many components have risen, but this was only one stroke in this big war.

Look at Huawei's annual report, the consumer electronics segment has fallen in many markets, but revenue remains significant. Also, the company, despite the sanctions and pressure, still grew.

Perfect storm - fall of Russian and global markets Perfect storm – fall of Russian and global markets A perfect storm - the fall of the Russian and world markets

The same TSMC that produced the Kirin processors not only received orders from Huawei, the company also financed the development of new technical processes (both 7nm and 5nm) on a parity basis. This made it possible to reduce the cost of production not only for Huawei, but also for Apple. Now there is no such funding, and prices from TSMC have already gone up, as the company has lost a strategic partner due to US sanctions.

The pandemic, the closure of production - all this affected all industries, and had a negative impact. In electronics, production faced two negative trends - low demand from buyers (shops were closed, demand automatically fell), and limited supplies (workers did not go to factories). The imbalance that arose in deliveries due to Huawei continued to grow.

The buyer's market suddenly began to transform into a seller's market. For example, small and medium-sized factories that produce electronics almost never stock components because it is expensive. The components were bought for specific projects and the production of certain goods, and in China, the choice was as wide as possible, delivery times were minimal. The resulting imbalance led to the fact that everything changed overnight.

Today there is a demand for goods, but small and medium-sized factories cannot produce them, as they are unable to buy components. Let's take a look at how component delivery times have changed in the first quarter.

Perfect storm - falling Russian and global markets

For your understanding, 52 weeks is actually one year of waiting for production! But the situation is changing so fast that already paid, placed orders are being cancelled. It's not very pretty, but it's a seller's market, not a buyer's. For factories that produce components, there is no point in producing a paid product. Even with the payment of a penalty of 50% of the price of the goods, it turns out that earnings cover everything with a vengeance. Many components have already tripled in price by now, and the growth continues.

Many manufacturers are in a permanent state of hysteria, as they have no money from the sale of goods and no product itself, which means they are willing to pay any price to get the components. This pushes prices up even more. The bull run will eventually bankrupt many companies, making things a little easier for those who remain, but not bringing prices back.

Pay attention to Samsung, the company has completely refocused on the release of processors for Qualcomm, in many models it abandoned Exynos in favor of Snapdragon. The reason here is solely in the money, since by producing Snapdragon, the company receives them for itself at a low cost, at the same time, the production price for Qualcomm is maximum. This is the growing profit from placing other people's orders, a business that is only possible at the moment. And while Qualcomm's president claims that deliveries until the end of 2021 will be difficult and will not normalize, demand is much higher than supply. This is a seller's market, in this case, one who can produce processors.

It is generally believed that rolling shutdowns of production occur due to the shortsightedness of specific manufacturers. But the range of reasons is much wider, we are faced with a shortage in the production of components, as well as a sharp increase in the prices of raw materials, such as metals. Check out the exchange and see futures for copper, nickel and other metals.

Perfect storm - fall of Russian and global markets Perfect storm – fall of Russian and global markets

Even people who are far from economics will understand that if the price of raw materials rises, then it increases the cost of production in the entire chain, including the cost of labor, which will increase sooner or later. Suffice it to say that the cost of plastics has almost doubled in a year, which means that even a doorbell will cost more than it cost just recently, there is no way to avoid it.

Today, the shortage of components is so severe that the production of washing machines and refrigerators, kettles and other small electronics is declining. This is already a fact that cannot be ignored.

The scarcity has come for several years, it determines the cost of many, if not all goods, and price increases are inevitable. But here we are faced with another part of the story that creates the perfect crisis - the existence of retail and how it will survive in the not too distant future.

Retail players - we have money, which means there will be goods!

The most dangerous thing is illusions that make you think that everything will get better and life will return to normal very quickly. I really want to believe in this, but life is somewhat more complicated and presents surprises. In 2020, the smartphone market expectedly fell due to the pandemic, but the fall was not very noticeable, less than 10%.

Perfect storm - fall of Russian and global markets

Closed stores, lack of money from people all over the world - all this affected sales. And about the same situation in most segments of electronics. The Russian market has become an anomaly against the background of problems in the world, it has not fallen at all. The reason for this is banal and lies on the surface, large players, for example, MVideo, DNS, MTS, sold many goods with a zero margin, that is, they actually sold them at a wholesale price, at a minus. The reason for the attraction of unprecedented generosity was very simple - companies needed to maintain stores, pay salaries, and service bank loans. During the crisis, they reduced their losses, including by selling goods at a loss (selling with a zero margin is a loss for retail, as there are additional operating costs).

Given the average life of a smartphone is three years, and it continues to grow in Russia and in the world, these were sales in 2021-2022, we did not have pent-up demand. In the first quarter of 2021, we see that smartphone sales sank by 11% in unit terms year-on-year. And the reason, among other things, is that buyers do not need smartphones in such a volume.

It is impossible to ignore another trend, the deficit is growing, which means that prices are rising, they have already increased by 20-30% for new models, and the growth will continue. Devices that are optimal in terms of price / quality ratio from previous deliveries are quickly washed out. Buyers are often not ready to buy anything, they want not only a specific model, but also at a certain cost.

Declining sales lead us to repeat the situation of 2020, many retail players need money to survive in the market. For example, Svyaznoy almost halved its retail network in 2020, since it was impossible to maintain such a number of stores. The operators that own the largest electronics chains are also cutting the number of stores to improve the economy for those who remain. But falling sales make that nearly impossible. By cutting off bit by bit from retail and temporarily improving the economy for themselves and those around them, companies cannot solve fundamental issues.

And the first question is the lack of goods. The shortage leads to the fact that in January the store shelves were half empty. Then the shortage of production intensified, prices went up, and retail, acting as a buyer, suddenly faced with the fact that they could not buy goods at comfortable prices. At the prices they expected. A vicious circle - buying at the offered price will obviously alienate buyers, sales will decrease. Lack of goods also will not give sales. But the main thing is that while there are thoughts about the need to buy a product, its cost is growing weekly, and retail simply does not keep up with this price increase. Only big companies that can fix the cost of goods, have a wide range of products and do not have a shortage (Samsung, Apple, partly Xiaomi) win. But the possibilities of these companies are also limited, they cannot replace the entire market. Interestingly, the combined unit sales of these three companies account for nearly 70% of the smartphone market today. The rest of the players are left with a smaller piece of the pie. Consolidation is forced and follows from the capabilities of companies.

Hence the current attractions of generosity, when expensive models are sold at the highest discount. This is exactly the same story as a year ago, you need working capital to support your retail.

Seeing the purchases of goods for the next periods, I can say that the most difficult in Russia will be the beginning of the third quarter, the goods may not be in many positions, and the remaining positions will be expensive. That will also push sales down, and make retailers look for sales at any cost, including selling at a loss. This will kill the market even more, it will start to shrink.

I often come across the gloating that sounds in relation to large retail chains - that's how they should be! The feeling that they did something to the writer, that he comes out with hatred towards them. But the problem here is that tens of thousands of people work in this retail, who remain unemployed, drop out (I hope temporarily) from economic life. And this is where the problems begin for all of us, since it is one thing when the market is stable or growing, it is quite another when it falls. And in Russia, and in the world, all markets are becoming like this this year.

The presence of money at retail does not affect the availability of goods, alas, this is an illusion. Now the supplier dictates the conditions, the situation is completely different than before.

What to do and where to run, is there a way out of this crisis

Current processes are determined by macroeconomics, state policy. For example, to address economic issues related to the pandemic, states have turned on the printing press. Money is depreciating before our eyes, some currencies are faster, some are slower - but this is a global process. And this means that inflation is added to the deficit, the cost of all products will grow, and this process cannot be avoided. My advice is simple - buy everything you need now. It’s definitely not worth buying buckwheat and food for the last time, but if you are planning large or small purchases, then you should take care to purchase everything you need now, tomorrow it will be more expensive. And if you still decide, but they stop the new prices that will appear in the near future, then here's your second piece of advice - fight your toad and buy, the day after tomorrow everything will be even more expensive. Actually, I did just that, bought everything that I had been planning for a long time, and made small stocks of what I use all the time and what I definitely need. There is no panic and there cannot be, this is a rational approach. It’s definitely not worth getting into loans to buy all sorts of things, but if you are planning a large purchase, then it might be worth buying a thing now. Just measure your payment options and financial situation, do not indulge in reckless spending.

The current crisis has come for a long time, at least for 3-5 years, and we need to learn how to live in these conditions. There is no doubt that we will learn how to do this. In the end, the market in Russia began with completely different values, and then it was possible to work. Few people know how to work in falling markets, but this is a skill worth acquiring. The rise of "speakers," "coaches," and sellers of courses on how to become happy or rich indirectly points to exactly the same thing. We have a full-blown crisis in front of us, depression 2.0 is running. Comparison with the depression of the last century suggests itself, but it is inappropriate, we are faced with tasks that are much more difficult, and they are not so trivial.

The only thing you and I can oppose to this crisis is our rationality and cold, sober calculation. There is simply no other recipe for this crisis.

The perfect storm - the fall of the Russian and world markets

For a long time, Troy in a state of siege Remained an impregnable stronghold, But the Trojans did not believe Cassandra - Troy, perhaps, would have stood to this day. Incessantly, the mad maiden Shouted: “I clearly see Troy, fallen to dust!” But clairvoyants - however, as well as eyewitnesses - In all ages people burned at the stake.

The lines from Vysotsky's song are spinning in my head, they are the best fit for the madness that is happening around. Everyone diligently pretends that nothing is happening, life goes on as usual, there will be no changes ahead. We live in the center of an ideal storm that smashes the previous world order to pieces, but from the outside it seems that everything is fine and everything is going on as usual. America's trade war against China began a few years ago and has not subsided for a minute, it is literally a war in which there will no longer be winners, but only losers. Associated losses can be considered the economies of all countries, there will be no exceptions. The pandemic added gasoline to the fire of this war, and it began to blaze so that we would not be able to return to normal life. The governments of different countries have fallen into a trap, any of their actions will be perceived negatively by the population, and there is simply no easy way out of the situation.

The thoughts that will be given in this text were voiced by me at different times, in front of different audiences and people. Someone may consider this a repetition, someone will call me an alarmist who paints apocalyptic pictures of the world. We drive bad thoughts away from ourselves and create illusions that everything will be fine tomorrow. This is a bad habit, but, of course, it is inherent in all people, and this is normal. I always wanted to be able to realistically assess what lies ahead for me, my family and loved ones in order to build a strategy and tactics according to the circumstances. Perhaps, this text is for those who want to look at the situation from different points of view, weigh all the pros and cons, and evaluate the prospects of the market. Of course, it is easier and clearer for me to talk about what is happening through the prism of the electronics market, both global and Russian. But the processes taking place today in the electronics market are quite transferable to all areas, the parallels are not only obvious, they are inevitable.

It is worth starting to talk about these difficult matters from one conversation that took place with me in December last year. Market prospects were vague, no positive expectations. My interlocutor is the owner of a large company that produces electronics in various segments, an adequate and sensible person. But I was struck by what he said about the near future, a rainbow picture was drawn in which we would wake up one day and everything would return to normal. Everything will be the same as before, the availability of goods will return, production cycles will be shortened, prices will fall, and this will give a boost to retail sales. Even bank loans will become more affordable as the market returns to growth. I had only one question - what makes you think so? The answer was stupidly simple - all this cannot continue like this, everything will collapse if it goes along this path. And it was clear that this topic was unpleasant for my interlocutor, causing persistent rejection. Unfortunately, many people who determine the future of the market live in exactly the same illusions, driving bad thoughts away from themselves.

At a discussion of the financial results of 2020 at Beeline, I asked a question about how the company looks at the shortage of servers, memory for data centers, how they will solve these problems. The answer struck me - we have many suppliers, they compete with each other, and there are no problems with supplies. This is exactly the same illusion that exists in the market, and it is the same for Russia, America or Europe. Over the years, we have become accustomed to living in market conditions, where large buyers dictate their own rules. Do you have money and a request for some product? So, you will get it and, most likely, you will be able to achieve good conditions. The rise of such companies as Amazon, in Russia it can be Wildberries, Ozon and a number of other players, was due to competition between manufacturers, the possibility of choosing different goods. The buyer chooses what and where to buy, he has the widest choice. Do you want to buy a smartphone? Here are offers from a couple of thousand rubles and almost to infinity, there are models from boutiques worth a couple of million. If you don’t want to pay several thousand rubles for an original smartphone case, you can buy something from a third-party company on the same AliExpress. We, as buyers, are spoiled for choice, and the widest range allows companies to build their strategy, get favorable and effective prices. The competition is such that suppliers often lose, but in the end it results in the fact that prices are kept low, do not fly into the sky.

The shortage of goods is an unusual situation, it is inherently utopian for a consumer society. But ahead of us is exactly such a period of time when the deficit will determine the future of any market, the struggle for resources is unfolding before our eyes, and this is not a battle of huge corporations, the existence of small and medium-sized companies is at stake.

Deficiency in the production of electronics and components - politics and economics

When America launched a trade war against China, American politicians were clearly counting on a quick victory. Confident in their own importance and invincibility, they clearly drew pictures like in Hollywood films, where the good guys tense up a little, but in the end they defeat the bad guys and everything turns out to be good. The course taken by the Donald Trump administration is continued by the current administration - to prevent China from obtaining the technologies that will determine the situation in a dozen developed countries in the next 50-100 years. It is important for America to control all the technologies that can transform our world, it seems to politicians that the world has remained the same and this is a feasible task. They are wrong!

In the 1950s, America received great resources and opportunities as the Second World War changed the balance of the international arena. The United States invested resources in new areas of development, in particular, in IT technologies, and received a breakthrough, due to which we now use a huge number of products from this country. The intellectual property is owned by American companies, but most of the goods are made in Southeast Asia and China, which has become the world's factory for everything from matches to cars. China quite consciously adopted America's strategy and for several decades has been building up potential, training specialists, raising scientists, and creating the groundwork for a big breakthrough. And this breakthrough took place, the country ceased to be just a factory, it became the creator of technologies for the whole world. For example, Huawei is the largest telecom company in the world, controlling 5G in every aspect. The threat that China is creating its own competing technologies, and taking off in other areas, has forced America to stay ahead of the curve. A trade war against China is an attempt to stifle a potential adversary, destroying all his chances of succeeding. And in the 80s, America won such a war against Japan, the IT sector was thrown back a decade, a strong competitor disappeared. For China, there was never an option to give up, since the future of the country, the very fact of existence, depends on it. With Russia, the situation is completely similar with slightly different accents.

US sanctions against Huawei and a dozen other Chinese companies are causing international trade to suffer. But it also creates problems throughout the supply chain, destroying established relationships and leading to higher prices for almost all goods. For example, Huawei created its own Kirin processors, which did not look like poor relatives compared to Qualcomm or Samsung products. American tools were used for development, they were taken away under the sanctions regime! It is impossible to produce smartphones without processors, the company was forced to sell the Honor brand, but it is still under sanctions and cannot produce new models of smartphones and other electronics.

The first blow to the market was the sanctions against Huawei, when the company bought components a year in advance, and this is not an exaggeration. Huawei stocked up for a year ahead to soften the blow, the company produced smartphones until recently, when Tshirt High Quality %Cotton Made in Turkey, in theory, it could no longer do this. The rise in prices for components was easily explained, since Huawei was at war, and nothing is a pity to win. World prices for many components have risen, but this was only one stroke in this big war.

The first blow to the market was the sanctions against Huawei, when the company bought components a year in advance, and this is not an exaggeration. Huawei made reserves for the year ahead, which helped soften the blow, the company produced smartphones until recently, when Tshirt High Quality %Cotton Made in Turkey Tshirt High Quality %Cotton Made in Turkey she, in theory, could no longer do it. The rise in prices for components was easily explained, since Huawei was at war, and nothing is a pity to win. World prices for many components have risen, but this was only one stroke in this big war.

Look at Huawei's annual report, the consumer electronics segment has fallen in many markets, but revenue remains significant. Also, the company, despite the sanctions and pressure, still grew.

The same TSMC that produced the Kirin processors not only received orders from Huawei, the company also financed the development of new technical processes (both 7nm and 5nm) on a parity basis. This made it possible to reduce the cost of production not only for Huawei, but also for Apple. Now there is no such funding, and prices from TSMC have already gone up, as the company has lost a strategic partner due to US sanctions.

The pandemic, the closure of production - all this affected all industries, and had a negative impact. In electronics, production faced two negative trends - low demand from buyers (shops were closed, demand automatically fell), and limited supplies (workers did not go to factories). The imbalance that arose in deliveries due to Huawei continued to grow.

The buyer's market suddenly began to transform into a seller's market. For example, small and medium-sized factories that make electronics almost never stock components because it's expensive. The components were bought for specific projects and the production of certain goods, and in China, the choice was as wide as possible, delivery times were minimal. The resulting imbalance led to the fact that everything changed overnight.

Today there is a demand for goods, but small and medium-sized factories cannot produce them, as they are unable to buy components. Let's take a look at how component delivery times have changed in the first quarter.

For your understanding, 52 weeks is actually one year of waiting for production! But the situation is changing so fast that already paid, placed orders are being cancelled. It's not very pretty, but it's a seller's market, not a buyer's. For factories that produce components, there is no point in producing a paid product. Even with the payment of a penalty of 50% of the price of the goods, it turns out that earnings cover everything with a vengeance. Many components have already tripled in price by now, and the growth continues.

Many manufacturers are in a permanent state of hysteria, as they have no money from the sale of goods and no product itself, which means they are willing to pay any price to get the components. This pushes prices up even more. The bull run will eventually bankrupt many companies, making things a little easier for those who remain, but not bringing prices back.

Pay attention to Samsung, the company has completely refocused on the release of processors for Qualcomm, in many models it abandoned Exynos in favor of Snapdragon. The reason here is solely in the money, since by producing Snapdragon, the company receives them for itself at a low cost, at the same time, the production price for Qualcomm is maximum. This is the growing profit from placing other people's orders, a business that is only possible at the moment. And while Qualcomm's president claims that deliveries until the end of 2021 will be difficult and will not normalize, demand is much higher than supply. This is a seller's market, in this case, one who can produce processors.

Retail players - we have money, which means there will be goods!

The most dangerous thing is illusions that make you think that everything will get better and life will return to normal very quickly. I really want to believe in this, but life is somewhat more complicated and presents surprises. In 2020, the smartphone market expectedly fell due to the pandemic, but the fall was not very noticeable, less than 10%.

Closed stores, lack of money from people all over the world - all this affected sales. And about the same situation in most segments of electronics. The Russian market has become an anomaly against the background of problems in the world, it has not fallen at all. The reason for this is banal and lies on the surface, large players, for example, MVideo, DNS, MTS, sold many goods with a zero margin, that is, they actually sold them at a wholesale price, at a minus. The reason for the attraction of unprecedented generosity was very simple - companies needed to maintain stores, pay salaries, and service bank loans. During the crisis, they reduced their losses, including by selling goods at a loss (selling with a zero margin is a loss for retail, as there are additional operating costs).

Given the average life of a smartphone is three years, and it continues to grow in Russia and in the world, these were sales in 2021-2022, we did not have pent-up demand. In the first quarter of 2021, we see that smartphone sales sank by 11% in unit terms year-on-year. And the reason, among other things, is that buyers do not need smartphones in such a volume.

It is impossible to ignore another trend, the deficit is growing, which means that prices are rising, they have already increased by 20-30% for new models, and the growth will continue. Devices that are optimal in terms of price / quality ratio from previous deliveries are quickly washed out. Buyers are often not ready to buy anything, they want not only a specific model, but also at a certain cost.

Declining sales lead us to repeat the situation of 2020, many retail players need money to survive in the market. For example, Svyaznoy almost halved its retail network in 2020, since it was impossible to maintain such a number of stores. The operators that own the largest electronics chains are also cutting the number of stores to improve the economy for those who remain. But falling sales make that nearly impossible. By cutting off bit by bit from retail and temporarily improving the economy for themselves and those around them, companies cannot solve fundamental issues.

And the first question is the lack of goods. The shortage leads to the fact that in January the store shelves were half empty. Then the shortage of production intensified, prices went up, and retail, acting as a buyer, suddenly faced with the fact that they could not buy goods at comfortable prices. At the prices they expected. A vicious circle - buying at the offered price will obviously alienate buyers, sales will decrease. Lack of goods also will not give sales. But the main thing is that while there are thoughts about the need to buy a product, its cost is growing weekly, and retail simply does not keep up with this price increase. Only big companies that can fix the cost of goods, have a wide range of products and do not have a shortage (Samsung, Apple, partly Xiaomi) win. But the possibilities of these companies are also limited, they cannot replace the entire market. Interestingly, the combined unit sales of these three companies account for nearly 70% of the smartphone market today. The rest of the players are left with a smaller piece of the pie. Consolidation is forced and follows from the capabilities of companies.

Hence the current attractions of generosity, when expensive models are sold at the highest discount. This is exactly the same story as a year ago, you need working capital to support your retail.

Seeing the purchases of goods for the next periods, I can say that the most difficult in Russia will be the beginning of the third quarter, the goods may not be in many positions, and the remaining positions will be expensive. That will also push sales down, and make retailers look for sales at any cost, including selling at a loss. This will kill the market even more, it will start to shrink.

I often come across the gloating that sounds in relation to large retail chains - that's how they should be! The feeling that they did something to the writer, that he comes out with hatred towards them. But the problem here is that tens of thousands of people work in this retail, who remain unemployed, drop out (I hope temporarily) from economic life. And this is where the problems begin for all of us, since it is one thing when the market is stable or growing, it is quite another when it falls. And in Russia, and in the world, all markets are becoming like this this year.

The presence of money at retail does not affect the availability of goods, alas, this is an illusion. Now the supplier dictates the conditions, the situation is completely different than before.

What to do and where to run, is there a way out of this crisis

Current processes are determined by macroeconomics, state policy. For example, to address economic issues related to the pandemic, states have turned on the printing press. Money is depreciating before our eyes, some currencies are faster, some are slower - but this is a global process. And this means that inflation is added to the deficit, the cost of all products will grow, and this process cannot be avoided. My advice is simple - buy everything you need now. It’s definitely not worth buying buckwheat and food for the last time, but if you are planning large or small purchases, then you should take care to purchase everything you need now, tomorrow it will be more expensive. And if you still decide, but they stop the new prices that will appear in the near future, then here's your second piece of advice - fight your toad and buy, the day after tomorrow everything will be even more expensive. Actually, I did just that, bought everything that I had been planning for a long time, and made small stocks of what I use all the time and what I definitely need. There is no panic and there cannot be, this is a rational approach. It’s definitely not worth getting into loans to buy all sorts of things, but if you are planning a large purchase, then it might be worth buying a thing now. Just measure your payment options and financial situation, do not indulge in reckless spending.

The current crisis has come for a long time, at least for 3-5 years, and we need to learn how to live in these conditions. There is no doubt that we will learn how to do this. In the end, the market in Russia began with completely different values, and then it was possible to work. Few people know how to work in falling markets, but this is a skill worth acquiring. The rise of "speakers," "coaches," and sellers of courses on how to become happy or rich indirectly points to exactly the same thing. We have a full-blown crisis in front of us, depression 2.0 is running. Comparison with the depression of the last century suggests itself, but it is inappropriate, we are faced with tasks that are much more difficult, and they are not so trivial.

The only thing you and I can oppose to this crisis is our rationality and cold, sober calculation. There is simply no other recipe for this crisis.