Tech Sector Fears Supply Delays as Effects of Virus Ripple Through China

Date: Monday, February 3, 2020
Source: The Wall Street Journal

 

Impact beyond Wuhan, a transportation hub and center for tech and auto manufacturing, will be clear in coming weeks, analysts said

HONG KONG—The world’s biggest tech companies are facing disruptions to their supply chains from prolonged factory closures and labor shortages in China, as the deadly coronavirus outbreak threatens the nation’s vast manufacturing network.

Electronics, telecom and semiconductor companies all rely on factories in China, honed to efficiency by years of servicing Western tech giants. Wuhan, the epicenter of the outbreak that is under lockdown by Chinese authorities, is home to numerous high-tech component suppliers and is a key transportation hub.

As the virus spreads across the country, including manufacturing regions near Shanghai and the southern tech belt in Guangdong province, there is uncertainty whether factories there will be affected. The Shanghai government has ordered businesses closed until Feb. 9, and businesses in Wuhan will be closed longer. Many nearby cities are on lockdown, rail and air links have been cut back, and long distance travel isn’t possible for many migrant workers seeking to return to cities after visiting their home provinces for the Lunar New Year holidays.

"The impact on our supply chain looks inevitable,” said Mitsuaki Nishiyama, the chief financial officer of Hitachi Ltd., HTHIY 0.54% the Japanese maker of electronics, elevators and other products, which has factories across China. Hitachi is “concerned about the possibility that infections may become more widespread and that the supply chain may be affected,” he said, adding it was unclear whether production can be resumed immediately when the holidays are over.

Other electronics giants, including smartphone maker Apple Inc. AAPL -0.27% and contract manufacturer Foxconn Technology Group, 2317 -1.20% are reliant on Chinese factories, and any disruptions could ripple across the global tech industry. Other companies with big factory footprints in China, such as global auto makers, are also preparing for supply issues.

The full effects of the outbreak on the tech sector aren’t yet known for sure. Many factories would have been closed this week anyway for China’s Lunar New Year, which the Chinese government has officially extended through Feb. 3. Many companies have extended the Lunar New Year holidays at plants by 10 days or longer to around Feb 9.

The impact will depend largely on how the outbreak develops in coming weeks, analysts said.

Many companies have built additional flexibility into their supply chains, following the upheavals from U.S.-China trade tensions. That could help companies weather supply issues in the short term, said Stephanie Krishnan, a supply-chain analyst at International Data Corp.

“If things escalate in China, some industries will need to build in further contingencies,” Ms. Krishnan said.

Many plant workers spent the Lunar New Year holidays traveling, including to Hubei province. Because of the lockdown in Wuhan and transportation disruption elsewhere, it’s unclear whether these workers can return on time, according to a supply-chain executive. Once they do come back, companies may impose quarantines before they can return to work.

Suppliers to Apple with major manufacturing footprints in mainland China are gathering information and grappling with uncertainties over workers and production. Apple is slated to launch a new iPhone in March; Chief Executive Tim Cook told investors this week it’s working on backup plans to make up for any lost production.

Foxconn, the world’s largest contract manufacturer, said it has “measures in place to ensure that we can continue to meet all global manufacturing obligations.” It said facilities in China remain on a holiday schedule.

At telecom giant Huawei Technologies Co., “some materials are in short supply” amid supplier disruptions in Hubei province, a spokesman said. “Huawei is taking backup or ‘pull-up’ measures to minimize the impact of work stoppage on supply in epidemic-free areas,” he said. The company canceled a developers conference in Shenzhen that was set for Feb. 10-11, he said.

Wuhan is home to many manufacturers of optical components, crucial to telecommunication networks; the area where many of these companies are based is known as “Optics Valley.” They include the Wuhan-based fiber-optic giant Yangzte Optical Fibre and Cable Co., Accelink Technologies Co. and FiberHome Telecommunication Technologies Co. The companies didn’t respond to requests for comment.

The components are so critical that supply disruptions could lead to delays in the rollout of China’s forthcoming 5G telecommunication networks, according to analysts at Jefferies.

The virus outbreak’s effects also are rippling through the automotive industry, with several auto makers extending factory shutdowns.

Wuhan also is home to Dongfeng Motor Corp., one of China’s biggest state-owned auto makers. It and its joint ventures with foreign car makers have many plants in the area.

Honda Motor Co. HMC 1.13% said its three joint-venture factories with Dongfeng wouldn’t reopen until Feb. 14 at the earliest, following instructions from the city of Wuhan to keep plants closed.

F-Tech Inc., which makes brake pedals for Honda models at its factory in Wuhan, said it is looking to reopen Feb. 14, depending on customer orders. Nissan Motor Co., which operates five joint-venture passenger vehicle factories in China, was originally set to reopen the facilities on Feb. 5. Now, there is no reopen date.

 

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