Manufacturing inventory hits record $1.8 billion worldwide

DNHN - This inventory build-up can be traced back to factors such as difficulty shipping products due to supply chain disruptions and some companies intentionally stocking up in case, they experience stock shortages.

Manufacturers from Samsung to Ford are seeing a sharp increase in inventories as consumer demand weakens amid rising inflation, sparking fears that companies will have to adjust production in the face of a prolonged economic downturn.

According to Nikkei analysis of information from QUICK FactSet, inventories by 2,349 listed global manufacturing companies hit a record $1.87 trillion at the end of March, up $97 billion from three months ago. This is the highest level in 10 years or since comparable data is available.

This inventory build-up can be traced back to factors such as difficulty shipping products due to supply chain disruptions and some companies intentionally stockpiling in case, they experience stock shortages. Some businesses are also stockpiling in anticipation of increased consumer demand with the reopening of economies following the COVID-19 slowdown.

The problem now is high inventories, coupled with slow consumption, can cause manufacturers to shut down production and exacerbate an ongoing economic slowdown.

The slowdown in consumer demand is particularly noticeable in electronic goods, such as smartphones and personal computers, as consumers feel their purchasing power declines due to inflation amid the backdrop of rising global commodity prices.

The $97 billion increase was larger than the $83 billion increase recorded in the first quarter of 2018, as worldwide inventory levels rose amid rising trade tensions between the US and China.

It took businesses 81.1 days to sell out, up 3.6 days from Q4 and the longest day in 10 years, excluding 2020 when sales plummeted due to COVID.

Inventories increased in all 12 manufacturing sectors. Three sectors, which account for 61% of the total are electronics, automotive and machinery.

Electronics recorded the most spike, up $26.7 billion, or 6%, to a total of $457 billion. Analysis of individual company levels shows that raw materials achieve the greatest profit.

Among all the companies mentioned in the analysis, Samsung Electronics recorded the largest inventory growth in USD terms, at $4.4 billion, or 13% increase from the previous quarter. This increase is due to an increase in raw materials worth $2.5 billion.

Samsung reported flat sales for the first quarter, compared with the previous quarter. Samsung was interrupted in April in its purchase of raw materials for memory production and has said that it intends to stockpile inventory to prevent such problems from occurring again.

At Taiwanese PC maker Asus, sales fell 9% while inventories rose 18%, as raw materials and finished products both increased by about $500 million. Asus has increased its stock of electronic materials, but sales in Europe have also slowed due to the war in Ukraine. Chief Financial Officer Nick Wu says the company intends to keep current inventory levels.

In the auto industry, inventory levels increased by $14.8 billion, or 6%, to $273 billion, as Ford Motor suffered an 8% decline in sales and a 21% increase in inventories to $14.6 billion USD, the highest in 25 years.

As many as 53,000 vehicles were abandoned due to lack of parts. Ford CFO John Lawler has stated the inventory build-up is weighing on the company's cash flow.

At Mercedes-Benz, shares rose 9%. The German carmaker has seen an increase in work-in-progress partly due to a lack of components and also due to shipping problems amid the Ukraine crisis. Chief financial officer Harald Wilhelm said it was difficult to make a forecast due to the uncertain geopolitical situation.

On the plus side, high inventories around the world are said to have yet to lead to a serious cash crunch. Cash holdings of 2,349 companies stood at $2.2 trillion at the end of March, 2.3 times their monthly revenue. Any number above 2 is considered reasonable.

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

However, companies are still right to be cautious. Both the US and the euro area saw their purchasing managers' index fall to around 50, breakeven, in June, while in China the index remained below 50 for three consecutive months through May. Any number below 50 indicates an economic slowdown.

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