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Manufacturing Inventory Hits Record US$1.8tn Worldwide

Manufacturers from Samsung to Ford are seeing a sharp increase in inventory as consumer demand weakens amid surging inflation, prompting worries that companies will have to adjust production in the face of a looming protracted economic downturn.

Inventory held by 2,349 listed global manufacturing companies hit a record $1.87 trillion at the end of March, up $97 billion from three months earlier, according to a Nikkei analysis of information from QUICK FactSet. That was the highest level in 10 years, or since comparable data have been available.

This inventory buildup can be traced to factors such as difficulty in moving products due to supply chain disruption, and some companies intentionally stocking up in case they faced shortages. Some businesses also built up stock in anticipation of an increase in consumer demand with the reopening of economies following declines in COVID cases.

The problem now is that this high level of inventory, coupled with slow consumption, could lead manufacturers to slam their brakes on production and exacerbate an economic deceleration that is already underway.

The slowdown in consumer demand is particularly noticeable in electronics, such as smartphones and personal computers, as consumers feel their purchasing power has diminished due to inflation amid global commodity price hikes.

The $97 billion increase is larger than the $83 billion jump recorded in the first quarter of 2018, when worldwide inventory levels surged amid intensifying trade tensions between the U.S. and China.

In percentage terms, the rate of increase during January-March 2022 was 5.3%, the largest after the 6.1% gain in January-March 2018. This has resulted in longer inventory turnover, with the ratio declining by 3% in the first quarter of 2022 from the quarter before.

It took 81.1 days for businesses to sell off their stock, up 3.6 days from the fourth quarter, and the longest in the last 10 years, excluding 2020 when sales plummeted due to COVID.

Inventory increased in all 12 manufacturing sectors. Three sectors accounted for 61% of the total — electronics, autos and machinery.

Electronics registered the biggest spike, up $26.7 billion, or 6%, to $457 billion. Analysis of individual company levels show that raw materials posted the biggest gain, followed by work in process.

Of all the companies covered in the analysis, Samsung Electronics recorded the biggest inventory growth in dollar terms, of $4.4 billion, or up 13% from the previous quarter to $39.2 billion. Of the increase, $2.5 billion was due to an increase in raw materials.

Samsung reported flat sales for the first quarter, compared with the preceding quarter. Samsung suffered disruption in April in its procurement of raw materials for memory production and had said that it intended to build up inventory to avoid further such problems.

At Taiwanese PC maker Asus, sales dropped 9% while inventory grew 18%, as raw materials and finished products both grew by about $500 million. Asus did increase the stock of electronic materials, but also saw sales slow in Europe due to the war in Ukraine. Chief Financial Officer Nick Wu says that the company intends to keep the current level of inventory.

In the auto industry, the level of inventory grew $14.8 billion, or 6%, to $273 billion, as Ford Motor suffered an 8% drop in sales and a 21% jump in inventory to $14.6 billion, the highest in 25 years.

As many as 53,000 vehicles have been left unfinished due to the lack of components. Ford CFO John Lawler had said that inventory buildup is weighing on the company’s cash flow.

At Mercedes-Benz, stock jumped 9%. The German carmaker has seen an increase in unfinished products due in part to the lack of components and also to shipping problems amid the Ukraine crisis. CFO Harald Wilhelm said it was difficult to make forecasts given geopolitical uncertainty.

On the positive side, worldwide high inventory is not expected to result in a serious cash crunch soon. The amount of cash held by the 2,349 companies stood at $2.2 trillion at the end of March, 2.3 times their monthly sales. Any number above 2 is considered reasonable.

Samsung, for one, boasts that it is holding $100 billion in cash, or equivalent to five months of sales. Toyota Motor has 6 trillion yen ($44.19 billion) in cash, which is worth 2.3 months of sales.

Still, companies are right to be cautious. Both the U.S. and the eurozone have seen their purchasing managers’ index drop to around 50, the break-even level, in June, while in China, the index stayed below 50 for three straight months through May. Any number below 50 indicates an economic contraction.

Source : Nikkei Asia

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