Here’s why – and how to handle it
The virus known as 2019n-CoV, or the Wuhan Coronavirus, has stirred up a tremendous amount of fear and created obstacles for businesses all over the world. The fast-spreading virus has raised concerns about the summer Olympics in Tokyo, for which there is no “Plan B.” The GSMA was forced to cancel the 2020 Mobile World Congress, the largest global event of its kind, particularly as one global electronics company after another withdrew as a result of the outbreak. Indeed, the virus has impacted markets globally.
The impact on manufacturing has been fast and far-reaching, particularly for companies that rely on China for production. As the illness hit that country first and hardest, the population has seen quarantines, travel restrictions and other hardships with implications that extend far beyond its borders. The challenges for these companies fall into four buckets:
- Labour: If quarantine guidelines discourage people from leaving their homes or travel restrictions make getting to work impossible, labour will see a tremendous negative impact. Many others may not be able work due to the illness. Still other workers simply will not return to the factories – a trend indicating a shrinking labour market in China that’s been on the rise for the past few years, and that may be exacerbated by the coronavirus outbreak. All of these factors have created a labour shortage in the country that’s creating financial headaches for companies like Apple, even as workers begin to resume production.
- Materials: Supply shortages of materials are as critical as the ability to reopen factories. While raw materials are one part of the problem, components are another: For example, the labour shortage is leading to a reduction in the number of LCD panels produced – including those used in 5G-ready smartphones. Shortages in LCD polarizers and LCD module printed circuit boards (PCBs) are causing further issues. Hyundai recently announced that it has suspended production due to a shortage of parts from China; Airbus has taken similar action. On the raw materials side, the Metal Bulletin reports that China will experience a supply shortage of tungsten concentrates and ammonium paratungstate (APT) as a result of the outbreak. At least semiconductors are still in supply – for now – but we’re likely to see OEMs scrambling for new materials sources in the months ahead.
- Logistics: Coronavirus is hitting container lines, freight forwarders and car carriers hard, as well. Established hubs and supply networks may experience limitations in capacity and availability so that even if materials are available, they could be stuck and unable to reach the OEMs and facilities that need them. Finding alternative routes and means of transportation will become difficult, particularly as container lines including Maersk, CMA-CGM and ONE all consider cutting shipping capacity as a result of the outbreak.
- Sourcing: Sourcing will also become a problem with travel restricted to (and from) certain areas. Quoting activity will be halted because the pricing and material information simply are not available.
It’s hard to predict the delays. If manufacturing resumes by the end of February 2020, this will be little more than a hiccup. However, the spread of the virus has been unpredictable to say the least, and global markets have been holding their collective breath. China is not only the centre of the electronics supply chain globally, serving key industries including auto, industrial machinery, electronics, white goods and more – but they also serve a booming domestic market with a $14 trillion economy. At one point during the outbreak, regions in China that account for nearly 69 percent of the country’s GDP were closed for business, according to Bloomberg.
The hardest hit companies will not be the Apples and Samsungs of the world, but the small and mid-sized manufacturers. A recent survey by Tsinghua and Peking University professors shows 85 percent of the small and medium companies (those with less than 500 employees, of which 15 are in manufacturing) have cash reserves that cannot sustain three months of suspended operation; 34 percent can’t last for a single month. Nearly 60 percent of these companies have already forecast that 2020 sales will drop by at least 30 percent.
While the picture may seem bleak at the moment, it is only temporary. China remains the heart of the electronics supply chain, and this isn’t about to change. Avnan has facilities there, and we will continue to rely on China as a dependable source of skilled electronics labour, quality materials and more.
That said, crises can arise in any country at any time, and there are actions companies can take to mitigate the impact of these issues. In the current situation, these steps may include:
- Evaluating the exposure of your supply chain from Tier One and below. Once your organization has made this assessment, set up monitoring and response programs for any potential supply chain disruption.
- Balancing supply and demand, and building buffers. Assess any opportunities to diversify your supplier ecosystem and review or create your organization’s overall risk management approach. Work with strategic and critical suppliers to establish a congruent risk management approach to monitor and prepare for potential material and manufacturing capacity shortages.
- Tackling strategic and concentrated supplies with high value at risk, and diversifying to alternative sources in different regions. Be better prepared than the competition; this could open new opportunities when the next disruption comes around.
A longer-term solution is to consider a flexible manufacturing partner with global advanced supply continuity. Avnan has developed manufacturing partners all over the world, so that if challenges appear on the horizon – whether it’s a natural disaster, new tariffs or some other disruption – we will manage your transition into another region. With facilities in Hong Kong, India, China, the US and other locations, Avnan is the partner that can help your business navigate away from risk, and into safer, more profitable waters.
The current virus outbreak may be a test of the resiliency of the Chinese government and its healthcare system however, it also stands as a test of the resilience of the global electronics industry to evolve. We are confident that the industry – in China and globally – will continue to thrive.