Sound the alarm: How inflation threatens the AV industry

With inflation on the rise across the globe, the AV industry faces a new threat. Reece Webb explores the drivers and potential solutions to the global cost crisis.

Rising inflation is dominating the global headlines. From mainland Europe to the Middle East, to North America, rising prices and a soaring cost of living have had a thumping impact on many industries around the world.

As an industry that is already struggling with historic recruitment issues and staff retention [See Inavate EMEA May 2022 P.37], not to mention ongoing product and part shortages driven by the impacts of Covid-19 and other factors, the industry has had a lot to deal with in the past 24 months.

The Covid-19 pandemic presented the AV industry with gargantuan challenges to overcome. With the bulk of global corporate workers relegated to working from home, projects delayed, and companies thrown into disarray as revenue streams dried up, the emergence of a cost-of-living crisis and record high inflation in places threw the AV industry out of the frying pan and into the fire

Limited supply and increased demand are two of the reasons that prices for necessities and commodities such as food, fuel and energy continue to spike. Have chip and other component shortages, coupled with multiple industries firing up again after a lull through the pandemic, done the same for the pricing of AV products?

Peter Hansen, economist, AVIXA, explains: “This issue is unprecedented. The first inflation happened in early summer 2021, when you were hearing a lot about transitory [short-term] inflation. That came to an end, but then we had major increases in inflation across the board, as well as a bit more demand than expected and the impact of Russia’s invasion of Ukraine.

“Our data suggest that inflation is lower for the industry than overall inflation globally. Prices in pro AV have been a bit more stable over the last year than overall economic inflation. We’ve looked at supply and price issues in pro-AV twice since the pandemic. Our members reported a 5.5% inflation rise for pro AV compared to a period where UK and Europe inflation was lower than 3.8%.

Pro AV price change compared to US and Eurozone inflation. AVIXA’s 2022 Q2 Macroeconomic Trends Analysis report on AV supply.

“When we asked again in May of this year, and our members told us that there is a 7.8% increase [for the industry] where overall inflation was around 8%, that number is below what you’re seeing in US, UK and EU inflation. However, our industry is at risk from the economic slowdown that results as a fallout effect from how central banks combat inflation.”

Uneven playing field 

Demand for pro AV has spiked as people return in-person, with pro AV revenue for 2022 forecasting to exceed the previous peak of 2019, according to research from AVIXA.

Revenue is predicted to reach more than €257 billion globally. The pro AV market in Western Europe has so far avoided any serious shocks, as the industry rides a tailwind of projects in the region.

According to Eurostat, Eurozone annual inflation reached 8.6% in June 2022, an increase of 0.5% from May. However, it remains unclear how long that this insulator can remain in place.

Systems integrator Kinly operates globally, with a heavy presence in the European market. Tom Martin, CEO, Kinly, clarifies: “Up until now, inflation in itself has not had a huge effect on our daily impact as a direct factor, but we are seeing general price increases from manufacturers and distributors. The price of manufacturing is going through the roof, in addition to a supply and demand issue. Logistics, from the point of view of distribution, is also causing an additional headache.

“The question is how much of this increase can you pass on to the customer and how much do you try to absorb? It’s unsustainable to have a scenario where an integrator’s prices are increasing on a monthly basis and being unable to pass those increases on to the end users. We’re trying to mitigate the risk as much as possible, and we’re not seeing the impact on customer demand or purchasing habits changing yet.

“We’re now getting to a stage where people are starting to talk about recession: what does it look like and what does it mean? With higher inflation, higher interest rates and an ever-increasing cost of living/higher wage demands, that dampens peoples’ enthusiasm for future investments, and it makes everybody a little bit nervous. We haven’t seen the impact yet [in Europe], but there’s going to be knock-on effects. That fear of recession is going to be a big driver.”

While the impact in Europe has not been felt yet, how do other regions compare? According to Sercan Atkas, director of systems integrator Redmouse, some regions are already facing the brunt of sky-high inflation that is already eating into profit margins and pointing to trouble ahead.

Photo credit: ago87, Shutterstock

“In EMEA and Western Asia, Turkey is ranked first for the highest inflation rate at over 80%. There are different areas where inflation is affecting us,” says Atkas. “Firstly, the products and hardware costs are going up, primarily due to the chip crisis, as well as the issue of fixed costs, driven by higher rents and rising wages. In countries with unstable economies like Turkey, the minimum wage increased by 50% and increased again by 30% over the summer. Wages have increased, but buying power is rapidly decreasing and the price of products is getting higher.

“Your sales rate as a company and your profit percentage is not increasing as quickly as wages, so if you are a company employing tens or hundreds of people, this makes a huge impact on your fixed rates.”

One major issue for countries with unstable economies is the effect of exchange rates. For weaker local currencies against a stronger US dollar or euro, inflation has seen a profound impact on purchasing power.

Atkas explains: “From most suppliers, we are receiving updated price lists every three months. Some manufacturers don’t even send price lists at the moment, but instead ask us to enquire when specifying a project. To carry out a project, it is really hard work right now.

“In Turkey, the exchange rate [of the lira] has doubled in six months. This means that our buying power has decreased by 100%. If I work on a project outside of Turkey and carry out that project at a cost of $100,000, I invoice my client and they pay me [in dollars or euros]. The government of Turkey requires me to change 40% of the money into Turkish lira due to reserve requirements, and I have to specify products in dollars or euros. As I have to buy foreign currency and the exchange rate for foreign currencies decreases the value of the lira, I then lose money on a project. This is a critical situation for our industry. The cost of our services is increasing and we are trying to maintain balance. We have to reflect some of the costs to the customer, but you cannot fully pass it on. You have to swallow the price increase.”

A silver lining? 

Despite the challenges the industry now faces, challenging situations often breed opportunity. Pro AV remains as important as ever, especially as companies return to the office post Covid, embracing hybrid workflows and increasingly relying more on AV equipment for day-to-day operations.

Martin says: “If you look at the business criticality of what we’re delivering, there’s more opportunity than ever in AV. We as AV integrators are delivering a broader range of services and products than ever before. If we manage to de-risk some of the challenges that we are facing, then there has never been more opportunity than now, but it is a rough thing to manage.”

Atkas also sees a similar trend, as projects continue to roll in for integrators, and hiring efforts remain at an all-time high. “Strangely, much like hiring trends, we don’t see any negative effects from the client side,” says Atkas. “Clients are still investing in projects, and I have not received any feedback from clients to reduce budgets or cancellations. This happened during the Covid-19 pandemic, but inflation has not had this effect.”

Trouble ahead 

Going forward, as we face a wildly unpredictable situation, what will the future hold and how should AV companies proceed?

"There has never been more opportunity than now, but it is a rough thing to manage." - Tom Martin, Kinly

Atkas foresees a difficult period ahead on the horizon, “I think it will take one or two years to get through this, but companies need to be very careful. Just being as profitable as you were in 2019 will be an accomplishment if things continue to worsen.

“The regional effects could even continue for up to five to ten years, depending on how bad things get as it is not easy to recover from such a difficult situation. Many people believe that things will get worse, and businesses should be prepared for what could come next.”

“I think you’re going to see a lot of smaller companies fading away because of unsustainable business models,” explains Martin. “That could create opportunity for other players in the market, perhaps new players such as the ITSIs making a bigger jump towards the AV market. Things will become more challenging in the period going forward and we are going to see changes in the market such as more companies coming up for sale. There is always movement in this industry, but what will it look like in 18 months’ time?”

Go forward confidently, but with caution, is the message from AVIXA. Hansen adds: “AVIXA is telling its members to have caution. We’re highlighting that the threat of recession now is bigger than it has been for over a decade. On the other hand, right now in 2022, pro AV has a big tailwind and that is the return to in-person events and in-person working. It is why we saw record growth through the spring. The industry could continue to grow through a recession, if one happens, due to that tailwind of in-person activity.

“There is danger, but there is this mitigating factor. We encourage people to keep in touch with thought leaders and our business index to keep up with real-time conditions in pro-AV. Staying plugged in to media and market research sources will help you be the first mover when whatever changes in the market become apparent.”

Main image photo credit: SERSOLL, Shutterstock

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