The COVID-19 Silver Linings for the Electronics Manufacturing Industry
As we transition from a widespread component shortage to a global sanitary crisis, the outlook seems fairly gloomy for the electronics industry. However, the current situation isn’t as woeful as it may seem, and the COVID-19 outbreak may have highlighted a few bright spots. Let’s dive in.
First, the Bad News: Shipping and Consumer Sentiment
Chinese factories have been slowly restarting. Decontamination and safety procedures have been implemented and 300 million people are now returning to work. This should lead to a steady ramp-up of Chinese manufacturing over the next month.
However, if production was rightfully seen as the most pressing issue, shipping and logistics may turn out to be more lengthy to resolve. The complete shutdown of the country has left both inbound and outbound stock clogging the Chinese ports, in addition to the backlog of shipments that typically follow the Lunar New Year. Moving ships and goods around the world takes time, and many countries have recently closed their borders to fight the virus outbreak.
In late February, some US car manufacturers started flying parts and components, to get ahead of potential supply chain disruptions. This doesn’t seem to be a viable strategy from a cost perspective, but there is hardly any alternative until cargo ships start crossing oceans again.
For reference, it takes between two weeks and a month for a cargo ship to travel from China to the US, and an additional five to six days to clear all customs and handling procedures before releasing the cargo.
Despite these recent manpower and shipping challenges, the industry hasn’t suffered widespread shortages until today. With Chinese manufacturing ramping up, it looks like the electronics manufacturing market could be spared any significant consequences from the COVID-19 episode, with one caveat: negative consumer sentiment.
As the virus outbreak was classified as a pandemic by the World Health Organization, consumer purchases started to shift towards medication and a variety of ‘crisis mode’ staples… including toilet paper.
A common market mechanic in times of panic is the reluctance of consumers to purchase high-ticket items and durable goods. This time, the fact that China was the epicenter of the virus outbreak is also likely to negatively impact the consumer sentiment regarding purchasing of goods made in China.
As a result, smartphones, TVs, cars, and appliances are most likely to take a hit in 2020. Some analysts forecast that Q1 and Q2 could be hit the hardest, with a recovery happening in the second half of the year. However, it seems very hard to predict the consequences of a pandemic without being able to determine its length accurately.
The Bright(er) Sides
The current crisis we’re going through bears some similarities with many traumatic episodes in recent years: the N1H1 outbreak and 9/11 attacks, for example. We are making short-term adjustments that impact our daily lives, but we may see some long-term effects directly related to some of the realizations brought to us by the current crisis:
Companies are Actively Thinking About Moving Away From China
While this statement may be excessive, the fact is that companies are currently looking to diversify away from China. A UBS report from Feb 26th reveals that 63% of surveyed executives are looking to move at least 40% of their current Chinese production to another location.
As Vladimir Signorelli, head of Bretton Woods Research puts it: “Using China as a hub…that model died this week, I think.”
After over a year of trade war between the US and China, the COVID-19 pandemic may represent a tipping point. This could lead to a global supply chain redesign, and the diversification of sourcing and manufacturing outside of the typically China-centric supply chain network.
India, Vietnam, and Mexico, among other countries, have been waiting for an opportunity to establish themselves as viable alternatives to China. Each of these countries has to solve their own set of issues before potentially becoming a major actor of the global supply chain redesign, but the series of events impacting the relationship between US and China seem to have set the stage for someone to step up.
Cost Has a High Price
By moving manufacturing overseas, and sourcing components around the world, companies have been able to save massive amounts of dollars. This cost-saving frenzy, driven by fierce competition, has also removed access to excess inventory and slack capacity.
This means that most supply chains have much lower elasticity and are more vulnerable to disruptions. Whether it’s trade wars, natural disasters, or pandemics, these disruptions seem to become more frequent lately, and it seems like a good time to think about the downside of cost-saving as the number one priority. It seems clear that both local and global companies need to build mitigation strategies, and that cost shouldn’t be the only consideration when building a supply chain.
The Need for Supply Chain Resilience
At Supplyframe, we have talked at length about the necessity of what-if scenarios. The current pandemic highlights the critical need for companies to build several pathways to market, and to have alternatives readily available at all times.
I remember talking to a former component engineer at Emerson, who mentioned how the Fukushima accident could have led to major financial losses if the company didn’t have a plan B ready to activate.
To become proactive and not be caught off-guard next time a global disruption happens, companies need to invest in their supply chain resilience. A lot of executives in the electronics manufacturing industry are most likely thinking about which steps to take as they’re spending the next few weeks at home.
It seems like supply chain infrastructure, software, and data providers could not dream of a better time to showcase their solutions and enable better, safer, and more resilient supply chains. The pain point is in front of everyone, so let’s tackle it together.
