"We seem to be a recession-proof industry," crows Jack Wayman, the Electronic Industries Association's senior vice president for consumer electronics.
He points to a rising arc: $10 billion dollars in factory sales in 1980; $12 billion in 1981; $15 billion in 1982 and an expected $18.5 billion for this year. Next year, he asserts, will see sales of more more than $23.5 billion.A lot of that growth comes from products that barely existed five years ago, or that have been undergoing transformation. Telephones, video games and personal computers are all categories chalking up impressive sales and expanding the definition of consumer electronics.
But while the industry's volume surges, margins in virtually all categories remain razor-thin as companies battle more for market penetration than for profit. Coming out of the recession, the profits are just beginning to catch up with the volume.
"The industry in both TV sets and video-cassette recorders is red hot," said Edward W. Adis, senior vice president of sales for Sony Consumer Products Co. "It's burning up. As a matter of fact, in VCRs, sales to dealers in the first half of 1983 were 17 percent higher than in all of 1981 and 113 percent above the first half of 1982."
Television's growth has been equally spectacular. E.I.A.'s Wayman reports that 10 percent of the nation's households purchased new television sets the first six months of the year.
Much of the growth in the more mature technologies like television is coming from the swirl of newer technological offerings. For example, cable TV now reaches more than a quarter of the nation's TV households, which is creating a demand for good-quality color TV sets for watching the movies, and perhaps a VCR to record them. VCRs are also used to play the pre-recorded movie cassettes Hollywood studios now market through video stores around the country.
Another example: personal computers and video games require "monitors" to display their flash and graphics. The television is the logical choice.
In fact, say industry experts, there seems to be a growing convergence of consumer electronics technologies. "Component television" systems are now offered by an array of companies, ranging from General Electric to Sony. The idea is to position the television as the centerpiece of the home medianetwork that can handle everything from large-screen television to computer games to stereo VCRs to 100-channel cable TV hook-ups. Though such systems are in their infancy, they are expected to sell at a steady clip come Christmas.
Of course, personal computers and, until recently, video games have been the real success stories in consumer electronics, buoying the industry during the recession. The E.I.A. estimates that home computer sales will leap from 2 million units in 1982 to more than 5 million by the end of this year--and to 7 million in 1984. And the software and peripherals that support those computers can be expected to reach at least a billion-dollar market by next year.
Still, that kind of robustness belies the difficulties of the industry as a whole during the last couple of years. "Last year was not an easy year," said Joseph Donahue, vice president and general manager of RCA's giant consumer electronics division. "The industry volume was pretty good, but everyone was moving for share and to get rid of inventory."
The problem, asserts Donahue and others, was that sales in the last part of 1981 dropped sharply and manufacturers entered 1982 with far higher than average inventories. With new products coming on line, prices were slashed to keep the retailers' shelves clear and the warehouse goods moving. Between the high inventory levels and the high interest rates, 1982 was a year of healthy sales but anemic earnings.
This year, says Donahue, factory inventories of TV sets are down 32.6 percent from a year ago, while VCR inventories have dropped almost in half.
Consumer demand, as well as price, is responsible, says Lee Isgur, a leisure-time industries analyst with Paine, Webber. In fact, says Isgur, demand is so strong that prices, for once, "might actually remain firm--or even go up a little."
That's essential for the industry's health. Privately, consumer electronics executives muse over the notion that the industry has a "death wish" to drive prices down in quest of the all-important sales volume. In late 1982, the VCR manufacturers were slashing prices on their machines. More recently, price cutting took its toll on the home computer industry, with Texas Instruments, Atari and Mattel Electronics all enduring heavy losses as they sought to match price cut after price cut with Commodore International.
Telephones, which will burst from a $400 million business in 1982 to close to a $1 billion business by 1985 because of the breakup of AT&T and resulting changes in the marketplace, also have begun to feel the price squeeze as manufacturers maneuver for position.
That philosophy is one that the industry, however painfully or self-destructively, lives by.
"We are not planning to sacrifice volume because it's important for us to stay competitive," says RCA's Donahue.
"Penetration is everything," says the EIA's Wayman. "If you're not doing it in numbers, you're not doing it."
Even Sony, which tries to position itself as a premium product company, feels the pressures inherent in market-share competition. "It's difficult to live with, but we don't have much choice," says Adis. "We had our problems, too. We let our discretionary pricing get a little too high. Our prices are now 14 percent to 20 percent above our major competition instead of 30 to 40 percent."
This has made the high end of the product line even more significant for its profit contribution. Manufacturers recoup the bulk of their investment in the add-ons and enhancements. RCA's Donahue points out that the remote-control option for a television set can add crucial percentage points to the profit margin. Adis says the same is true for the stereo option for a VCR. "This is a low-margin industry," says Donahue. "The margins at the high end are making the difference for us."
All this competition has led to an industry that, dollar for dollar, probably delivers more value to the consumer than virtually any other in America. E.I.A.'s Wayman likes to point to the history of the consumer price index: prices, he says, have jumped nearly 300 percent since the CPI's base year of 1967. In contrast, consumer electronics prices have virtually stood still at the 100-to-130 level.
And prices have been fairly constant despite the industry's record of innovation. Indeed, several consumer electronics staples weren't even a gleam in an inventor's eyes back in 1967. For example, the compact audio disc--a "record player" that uses a laser to read and play digitally recorded music--is "revolutionizing the audio business," says Sony's Adis, whose company makes the disc system.
As personal computers and their associated software continue their surge into the market, the industry is likely to continue its growth. Wayman points out that the number of consumer electronics retail outlets has grown in three years from 35,000 to 50,000.
Clearly, say industry observers, the old technology will make way for the new eventually. In the meantime, they say, old and new technologies are reinforcing each other in the market and being integrated and repackaged into systems that eventually will be as much a part of people's homes as the stand-alone TV set or telephone.
While the recession clearly killed the margins of consumer electronics, the industry clings to the belief--thus far borne out--that as long as it innovates and keeps it prices close to the consumer's pocketbook reach, it will always snatch more than its fair share of discretionary income.