CE industry growth set to decline despite bright spots, says iSuppli

El Segundo (CA) - While the consumer electronics industry worldwide is still poised for growth, industry analyst iSuppli says its rate of growth will slow to the single digits for 2006. The reasons, however, are not the two hot points that others tend to focus on: confusion in the high-definition video industry on account of two near-identical formats, and delays in the next generation of video game consoles. No, those two problems should actually be nicely resolved this year, says iSuppli.

The problem, it says, lies with factories, whose revenue growth is shrinking surprisingly rapidly, and could actually trend negative by 2010. If factories make less revenue, the theory goes, they respond by making less goods, which reduces supply. And a slowdown in supply could lead to a slowdown in growth.

There's also a little bit about higher interest rates. Inflation fears, caused in large part by the beyond-instable state of affairs in the Middle East, have led to major banks in Europe and the Americas raising interest rates. Asian banks are responding almost in kind, except for China, whose relatively booming economy has made it almost immune to the ills of the world, at least for now. But as China seeks to be an equal player with the rest of the world, its banks, too, may be compelled to raise their lending rates to other world banks, which means their corporate lending rates would follow suit. Funding for the rapid pace of factory expansion we've enjoyed over the past five years or so, would slow, forcing manufacturers to stick with the factories they have. Thus, the rate of increase in CE goods supply could slow, the theory goes.

Which, you might think, would be bad news for people who like to play video games. Not so, iSuppli believes. In yesterday's report, senior analyst Chris Crotty pointed to a resurgence in competition among the consoles, as Sony and Nintendo join Microsoft. With a rise in console prices, Crotty believes, will be a rise in shipments - up 30% this year to 26.5 million units worldwide - and a colossal 51% surge in revenue, to $7.6 billion.

In the high-definition video market, Crotty believes dual-format players, like those announced recently by LG Electronics, will rule the day; and all movie studios will be forced into a position of format neutrality, partly as a result. Furthermore, MP3 players and standard-definition DVD players should continue to sell well, he says, because these are among the items that consumers have little trouble owning more than one of.

So that should about cover it, shouldn't it? Where's the dark spot? Believe it or not, it's the digital camera industry, which iSuppli believes will be impacted by reduction in shipment growth, declining revenues, and further manufacturer consolidation and shakeout. But that could be, Crotty said in iSuppli's statement yesterday, where new trouble begins for the CE industry, going into 2007 and beyond. "Unfortunately," he said, "the losses and consolidation already seen in the digital still camera market may be a sign of things to come for other segments."