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

Taipei-based Foxconn, which is a key parts supplier forApple, Microsoft, Nintendo and Sony, on Tuesday announced that its plants onmainland China would resume normal production by the end of the month.Numerous factories across China were forced to shut down in lateJanuary 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 callwith investors.

There could be a significant, negative year-on-year impact for thecompany’s core business segments, Liu warned and it was even possible thefirst 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 assemblyand manufacturing plants in Europe and the United States, TheHarvard Business Review predicted last week.

The most vulnerable companies likely will be those thatrely on China to supply key components, and it could take months orlonger 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 TechnologiesAssociates.

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

Health officials have reported more than 100,000 confirmedcases of coronavirus worldwide, as of Friday. There have been 3,300 deaths,with about 300 outside mainland China. Thirteen of those were inWashington state. COVID-19 has been detected so far in at least 83countries.

Break in the Supply Chain

Consumers around the world already are seeing empty shelves in retailstores, 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, everycompany in the supply chain has switched to a just-in-time productionmodel, minimizing if not eliminating stockpiles,” he toldTechNewsWorld.

“Most factories have supplies for only one day of production, asstockpiles are ultimately an inefficient use of capital,” Entner said. “Factoryspace is better used to produce something rather than storesomething.”

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

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

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

Short-Term Problem

Consumers will have to wait for new products to arrive, whichcould 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 relationshipswith manufacturers in multiple countries,” added King.

Global Shutdown of Tech Events

The World Health Organization (WHO) has yet to declare thecoronavirus a global pandemic, but the tech world has been veryproactive in addressing the issue. So far, more than a dozenconferences and trade events have been canceled or postponed.

Among them are the Adobe Summit, Black Hat Asia 2020, Facebook F8and the Mobile World Congress in Barcelona. The latter is thelargest event to be completely canceled, but some events are stillbeing held online. In addition, Facebook, Twitter and other techcompanies announced they were pulling out of theupcoming SXSW conference in Austin, Texas.

It isn’t just in the tech world that events are being postponed orcanceled — or in some cases heavily modified. The National CollegePlayers Association has called upon the NCAA to even consider holdingthe upcoming March Madness basketball tournament in arenas withoutfans in attendance.

There’s debate over whether such extreme measures actually are required.

“First of all, while the coronavirus has killed 3,000 people on aglobal scale, the CDC estimates that as many as 56,000 people die fromthe flu or flu-like illness each year. We need to get this inperspective,” suggested technology industry entrepreneur and consultantLon Safko.

“The worldwide panic over coronavirus has been exaggerated and hasalready caused significant actual damage to the global economy,” hetold TechNewsWorld.

“Hotel reservations around the world are being canceled along withairline reservations, while restaurants in many destination cities areempty and conferences, expos, concerts, and many large publicgatherings are being canceled at an alarming rate,” Safko added.

“I congratulate the Chinese government and other regulatory agenciesaround the world for taking the necessary precautions by quarantiningtowns, ships and flights in the hope of controlling the spread ofthis disease,” he said. “We should by no means take this lightly, but we do needto develop a calmer, rational perspective.”

Peter Suciu has been an ECT News Network reporter since 2012. His areas of focus include cybersecurity, mobile phones, displays, streaming media, pay TV and autonomous vehicles. He has written and edited for numerous publications and websites, including Newsweek, Wired and FoxNews.com.Email Peter.

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