Could the Coronavirus Outbreak Mean a Global Shortage of Electronics?
Since the discovery of the Coronavirus, Chinese authorities have been working with the World Health Organisation (WHO) to contain this pandemic amid echoes of SARS outbreak in 2003 that infected more than 8,000 across 17 countries.
The current epidemic – Coronavirus or officially known as COVID-19 – has killed almost 5,000 and approximately 125,000 have been affected. Wuhan, a city of more than 11 million people in the province of Hubei, has been under lock-down as evidence points to illegally traded wildlife at a seafood market within the city and is cited to be the possible source of the disease.
As the crisis escalated, tech companies took steps back in order to protect their employees. Elon Musk said that Tesla had shut down the carmaker’s newly opened Gigafactory in Shanghai on the orders of the Chinese government. Apple reported that it had shut some stores and reduced its opening hours at others. It also added that it would miss its March quarter revenue guidance due to the Coronavirus slowing down production and weakening its demand in China.
Google, Facebook and other large industries restricted travel. Several of them introduced policies requiring workers returning from China to work from home.
But regardless of these sensible precautionary measures, there are also signs that a prolonged economic shutdown could cause greater problems. The global electronics supply chain is a complex and delicate one that often operates on short timelines.
“The Coronavirus outbreak landlocked in Wuhan will undoubtedly cause disruption in the technology supply chain, given manufacturers’ reliance om just-in-time production techniques.”
Apple starts its mass production of its iPhones as close to their release date as possible to avoid any leaks, and only has days of sales inventory at any one time.
Although the company’s main partner, Foxconn, handles almost all the assembly of iPhones at individual plants, some other electronics travel around the country as they are assembled. One weak link can disrupt an entire supply chain further increasing its economic problems.
Wuhan, the centre of the outbreak, is one of China’s significant manufacturing hubs, with a major Foxconn site and some of the country's most advanced chip plants, this includes a complex owned by Tsinghua Unigroup, which makes flash memory devices used in smartphones and computers.
Foxconn, a Taiwanese multinational electronic contract manufacturer is the world's largest contract maker of electronics, with factories across mainland China. It's best known for making iPhones and other Apple devices but its long list of customers includes Sony Corp, Dell Inc and BlackBerry Ltd.
That makes Wuhan a critical location in the technology sector’s straggling supply chain. Figures from the data firm Panjiva shows over 450 US importers are susceptible to a supply chain hit from a decline in Wuhan’s wider province of Hubei, which had a GDP of $595bn (or £454bn) in 2018. Last year, the region accounted for 27.4pc of US seaborne shipments related to Foxconn alone.
Estimating the effects of the outbreak is difficult, but the industry runs on certainty – slick operations and months of planning. Over a month ago, Apple said its financial forecasts for the next quarter were wider than normal because of uncertainty that was created by China.
JP Morgan analysts put out a warning on Apple and other US tech firms which, although highlighted a hit on the demand side with China accounting for 15pc of Apple’s iPhone sales in the first three quarters of 2019, pointed to an assembly footprint spread across multiple facilities close to impacted regions.
As reported cases of the virus spread, the greater fear will be that it starts to affect production across the country. But another ongoing issue in China may have offered companies a silver lining.
Janardan Menon, an analysist as Liberum, an investment bank, argues that the trade war between the US and China has seen tech firms shift some of their supply chain sourcing to places such as Vietnam, Mexico and India, giving them some cushioning against the Coronavirus.
“If this thing caught us 15 months ago, we would have been completely sitting ducks. Everybody has done something to limit the impact of tariffs.”
But there is no question that China remains the key link in the supply chain. Apple is already struggling with supply shortages for products such as its AirPod headphones and Apple Watch and is rumoured to be releasing a new lower-priced iPhone in the coming weeks.
Foxconn has claimed that it is prepared to hit production targets despite the outbreak, but the longer China’s epidemic lasts, the more its carefully laid plans are in doubt.