Tech sector should brace for drastic coronavirus impact

The coronavirus outbreak is expected to severely impact South Africa’s ICT market, as more global tech giants doing business in China suspend their office operations.

Analysts say while the economic impact of China’s coronavirus outbreak will depend on how long it ultimately lasts, its repercussions on global technology markets are already being seen, and South African tech firms should brace themselves for the consequences.

The outbreak, which originated in the central city of Wuhan in December, has seen several technology companies ‒ including Amazon, Microsoft, Samsung, Google and Apple ‒ impose travel restrictions to and from China, with some altogether suspending their office operations in mainland China, Hong Kong and Taiwan.

Almost half of the Fortune 500 companies have investments in Wuhan, with most technology giants having their manufacturing hubs in China, where a range of devices including PC components and peripherals, and consumer devices are manufactured.

Arthur Goldstuck, CEO of World Wide Worx, says if the Wuhan lockdown spreads to manufacturing hubs like Shenzhen and Guangzhou, SA could see a massive shortage of tech components and products, resulting in large and rapid price increases.

“South African companies doing business in China will be severely affected due to travel restrictions,” notes Goldstuck.

“While in the short-term, the supply chain for products coming from China does not seem severely affected, technology supply and manufacturers related directly to Wuhan will be severely curtailed, due to the city being in virtual lockdown.

“Wuhan is known as Optics Valley, supplying a quarter of the world's optical fibre, so we may well see prices go up, as clients turn to other sources. SA's rapidly growing fibre connectivity industry may, then, be affected, but most companies should have reasonable stock levels, given the demand we see locally.”

Goldstuck points out Chinese companies supplying the South African market may not see a dramatic impact in the short-term.

“Some well-known Chinese tech companies with a presence in SA, like Lenovo, have major factories in Wuhan, but they can divert manufacturing to other centres.”

The outbreak, which entered a crucial phase after the World Health Organisation declared it a global health emergency, had claimed the lives of 361 by this morning, with over 12 000 confirmed infection cases. This weekend, the Philippines became the first country outside of China to record a fatality from the illness.

Over the weekend, Apple announced on its Web site that all its 42 China-based stores will be closed until 9 February. The company said it is shutting down all operations, including corporate offices, stores and contact centres.

This was followed by Samsung Electronics announcing it will also temporarily shut down its flagship store in downtown Shanghai.

China is an important market for Apple – it is among the top five smartphone vendors in China and the only non-Chinese vendor, earning nearly 15% of its revenue from the country.

The outbreak has seen the first mandatory Centres for Disease Control and Prevention quarantine in the US in 50 years, with some governments across the globe temporarily suspending all flights to and from China.

Derrick Chikanga, senior analyst of IT services at research firm Africa Analysis, believes it’s too early to measure the consequences of the outbreak on the local tech sector.

“This virus was first reported on the 31st of December 2019, and it’s only been just over a month since then. As such, I’d think any measures currently being put in place could only be temporary until the virus is brought under control. We will have to wait and see how authorities respond to the situation as a whole before trying to establish the potential implications on the local tech sector.”

Technology research firm GlobalData says while the temporary closure of tech companies in China will have a negative impact on the product offerings and development initiatives targeted at the domestic audience, the closure of manufacturing plants will have a much larger impact on the product release and the 2020 roadmap of these technology giants.

Nishant Singh, head of technology and telecoms data at GlobalData, explains: “The manufacturing of devices and components is via an intricate supply chain which traverses the region, and hence a prolonged outbreak can drastically affect the manufacturing obligations – this will in turn impact the product release roadmap of these technology giants.

“Even if factory operations for these technology hubs are temporarily suspended, like it has happened with Tesla’s Shanghai plant, the impact of the reduced production might cascade through to the rest of 2020.”

While the technology markets in the other geographies might eventually bounce back and recover after the outbreak, especially in the second half of the year, the impact will be drastic for the domestic technology market in China, notes Singh.

GlobalData previously estimated the market for enterprise ICT products and services in China will grow at a compound annual growth rate of 7.9% between 2019 and 2023.

“Before the outbreak, we had estimated 8% growth in 2020 for the enterprise ICT market in China. The outbreak will likely shave off around 2% of this growth, as there will be limited spending in this quarter.”

While most of the technology giants have their manufacturing hubs in China, fortunately though, the majority of the manufacturing hubs for these devices are still functioning, for now at least, such as Foxconn, a major manufacturer for several big technology companies including Apple, Intel, Microsoft and Sony, notes GobalData.

Similarly, Pegatron, another prominent manufacturer of PC components and peripherals, has also so far not indicated any negative impact on its manufacturing facilities in mainland China.