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Could the coronavirus outbreak create a global electronics shortage?
Tech firms depend on suppliers in China for electronics, but with no end in sight to the coronavirus outbreak, a shortage could occur
At the end of the lunar new year, millions of Chinese workers who travel across the country to visit family return to manufacturing hubs like Shenzhen, Ningbo and Guangzhou.
The holiday is always disruptive. Every year, activity must be scaled back and production reduced as workers take time off. But assembly lines can be rebooted as soon as the bullet trains and buses bring them back.
This year has been different. The coronavirus epidemic saw the new year extended, and Beijing advised citizens to avoid travel.
“The real question is how afraid people are. Will the labour move back or will people just stay in their hometown?” says Collins, a former executive at Foxconn, the Taiwanese electronics company that is China's biggest private employer and a key supplier to Apple.
Since the coronavirus was first discovered, Chinese authorities have been working with the World Health Organisation to contain it amid echoes of the SARS outbreak in 2003 that infected more than 8,000 across 17 countries.
The current epidemic has killed 213 and over 9,600 have been diagnosed. Wuhan, a city of more than 11 million people, has been under lock-down as evidence points to illegally traded wildlife at a seafood market in the city as the possible source of the disease.
As the crisis escalated, tech companies took their own steps to protect employees. Elon Musk said Tesla had shut down the carmaker’s newly-opened Gigafactory in Shanghai on the orders of the Chinese government. Apple announced it had shut some stores, and reduced opening hours at others. It added that it would miss its March quarter revenue guidance as the coronavirus slowed production and weakened demand in China.
Google, Facebook and others restricted travel. Several introduced policies requiring workers returning from China to work from home.
But while these were all sensible precautionary measures, there were 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 in landlocked Wuhan will undoubtedly cause disruption in the technology supply chain, given manufacturers’ reliance on just-in-time production techniques,” says Jonathan Simnett, a director at Hampleton Partners, a corporate finance consultancy.
Apple starts mass production of its iPhones as close to their release as possible to avoid 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.
Wuhan, the epicentre 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, including a complex owned by Tsinghua Unigroup, which makes flash memory devices used in smartphones and computers.
That makes Wuhan a critical location in the technology sector's sprawling supply chain. Figures from data firm Panjiva show over 450 US importers are exposed to a supply chain hit from slowdowns in Wuhan’s wider province of Hubei, which had a GDP of $595bn (£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. The coronavirus is now taking that away. Last week, Apple said its financial forecasts for the next quarter were wider than normal because of uncertainty created by China.
JP Morgan analysts put out a warning on Apple and other US tech firms including Qualcomm, which, although emphasised a particular 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 analyst at 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 like Vietnam, India and Mexico, giving them some cushioning against the coronavirus.
“If this thing had caught us 15 months ago we would have been completely sitting ducks,” he says. “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.