Why is the coronavirus disrupting global high-tech supply chains? Afterall, as of February 10th, while more than 40,000 people have been infected, only 910 have died. That is a mortality rate of about two percent. While any mortality is a tragedy to the loved ones impacted, should a two percent mortality rate shut down the city of Wuhan, lead to the quarantine of 60 million people, impact inland transportation and transportation into and out of China, shut down factories, and lead to global supply chain disruptions?
Well, yes. Beyond the mortality rate, the National Institutes of Health is reporting that about 25% of those who have caught this pneumonia like virus have “a very serious disease, requiring relatively intensive or really intensive care.” Further, each person infected with coronavirus is passing the disease on to between two and three other people on average, making it more contagious than the flu. Finally, the vast majority of cases are located in China, whose $2.7 trillion in exports make it the manufacturing center of the world. The city of Wuhan, where patient zero was diagnosed, is in lockdown with people forbidden from leaving or entering. Wuhan is a manufacturing hub.
It is known that Foxconn is a critical contract manufacturer in high tech supply chains. Foxconn, Apple’s most important contract manufacturer, was originally supposed to resume production Monday after a recent forced shutdown. But there were reports over the weekend that the factories will remain closed for some time to come. Reuters reports Monday that China declined Foxconn’s request to reopen its production plant in the city of Shenzhen today, and that employees were also not to return to work on Tuesday. Further, while the company received approval to reopen its plant in Zhengzhou, only 10% of the factory’s workforce has returned to work. If Foxconn is unable to ramp up production soon, Apple will have to delay the launch of its next iPhone. Apple is highly likely to suffer material impact to its financial results.
With its heavy souring of contract manufacturing in China and just-in-time shipments, the high-tech industry is among the hardest-hit by coronavirus. Dell Technologies, HP, Qualcomm, Huawei, Samsung, Qorvo, Skyworks Solutions, MagnaChip Semiconductor, and Amkor Technologies are all looking at disruptions to their supply chains. While there are other contract manufacturing partners active in this industry, most of that capacity is located in regions that are under the same kind of restrictions as the province of Henan where Wuhan is located.
When capacity does start to free up, and companies seek to shift orders elsewhere, these companies will face allocations as the contract manufacturers divvy up the capacity between their customers in a manner that means no company is apt to get all of what they want (Although, more important customers will get more of what they want than smaller customers). Further, many of these global high-tech companies pulled their engineering talent out of China once the virus’s seriousness was understood. When the virus begins to taper off, it is apt to take weeks, maybe several months, for production engineers from the customer companies to certify that quality products can be produced on alternate production lines. The numerous quarantine and transport restrictions announced by different municipalities, and differences in how they are implemented, have added to the difficulties.
Razat Gaurav, the CEO at LLamasoft, points out that the ability to activate contingency plans is affected by the industry. LLamasoft is a leading supplier of ai-powered supply chain analytics software. “If companies are making sneakers in China, they can get an alternative plant up and running in Bangladesh or southeast Asia relatively quickly.” The production facilities already exist and the cost of adding capacity is relatively inexpensive. “But,” Mr. Gaurav points out, a typical semiconductor fab costs $1 billion to open, so short term optionality is greatly reduced.”
“This is a wake-up call for companies thinking about designing a supply chain. Risk and resiliency need to be part of the design.” Mr. Gaurav added, “Companies that have not fully thought through the details could be in trouble. Many companies have business continuity plans for earthquakes and floods (in China) but the alternative facilities were also in China.” The problem is that this disaster is region wide.
“One immediate thing we are looking to do, is to create a war room at LLamasoft for our customers” that will provide extra resources and help. “A lot of our customers,” Mr. Gaurav explained, “are looking to update their March contingency plans right now.” There is great uncertainty on how long this crisis will run or what can be done to mitigate the disruptions to global supply chains.
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