The impact of the coronavirus outbreak on Chinese manufacturing plants could lead to technology firms missing their revenue forecasts and a hike in technology product prices, as supply chains become severely affected.
As the impact of the outbreak reverberates through the global economy, analysts say it will lead to multitudes of short- and long-term negative effects on the ICT sector, resulting in postponed product launches, delayed tech production lines, and tech and telecoms companies missing their sales targets for the first half of the year.
The “Covid-19” virus, which originated in the central city of Wuhan in December, has gripped China, claiming the lives of over 2 011 people, with a current infection rate of 75 216.
Last month, several tech giants, including Amazon, Microsoft, Samsung, Google and Apple, temporarily closed offices, stores and factories in China, and restricted their employees from non-essential travel to the country.
Much of the world’s consumer technology is either made in China, or relies heavily on components made there.
The country is the world’s largest manufacturer of mobile phones and computers, exporting billions of dollars’ worth of goods every year, with Wuhan, known as Optics Valley, supplying a quarter of the world's optical fibre.
Almost half of the Fortune 500 companies have investments in the city, and technology supply and manufacturing related directly to Wuhan is being severely curtailed, due to the city being in lockdown.
The fallout from the outbreak reflects the global ICT industry’s heavy dependence on Chinese factories, with production halts expected to lead to disruption in distribution channels, resulting in product shortages and companies missing sales targets, warn analysts.
This week, Apple became the first company to reveal the outbreak will result in it failing to meet its quarterly revenue target of $63 billion to $67 billion, due to “iPhone supply shortages” as a result of its Chinese factories being shut down for a few weeks.
In a letter to investors, Apple said it is cutting its sales expectations for this quarter, which it had projected to be robust a month ago, citing two key reasons for the change in guidance.
“The first is that worldwide iPhone supply will be temporarily constrained. While our iPhone manufacturing partner sites are located outside the Hubei province ‒ and while all of these facilities have re-opened ‒ they are ramping up more slowly than we had anticipated.
“The second is that demand for our products within China has been affected. All of our stores in China and many of our partner stores have been closed. Additionally, stores that are open have been operating at reduced hours and with very low customer traffic,” according to the letter.
Arnold Ponela, research analyst for mobile devices and image printing and document solutions at IDC, says Apple is but one of many tech firms expected to miss their sales revenue targets as a result of the infection.
“Most companies will miss their sales targets for the first half of the year and this will potentially see an increase in the average selling price of most devices as shortages hit most markets.
“As many products or components are manufactured in China, customers can expect shortages for various products, such as smartphones, laptops and other tech accessories,” notes Ponela.
China contributes almost half of the world’s LCD panels for TVs, laptops and computer monitors. In addition, suppliers of key components for 5G base stations are mostly based in Wuhan and other regions in Hubei.
Samsung has reportedly started buying some of its phone components from Vietnam due to the disruption in its supply chain.
While some companies had already diversified their production portfolios by manufacturing in other countries such as India, Vietnam and South Korea amid the China and US trade dispute, Ponela is of the view that the reality is that these countries still heavily rely on components developed in China.
“Some companies had supplies stocked for January in preparation for the Chinese New Year holidays, so the epidemic may not have impacted them just yet. But if production does not resume in February, then there will be an impact on the manufacturing of electronics even in other countries, as they are dependent on the Chinese supply chain ecosystem,” he points out.
Research firm TrendForce, in a report released last week, said it was lowering its 1Q20 smartphone production forecast from an earlier predicted fall of 10%, to a 12% decrease year-on-year, due to several factors, including the reduction in the public’s willingness to buy smartphones and delayed work resumption in light of the coronavirus.
“Several factors have negatively affected smartphone production: first, the labour-intensive nature of the smartphone industry; second, China’s delay in work resumption until 10 February and population movement control; finally, the reduction in the public’s willingness to buy,” noted the report.
Arthur Goldstuck, MD of World Wide Worx, told ITWeb last week that in a worst case scenario, the coronavirus could result in reduced business activity, trade and tech product shipments, potentially creating scarcity, which would lead to increased prices, and shift the balance of sales away from Chinese brands to South Korean, Japanese and US brands.
“Given that Apple's stellar results for the last quarter of last year were based partly on its strong showing in China, where it has entered the top five of smartphone vendors, it is the global manufacturer most likely to see a significant impact on sales,” explains Goldstuck.
Facebook last week announced production of its Oculus virtual reality headset will be negatively impacted and it has stopped accepting orders for the latest model, Oculus Quest.
According to reports, Vodacom sent a memo to its suppliers last week, aimed at mitigating exposure to the virus.
“All suppliers and/or third-party staff who have been travelling to and from China, or had direct exposure to potential sources of coronavirus infection, must be placed under medical observation and isolation for at least 14 days upon return,” wrote Vodacom in the memo.
The telco also asked its suppliers to confirm that staff who have travelled to and from China have been screened and undergone the 14-day observation and isolation exercise.
Mounting economic damage
Last week, GSMA, organiser of the Mobile World Congress, cancelled the 2020 event because of fears of the deadly infection.
The conference, set to take place from 24 to 27 February in Barcelona, Spain, is the global telecom sector’s biggest annual convention, with companies spending millions to exhibit.
The cancellation came after a number of technology companies pulled out of the event, citing coronavirus concerns.
In a move to mitigate the impact of the coronavirus, Samsung has introduced a smartphone delivery service that enables customers to test its new devices at home, according to Reuters.
This comes after the tech giant had to cancel some promotional events and cut a number of in-store "experimental zones", where consumers test the latest phones.
The service allows customers who want to test new phone models to have them delivered to their door and use them for up to 24 hours, before a delivery worker collects them again.
“Consumers are driven by the launch of new phone models and are excited by newly smart features, hence if the launch of new models is delayed, they would rather hold on to their devices for a long period, resulting in lower demand,” notes Ponela.
“Other players such as those in the electronics industry and automobile industry will also be impacted by this, as it will disrupt the entire supply of components imported from China, resulting in serious consequences in the value chain across industries.”
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