Coronavirus is Disrupting the Electronics Supply Chain
With over 90,000 confirmed cases and over 3,000 deaths, the coronavirus has already spread to over 70 countries in a matter of weeks. Although the situation in China appears to be stabilising, new cases from South Korea, Italy, Iran and beyond are being identified.
The World Health Organisation (WHO) has increased the risk assessment of COVID-19 to 'very high' on a global scale, amid fear that the virus could go in ‘any direction’. The outbreak has eclipsed most headlines, and for good reason. The impact of COVID-19 on supply chain, logistics, and the global economy as a whole is worrying.
Recently, the electronics supply chain has faced many challenges, including the US-China trade war, but the coronavirus outbreak is wreaking even more havoc in the sector.
China: slow restart to production
In China, the areas most affected by the outbreak are also the areas where major electronics firms are located. This ranges from the coastal province of Guangdong (e.g. Shenzhen and Donguan – Huawei’s smartphone manufacturing bases), to the inner Henan province (e.g. Zhengzhou, Foxconn’s smartphone production base). In a bid to contain the virus, the Chinese government enforced tough measures between end-Jan and early-Feb to extend public holidays and shut factories across the country.
Although Chinese manufacturers have started resuming work since mid-Feb, progress is slow. Many workers have been prevented from returning to work, thanks to quarantines, travel restrictions and other efforts to minimise the spread. According to various news reports in early-Mar, electronics firms in China are still only operating at 30-50% capacity, far below normal levels.
South Korea: significant uncertainty
South Korea has also been badly affected by the coronavirus, particularly in Daegu and the neighbouring province of Gyeongbuk in the country’s southeast. Gyeongbuk is a key manufacturing base for smartphones, TVs and other consumer electronics products, for major firms such as LG and Samsung. Fortunately, the coronavirus situation is not yet serious in the northwestern Gyeonggi province, where the Samsung and SK Hynix semiconductor plants are based.
In contrast to China, South Korea has not yet locked down cities or forced factories to shut down to curb the virus. In late-Feb, Samsung and LG voluntarily stopped production at their smartphone and camera/display plants in Gyeongbuk, but only for 2-3 days.
Thanks to its active use of robots and smart machines, South Korea’s manufacturing sector boasts the world’s highest automation rate, providing some protection from the outbreak.
However, there remains significant uncertainty in the region. Given the rapid increase in the number of confirmed cases in Daegu/Gyeongbuk, there are valid fears that the outbreak will spread in the months ahead. This could lead to further disruption of production activity.
Known as the 'factory of the world', China is the largest global manufacturer of smartphones, computers and other core consumer electronics. It is also a major exporter of automobile, computer, electronic and electrical components.
With Chinese manufacturers struggling to resume production, it is likely that the ripple effects of this will be felt throughout the global electronics supply chain for the next 1-2 months.
According to JP Morgan Global Manufacturing PMI, global manufacturing activity contracted in February by the most since 2009, caused by the plunge in production and export orders. Many electronic firms have updated their initial 2020 outlooks, which did not account for the impact of COVID-19. In February, Apple announced that it expected its quarterly earnings to be lower than previously expected, referring to the constrained global supply of iPhones and the considerable drop in demand in Chinese markets.
The extended Chinese holiday may have motivated some firms outside of China to increase inventory coverage for a short period, allowing them to match their supplies with demand. However, supply lead times will also have an impact. On average, shipping by sea to the US or Europe takes 30 days. Therefore, if Chinese manufacturers stopped production before the start of the Chinese holiday in late-Jan, the last of their shipments will have been delivered at the end of February. According to the Harvard Business Review, this may indicate an increase in temporary closures of manufacturing and assembly plants mid-March.
Already, a growing number of manufacturers outside of China are having to cut production, due to disruptions in the supply of parts and components.
Thankfully, the electronics industry is not labour-intensive, nor is it heavily reliant on social contact to generate demand. As long as the outbreak stabilises, analysts believe supply and demand in the sector should be well positioned to recover. Should the outbreak worsen or become prolonged, an increase in the stay-at-home economy might even boost demand for electronic goods, such as tablets and smartphones.
Economists expect that the downturn in the electronics industry caused by COVID-19 will be temporary (excluding other hurdles such as a global recession, financial crisis or epidemic out of control), and that it should recover late-2020.