The spread of the deadly Coronavirus has led to factory closures in Wuhan, China and surrounding cities. China’s role in global supply chains has been anything but downplayed in the last several years, with the US alone relying heavily on Chinese-based manufacturers.
The Trump administration’s efforts to regulate emerging technologies and blacklist Chinese-based telecom giant Huawei Technologies have brought to light China’s integral role in many tech giants’ supply chains, with backlash from major companies like Intel and Micron.
A look at China’s top exports
In 2019, China exported roughly $2.5 trillion worth of goods. Top Chinese exports include broadcasting equipment, computers, office machine parts, integrated circuits and telephones. Home to companies like Huawei, Vivo, Oppo, Xiaomi and Apple’s contract manufacturer Foxconn, China has been the world’s largest producer of smartphones and related components since 2013. China accounts for about 55% of global display panel production, some of which are used in smartphones. Chinese display panels are also used in televisions, vehicle dashboards, laptops, computer monitors and more. The country is a top provider of other key inputs, such as optical fiber and memory chips, as well as finished tech gadgets.
Staff shortages and production delays
As China is a top producer of display panels, shortages stemming from the country are likely. Wuhan alone is home to five LCD factories (e.g. BOE Technology Group and Tianma Microelectronics Co.), and capacity at these factories could fall by as much as half in February. Samsung’s display panel production is also hurting, with display module plants located in Suzhou, Yentai and Nanjing. Located several hundred miles from Wuhan, these plants are less impacted by the virus than Wuhan-based plants, but still face staff shortages within their facilities and at nearby shipping ports. Delays in semiconductor production also threaten gadget producers, with less than 50% of the entire Chinese semiconductor workforce expected to return to factories the week of February 10.
Fast facts: tech companies and the Coronavirus
- Apple’s shipments from China could be down 5% to 10% this quarter due to complications with Foxconn.
- As of Monday, less than 10% of the workforce, had returned to Foxconn’s plants in Zhengzhou and Shenzhen.
- Huawei’s smartphone shipments could be down 6 to 7 million, while Oppo and Vivo could fall 3 to 4 million and Xiaomi could see a decrease of roughly 2 million devices.
- Noting hardware production delays, Facebook is reducing its shipments of the Oculus Quest VR headset and has stopped taking new orders.
- Nintendo is also reporting delays and reduced shipments of its Nintendo Switch, Joy-Con controllers and games.
Checking up on risk management
Smartphone producers like Samsung, Google and Sony have been slowly relocating smartphone factories in recent years, moving to Vietnam or India to avoid trade tariffs and diversify supply chains. However, China still produces many of the components used in their smartphones, including sensors and glass screens. Last summer, Nintendo began moving production from China to Vietnam to mitigate risk, but most of its hardware is still made in China.
Tech companies are particularly affected by sudden production dips due to the just-in-time (JIT) manufacturing practices they have adopted to manage inventory and the sheer cost of setting up short-term facilities in the event of disruptions. Using alternative plants for short term production may be possible for manufacturers in other industries, but tech plants typically cost $1 billion or more to open.
Implications for procurement
Major concerns for procurement departments revolve around shipment delays and product shortages. In addition to longer wait times, buyers may face short-term price hikes for products such as LCD screens as producers struggle to meet demand. In terms of securing inventory, large companies with long-standing supply contracts are expected to take priority over less-established companies, causing smaller players to face longer delays. While these delays threaten tech companies’ supply chains, most companies are waiting out the shortages. Tech supply chains are deeply embedded in China and alternative production plants are an unlikely solution, causing many to wait weeks or months with dwindling inventories. Using Coronavirus as a lesson, companies are anticipated to strengthen risk mitigation plans by diversifying supply contracts and production locations, as well as more heavily vetting their vendors’ upstream suppliers.
By: Kim Bucci
Read more about how the Coronavirus is affecting the global economy:
From ProcurementIQ - Coronavirus Spotlight: The Automotive Industry
From IBISWorld - Industry Impacts of the Coronavirus
From IBISWorld - Going Viral: Coronavirus Weighs on Australian Economy
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