Electronic component manufacturers (OCMs) and their OEM/EMS customers say they don’t have much visibility into their partners’ supply chains. During the coronavirus outbreak, that visibility may determine how quickly the electronics industry bounces back from a prolonged China shutdown.
A survey the ECIA conducted on Feb. 7 found a majority of OCMs didn’t know how the virus would impact their ability to supply customers. By Feb. 21, respondents said the impact would be “minimal to medium.” Most IP&E respondents expect their lead times will stretch by two weeks or longer, said Dale Ford, ECIA’s chief analyst, on a webinar. Semiconductor manufacturers predict their lead times will stretch longer.
“In IP&E, visibility improved [between the two surveys],” said Ford. “Semiconductor manufacturers continue to struggle with visibility.”
Semiconductors can act as a proxy for the wider components industry, he explained. “Up until the end of January, forecasts were encouraging, and it looked like the industry would enter a growth phase in early 2020 and mark the start of a new cycle in the industry. Concerns over the virus have sucked all the life out of the room regarding those predictions.”
The global interdependence of the electronics industry hinders visibility, supply chain risk advisor Resilinc explained, also in a webinar. For a true picture of an OEM/EMS supply chain, they have to know their suppliers, and their suppliers’ suppliers. Delays in raw materials and chemicals shipments impact component suppliers’ production. An OEM/EMS can’t finish their end-product until components show up. Few OEMs and EMS providers know where their suppliers source from downstream.
Shipment delays out of China are now built into electronics supply chain forecasts. But what comes next, says Ford, depends on multiple factors. The good news: New Covid-19 cases in China are declining, employees are returning to work and ports are showing some activity. The bad news: The electronics supply chain still has to make up for lost time.
Within China, said Ford, there are about 5,507 electronic component manufacturing sites. Of those, 3,855 have been affected by Covid-19. Many suppliers are operating with only 2-3 months of cash. OEMs such as Xiaomi and Huawei are not refreshing their component inventory and Microsoft and Apple have already noted constrained supply.
Resilinc noted the global manufacturing industry’s dependence on Asia:
- Over 50 percent of global manufacturing output comes from Asia
- 2019 manufacturing GDP from Asia was more than $7.1 trillion
- China’s 2019 manufacturing GDP was 58.3 percent ($4.1 trillion)
- Japan and South Korea round out the top 3 manufacturing regions
- Japan’s manufacturing GDP is more than $1 trillion and accounts for 14.7 percent of the Asian market
- South Korea’s manufacturing GDP is nearly $500 billion and accounts for 6.3 percent
In each region, supplier disruptions average between 5 percent to 11 percent, Resilinc said. The impact on logistics will be globally significant.
U.S. ports expect activity to drop, Ford reported. U.S. ports forecast a 20 percent drop in cargo, recovering after several weeks. Over 100 transpacific ships to North America have been canceled between February and April.
A drop in ocean freight traffic will mean lost revenue, Resilinc said. Logistics companies may lack staff to resume loading/unloading and processing operations. Lower oil prices will help carriers, but there’s also a danger that current reduced pricing could get locked into long term contracts, and some shipping lines could experience financial distress. Capacity constraints are expected on all transport modes once recovery resumes.
When will the electronics market rebound?
The signs for a timely rebound just aren’t there. If companies don’t already have visibility up and down their supply chains, it’s too late to collect data for this disruption, according to Resilinc. Many companies will watch the crisis play out. (Resilinc is among consulting companies that provide supply chain risk-analysis and planning services.)
ECIA partner research TPC, in mid-February, surveyed roughly 6,000 electronics companies, 85 percent of which are in China. About 44 percent of these companies don’t believe a first-quarter (1Q) shortfall will be made up by Q2. “We believe that the increase to 2Q’s manufacturing schedule and requirements will further tighten the supply chain, resulting in shortages and some allocation,” TPC added.
The TPC survey also found:
- 83 percent of the respondents are seeing a negative impact to demand and/or production from the virus.
- Roughly half of the respondents see production down more than 10 percent for 1Q due to the virus’ impact and another 40 percent see it down 6 percent to 10 percent vs. previous plans.
- 44 percent think this shortfall in 1Q will not be made up in 2Q.
- Regarding the 2Q shortfall, ~70 percent of these responses believe there will not be enough workers back by 2Q to make up the 1Q production deficit; while ~65 percent believe there will not be enough components available in 2Q to make up the shortfall. Only ~25 percent see any demand being destructed because of production shortfalls in 1Q.
- We are seeing evidence that only ~50 percent of the workforce at the major manufacturing sites have returned.
- China government officials are not available at factories to approve their reopening.
- ~40 percent of China-based suppliers have still not given a return to work date.
- Non -China based components shipped in February, in a lot of cases, cannot be received due to lack of workforce.
Forecasts depend on containment of the outbreak, said Ford – March or April would be optimistic. If Covid-19 is contained, the electronics market will dip through the first half of the year, with a snapback in H2. Growth could range from 3 percent to 5 percent.
As of March 10, Italy was in a state of national quarantine.
If the outbreak extends well into Q2, Ford doesn’t expect the market to rebound any time soon. Multiple companies will fail and consolidation will increase.
The high degree of uncertainty in markets from Wall Street to Main Street make it difficult to predict the future of the electronics component in the near-term, Ford concluded.
“At this point, possible outcomes range widely. Optimistically, there is hope for a snapback in the second half of the year if the virus can be brought under control in the first half,” he said. “In a more painful scenario, a multi-year decline could result if the global economy is damaged severely by a long-lasting global pandemic that continues through 2020.”
Research firm IC Insights is preparing to revise its 2020 forecasts. “With much of the industry based in the Asia-Pacific region—perhaps the most impacted region for the virus—the IC industry is now squarely in the crosshairs of being heavily impacted by Covid-19. IC Insights has had to step back and take a fresh look at its IC market forecast as it stands today and assess what can be expected for 2020.”