Science & Tech

COVID-19 and the Bleak Outlook for the Tech Supply Chain

Taipei-based Foxconn, which is a key parts supplier for Apple, Microsoft, Nintendo and Sony, on Tuesday announced that its plants on mainland China would resume normal production by the end of the month. Numerous factories across China were forced to shut down in late January due to the outbreak of the coronavirus, or COVID-19.

However, uncertainties remained, and the shutdown’s impact on full year earnings was still unknown, company chairman Liu Young-Way said during an earnings call with investors.

There could be a significant, negative year-on-year impact for the company’s core business segments, Liu warned and it was even possible the first quarter of 2020 would not be profitable.

The impact of the shutdown isn’t limited to China, ground zero for the COVID-19 virus outbreak.

The coronavirus impact could hit global supply chains for all products in mid-March, and force thousands of companies to slow down or even temporarily shut assembly and manufacturing plants in Europe and the United States, The Harvard Business Review predicted last week.

The most vulnerable companies likely will be those that rely on China to supply key components, and it could take months or longer for supply chain problems to be resolved fully.

“There is a great intertwining with participants in the supply chain,” said Roger Kay, principal analyst at Endpoint Technologies Associates.

“Tech will be impacted more than other industries,” he told TechNewsWorld.

Health officials have reported more than 100,000 confirmed cases of coronavirus worldwide, as of Friday. There have been 3,300 deaths, with about 300 outside mainland China.

Consumers around the world already are seeing empty shelves in retail stores, and products from China likely will be in high demand. Shortages will disproportionately affect the tech sector, as tech firms typically do not keep large inventories of parts on hand.

“The COVID-19 virus is impacting the global electronics supply chain,” said Roger Entner, principal analyst at Recon Analytics.

“To keep costs low and make products as affordable as possible, every company in the supply chain has switched to a just-in-time production model, minimizing if not eliminating stockpiles,” he told TechNewsWorld.

“Most factories have supplies for only one day of production, as stockpiles are ultimately an inefficient use of capital,” Entner said. “Factory space is better used to produce something rather than store something.”

This approach works as long as factories remain staffed and products flow from one facility to another, but even a small a disruption in the supply chain can impact a company and with it the whole sector. This was seen in Japan after the 2011 earthquake, and it took years for some firms to recover fully. Some businesses were shuttered for good.

The truth is that the tech industry runs on such tight margins that an ample supply of parts wouldn’t be a solution to the problem.

“Even if companies wanted, they simply don’t have the storage capacity,” explained Entner. “The bottom line is that factories are idle until supplies are rolling in.”

Consumers will have to wait for new products to arrive, which could be an issue in today’s instant gratification society. Shoppers have become accustomed to products being a click away online.

“While there are disruptions currently in China-based manufacturing, I expect that situation will eventually be resolved,” said Charles King, principal analyst at Pund-IT.

However, shortages could impact companies in other ways, including brand loyalty.

“Depending on the length of the disruption, companies could be severely disrupted,” King told TechNewsWorld.

That could be particularly true for Apple, which depends heavily on iPhone sales, warned King.

Xenophobic reactions — even overreactions — are a problem. Outlandish posts circulating online suggest that products from China could be spreading the virus. Health officials have stressed that the coronavirus could not be active long enough on a surface for it to be transmitted through touching a product that came from China, even from a coronavirus epicenter such as Guangdong or Zhejiang.

Despite this fact, the outbreak could make some companies reconsider business partnerships with some international firms, a move that isn’t likely to help the supply chain issues.

“It isn’t appropriate for companies to be wary of specific countries, but the coronavirus could lead many companies to develop relationships with manufacturers in multiple countries,” added King.

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