‘The worst I’ve ever seen’: Coronavirus is obliterating the tech supply chain
Date: Tuesday, February 25, 2020
Source: Digital Trend
The disease Covid-19, commonly called the coronavirus, has dealt hit after hit to the global economy for the past couple months, and Wall Street has stumbled from the blows. Stocks plummeted on Monday, February 24, as a result of continued panic and stalled production in China, the world’s greatest manufacturing hub. Although investors were keeping their cool a mere week ago, continued production problems in China, as well as the spread of the virus to other countries, have worn away much of that early optimism.
The outbreak has already shuttered Mobile World Congress (MWC) and cut into the business of major companies like Samsung and Apple, but for the tech industry, and the people buying its products, the crisis is only beginning.
China is the engine of the global economy
Sprawling a long the coast of China, just a short hop from Hong Kong, is the Pearl River Delta, a densely populated region comprising cities like Shenzhen, Guangzhou, and Dongguan.
“We always like to call it the factory of the world,” says Rosemary Coates, president of Blue Silk Consulting and executive director of the Reshoring Institute. Coates describes the region as “ground zero for electronics manufacturing … So even if you have electronics parts that might be further fabricated in the U.S. or somewhere in Turkey or South America or something like that, almost all of the component parts are likely to come from the Pearl River Delta in China.”
China’s central role developed thanks to savvy economic policy during a time when companies wanted to globalize.
“When China began to open up under [former leader] Deng Xiaoping, creating special economic zones, they provided their armies of low-cost labor to the world. Companies everywhere took advantage of that,” explains Paul Tiffany, senior lecturer at the Haas School of Business in Berkeley, California. These special economic zones offered not only cheap, disciplined laborers, but generous tax incentives to get businesses to invest in them. As a result, China became the most attractive manufacturing hub in the world, the center of a web of supply chains stretching across the entire world, a web that provided massive economic gains for decades.
“We’re seeing now the other side of the coin,” Tiffany says, where something hits one part of the web and shakes the whole thing.
Although the coronavirus did not originate in the Pearl River Delta (ground zero was the city of Wuhan, hundreds of miles north) ,it has hit the region’s manufacturing hard. Coates claims about 50 percent of the factories there have shut down.
“I have never seen anything like this,” Coates says. “This is horrendous, what’s going on with supply chains to the factories in China. The worst I’ve ever seen — and we’re only seeing the beginning.”
As of February 24, there are more than 77,000 confirmed cases of coronavirus in China alone, and with any vaccine many months away, that number will likely grow. Quarantines, as well as fear among China’s workers, have led to the factory closures, and although some of them are coming back online, “that doesn’t mean they’re at full production,” according to Coates. “In fact, most of those factories are at 15 or 20 percent production. So not only do they have a backlog from being closed for a month, but now they’re only operating skeleton crews … they’re not operating at capacity, they’re not going to be able to fulfill the orders that are waiting.”
There’s no easy fix on the way
Although this isn’t the first time an epidemic has hit China — the SARS outbreak in 2002 comes to mind — the scale of the crisis is more severe, not only because of the virus itself, but because of how the global economy is now wrapped so tightly around China. When SARS hit, Coates explains, the other advanced economies of the world hadn’t yet moved all their production there.
“I have never seen anything like this,” Coates says.
Unfortunately, tech companies can’t simply pick up their operations and move elsewhere.”
“If it’s simply an assembly process, you could move relatively quickly,” Coates says, “but if you’re sourcing component parts, it’s likely to take a year to 18 months.” Advanced components like semiconductors require specialized facilities, and the testing and qualifications processes to make sure they work are extensive. “You can’t just flip the switch and go from China to Vietnam and produce the same products.”
While there are other countries in Asia known for producing electronics, none can match the sheer volume of China’s manufacturing machine.
“Their factories are reeling with the amount of work that’s coming their way,” Coates emphasizes, adding that “while you may be able to find a factory that’s qualified to meet your needs, it could be months before you get in the queue to have anything manufactured.”
Your stock portfolio will likely be fine
While the tech supply chains may not recover quickly, Tiffany notes that stock markets will probably bounce back.
“Markets react quickly, but recover quickly,” he explains, a result of the fact that so much of trading these days is done by algorithms. “When something happens, a lot of the funds immediately start selling. Not because an analyst sits there and looks at the data and uses human judgment. Trading is overwhelmingly done today by formula. As things begin to happen, the formulas kick in, it’s a downward spiral, everybody starts selling.”
With past pandemic events, Tiffany says, “the recovery has been very rapid, within months, not years. The market not only recovered, but the gains were double digits.”
Brace for shortages
What does all this mean for people shopping for electronics? Higher prices, probably, but Coates warns that in all likelihood, you simply won’t be able to get the products you want.
“Inventories are pretty thin, because we got pretty good at global sourcing and the logistics associated with it,” she explains. “We got really good at that over the last 10 or 15 years, so there wasn’t any reason to keep a lot of inventory.” With the cupboards bare and production clogged, new gadgets could be scarce in the coming months.
“I remember after the tsunami hit Japan,” Coates recalls, “and I was in the market for a car. I wanted to buy a Lexus and I went to the dealer, drove the car, all set to go, and sat down to sign the contract and he said, ‘Actually, because of the shortage of parts, we haven’t been able to make that model for a while, so you have to wait six months to get your car.’ That was just the tsunami; it’s a drop in the bucket compared to what’s going on in China now.”