It’s been a funny old year, has 2008. Traditionally this is the time to pull your chair close to the fire, grab a glass of mulled wine and tell ghost stories. We won’t do that this year: no yarn we could spin would chill your bones half as effectively as the news about sub-prime mortgages, Ponzi schemes/scams, financial meltdowns, factory closures and Reductions in Force.
(Interestingly, a quick Google search show that the use of the term, Reduction in Force, seems to be mainly in press releases from North America. I suppose it is easier on the corporate Human Resources’ tongues than to use words like “lay-off” or “fire.”)
Years ago, I learned that accountancy and financial people see the world in a very different way from the rest of us, certainly different from the way that most engineers see it. Now there are all sorts of reasons for this: one is the constant pressure on companies, particularly in the US, to ensure that the quarterly earnings figures look good. Another is that there are areas where arithmetic does not explain simply what is happening. Yet another is the continual battle between regulators and the regulated: a government devises a set of rules for taxes – the taxed find a way around them before the ink is dry. Accounting regulatory bodies devise rules to ensure that a company’s figures are reported in a way that is as honest as possible – the auditors and the audited are immediately on the hunt for ways of presenting them in the best possible light.
It still seems incredible that a group of people can borrow large sums of money to buy a company and then, as soon as the deal is done, the loan becomes the company’s problem. A healthy company, paying reasonable returns to the investors, suddenly finds that it is saddled with debts for which it has to find hundreds of millions of dollars a quarter to service. Immediately the company looks a lot less healthy. Investment slows, risk taking is reduced to nothing, and bits and pieces of the company are closed down or sold off to reduce the debt. (Oh, and people lose their jobs.) Two major semi-conductor companies are working in this position.
How companies account for sales is another area of concern. The next few sentences are about Cadence, but this is not meant to mean that they are any worse in their behaviour than any other big company. When Cadence makes a sale it is, broadly, many tens of thousands, or even tens of millions, of dollars for a licence to use their software for, say, three years. This money is paid over the entire life of the deal, not up front. Yet, until recently, Cadence showed the majority of this income as a sale in the accounting period that the licence was signed (less a few percent for “maintenance”). The problem for someone like Cadence is that this is like holding a tiger by the tail. If you let go, the tiger will eat you, or at least hammer your share price. So only when you have some calamity like losing a huge chunk of your senior management, including the CEO, can you do something about changing the position – after all, by stating more accurately when the money actually arrives in the company’s coffers you effectively write a chunk out of this year’s income. Cadence is moving towards making some of these changes. The way that future sales will be reported will change (“We have changed the business model”), and this has been applied retroactively to some sales in the first part of the year. This means that the quarterly earnings reports for the first six months of the year are being restated, changing a loss of $7.6 million into a loss of $42.9 million. There will be an RiF of 12% of their staff, mainly by “flattening the hierarchy,”, as well as significant internal reorganisations
Cadence is by no means alone in this way of showing revenue, nor is it the worst. A computer company, now well dead, used to show a sale the moment a machine left the loading bay in the factory in the United States. These were mainframe machines, and if the sale was to somewhere like Italy, it might be many months before the machine was shipped, assembled, integrated and passed through acceptance testing and then many more months before the invoice was paid.
So, what does this have to do with engineering, apart from the phrase “financial engineering” – which is almost as much an insult to an accountant as “creative accountancy”?
Firstly, it means that perfectly good companies, making products people want and employing good engineers, can change from looking financially healthy to financially ailing, purely through the way in which financial people behave and choose to treat numbers.
It also means that, as the recession bites more deeply, many financial chickens will be coming home to roost. A small business may be totally sound one day, then the next day their customers, the bigger companies, exercise their financial muscle and arbitrarily extend the time they take to pay invoices, to protect themselves in a time of financial crisis. Their bank will respond by cutting back on the line of credit and increasing their interest payments. Suddenly the small business is in deep trouble.
Yet was there originally a real crisis outside a few banks lending injudiciously, or did we talk ourselves into this mess? In the last major recession, Franklin Roosevelt said, “We have nothing to fear but fear itself.” Were the current financial dominoes knocked over by a genuine major weakness in the economy, or by a minor weakness exacerbated by fear?
The future is hard to predict, and my crystal ball needs a new communications interface, but two things are certain about 2009: it is going to be difficult for many companies and there will also be some tremendous opportunities. If you are working for a company heavily burdened with private-equity-induced debt, then it is clearly going to be difficult as consumer demand continues to fall but the debt interest remains high. If you are working for a privately held company, then there is a fighting chance that you will do better.
But there are areas where there will have to be opportunities. The world needs to wean itself from its addiction to oil, so solar power is going to continue to be important. The output from photo-voltaic cells will need to be controlled and integrated with the local power supply. Electric-powered vehicles, either hybrid or pure, will need very sophisticated control electronics to get the best from their batteries and fuel cells, both discharge and charge. Elsewhere in automotive the legislative pressure for safer cars already means that new models will be required to have stability control, with lane change warning compulsory for larger vehicles. Governments are mandating improved efficiency for internal combustion engines, from improved engine management throughout the drive train to tyre pressure monitoring. Improved information to the driver can increase fuel efficiencies by minimising congestion.
Across the embedded spectrum, there will be incredible pressures to reduce power consumption. This is already well underway in portable and hand-held devices, but the demand for lower power consumption will spread into consumer and industrial. Electric motors are terribly inefficient. While the semiconductor companies have for several years been producing control chips and software that can make significant improvements, it will take strong financial pressures, and possibly legislative action, to implement these.
I didn’t do any specific interviews for this piece, but over the last few months, I have been asking people how they see the future. And no one was gloomy. Since the embedded community employs bright people, I don’t think this was whistling happy tunes, but a genuine feeling that, although the future is going to be difficult, many of the problems that do need solving will require the help of embedded engineers. From gossip, it appears that development tools providers are seeing an up-turn in tool spend as designers, under pressure to work faster, see working smarter and using tools to increase their efficiency as the answer.
Whatever the results for the economy as a whole, may I, personally and on behalf of Techfocus Media, wish you all a prosperous 2009, and hope that this time next year we looking at a turned-around economy and a booming market.