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DEMAND SHOCK

The tech industry will recover faster from coronavirus than we do

Reuters/Tyrone Siu
  • Amrita Khalid
By Amrita Khalid

Tech reporter

Published This article is more than 2 years old.

China’s workers are gradually heading back to work, nearly two months after the Covid-19 pandemic put the world’s largest exporter of goods at a standstill.

Consumer electronics, from smartphones to laptops to flat screen televisions, was perhaps the first industry to feel the direct impact of the novel coronavirus that causes Covid-19. China, where the virus originated, is the world’s largest producer and exporter of consumer electronics. The virus spread from the city of Wuhan into high-tech hubs like Shenzhen—home to Huawei, Tencent, and ZTE—and the manufacturing zone of Dongguan, where 75% of the city’s residents are migrant workers who work in factories churning out robots and other automated equipment.

But this month, Foxconn, the company that assembles the world’s iPhones, resumed work at its factories in Vietnam and mainland China. The company’s founder, Terry Gou Tai-ming, told reporters that the return had “exceeded our expectations and imagination,” and that supplies had returned to normal. Apple’s retail stores in China are open again for business. Samsung’s smartphone factory in Gumi, South Korea—temporarily shut down after workers tested positive for the coronavirus—has since re-opened.

“China’s slowly returning to normal life,” said Marina Koytcheva, vice president of forecasting at CCS Insights. “We hear from a number of companies that demand is improving. And of course, the supply chain is slowly coming back into place.”

The sight of China’s industrial engine shifting back into gear may seem surreal to those in other parts of the world, where the number of confirmed Covid-19 cases is increasing exponentially. At present, restrictions have closed the borders to international travel in Europe, North America, and many countries in Latin America. Most major cities in North America have enacted social distancing measures, including shutting down bars, restaurants, and gyms.

Airports have become ghost towns, and shipping ports lay empty. The once bustling casinos in Las Vegas are silent. Much of the white-collar workforce is working from home, while gig economy drivers fetch them packages and meals.

Not all factories in China are operating at full capacity, as some workers wait out the last several days of their quarantine. And as the world enacts many of the same measures China used to slow the virus’ spread, the global economy is expected to see a $1 trillion loss due to the pandemic, according to estimates released by the UN’s trade and development agency.

But while Koytcheva and other industry analysts acknowledge that supply chain constraints due to coronavirus will result in product shortages in some tech products, they predict many companies will have recovered by next month.

“Supply chain disruptions are not new for this industry; electronics manufacturers have become adept at shifting supply chains and managing operations based on external events,” wrote IPC president John Mitchell in an email. A majority of electronics manufacturers surveyed by IPC in March said they expected business operations to be “back to normal” by July of this year. A total of 75% expect recovery by October.

For those countries and industries looking ahead to their eventual recovery, it will be instructive to look at those remaining 25% of manufacturers. More than half of manufacturers found alternative sources of input and roughly a quarter expected capital expenditures to decline.

Back in mid-February, when the vast majority of coronavirus cases were still in China, a total of 84% of electronics manufacturers and suppliers surveyed by IPC said they were worried about the epidemic’s impact on their business operations. The survey was conducted the same week that the GSMA decided to cancel the upcoming Mobile World Congress in Barcelona, citing public health risks.

The cancellation of Mobile World Congress (MWC), the world’s biggest mobile phone show, may be easy for the Samsungs and Huaweis of the world. But for smaller vendors, it killed their sole chance to get the word out about their product. (And MWC was only the first of many trade show and conference cancellations, from Apple’s WWDC to Google’s I/O to Microsoft’s Build developer event.) Vittorio Di Mauro, the owner of ConnectLab, which has a manufacturing facility in Shenzhen, called MWC’s cancellation “a nightmare.”

The economic losses of cancelled events are staggering, and insurance plans don’t cover pandemics. Recode reported that the cancellation of Google I/0 resulted in a loss of $20 million; F8 resulted in a loss of $12.2 million. Cancelling MWC resulted in a grand total of $480 million in economic losses.

The biggest tech companies will largely be able to navigate around disruptions to manufacturing and advertising. The thing that these companies can’t fix, though, lies beyond its borders: demand.

Far bigger than challenges to electronics supply chains will be a dramatic shift in consumer spending habits amidst a pandemic—especially if economists are correct in their assessment that a global recession is underway. In times of economic uncertainty, consumers all over the world will cut back on their spending in a way that will directly impact the tech industry.

“A decrease in demand is a bigger problem than supply chain delays,” IPC’s Mitchell wrote. “The industry expects to see demand deteriorate across the economy at some point. There is significant uncertainty regarding the depth and length of this demand deterioration, and uncertainty is very difficult to manage, which is a reason why the industry anticipates sales and revenue to decline this year as a result of the impact of coronavirus.”

As vital as technology may seem to our lives, gadgets, much like travel or the restaurant industry, aren’t recession-proof. Apple released its first iPhone in 2007, right at the beginning of the financial crisis. While customer loyalty carried the iPhone through the last global recession, the rest of the mobile phone industry didn’t fare too well. Nokia, then the world’s largest handset maker, saw its profits fall by 69% by the beginning of 2009.

A 2009 McKinsey survey of consumer spending habits found that 90% of respondents decreased their spending as a result of the financial crisis. Nearly a third said they cut their expenditures “significantly.”

It could seem like a shift to remote working and virtual experiences would be a boost for the consumer electronics industry. You might invest in a bigger desktop monitor, for example, or a laptop with faster performance. Being stuck at home has led to an increase in gaming and Netflix consumption, which may warrant the purchase of a new flat-screen TV or a Nintendo Switch for many.

But gains from such a transition will be fleeting if the global economy experiences a prolonged recession.

“Consumer demand can shift down,” said John Cui, assistant professor of operations and information management at Georgetown’s McDonough School of Business “If one cannot run outside anymore, she or he won’t need a high-tech watch or headphones for now.”

And as cities mandate quarantines and shut down restaurants, bars, and other leisure activities, this will no doubt lead to job loss or decreased income for a large segment of society that works in these industries, especially in the United States, where a $2 trillion stimulus package contains only a fraction of the relief for unemployed workers proposed by nations like Canada and the United Kingdom. And if the economy is in crisis, even those who remain employed will find it hard to justify the purchase of non-essential items.

While many consumers consider smartphones and even laptops to be essential, they likely won’t feel the same about a $159 pair of AirPods, or a $1286.99 HTC Vive Pro VR headset, or a $10,000 8K television. For smartphones, most consumers will likely hold off on upgrades and hold on to their old devices, which they’ve already been doing.

“Demand for electronics, excluding those that can improve productivity for telework, will decrease until this pandemic ends, and then it will surge because of demand accumulation and because people will be happy that it ends,” predicted Cui. Those shifts in demand will apply across the board—to many industries, irrespective of borders.

Cui believes that a recession could force the consumer tech industry to innovate, and give it more time to test and release products. Many companies will likely be doing that already, as coronavirus threatens to delay product launches.

Despite suppliers getting back to work to fulfill existing orders, delays are causing a ripple effect through the supply chain that analysts think could impact the release of new products. The virus has caused transportation bottlenecks, delayed sales, and delayed prototyping. On average, electronics manufacturers surveyed by IPC expect a shipment delay of five weeks. Even Apple recently pushed back a March release of a lower-cost iPhone due to production delays, according to Cult of Mac.

As far as when, exactly, things will end, that depends on the virus and on the effectiveness of the world’s efforts to contain it. Even if supply reverts back to normal by the summer, there’s no guarantee that demand will follow. “Whether or not things go back to normal by July 2020, to me, would depend on the nature of the virus, which we aren’t completely clear about yet, and whether we get effective treatment fast enough,” said Cui. “It’s a scientific question, not an operations question.”

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