How the coronavirus has infected global tech supply chain

How the coronavirus has infected global tech supply chain

How the coronavirus has infected global tech supply chain

The Covid-19 pandemic now appears to be infecting businesses and economies as quickly as it does people. Evidence that the virus is just as economically contagious as it is medically contagious is abundant – from data that shows the outbreak is disrupting manufacturing operations and strangling supply chains, to emergency monetary policy measures by central banks and the downgrading of global growth forecasts.

So, how is this global threat impacting supply chains and manufacturing in the tech industry?

Why the tech industry is feeling under the weather

The tech industry has not been immune to the effects of the unfolding Covid-19 crisis. The outbreak, which originated in China – a key player at both ends of the tech supply chain – forced the quarantining and closure of large swathes of the country’s economy back in January: factories were shut down, workers confined to their homes and travel bans implemented. All of which has wreaked havoc within the global tech supply chain.

This has precipitated shipping delays of hardware components from the economic superpower and other countries where the virus has spread rapidly; a worrying trend that has led to production delays further down the chain. For example, the industrial north of Italy – home to the nation’s tech industry – has been severely affected by the Covid-19 pandemic.

How Covid-19 is impacting the tech industry

Microsoft relies heavily on customers who install its software on laptops and tablets. Unfortunately for the tech giant, the supply of hardware products has been chocked by factory closures and supply slowdowns in China. This caused a serious headache for the world’s most valuable tech company, which relies on personal computing to generate roughly a third of its revenue.

Another major player in the tech world that has suffered due to its direct exposure to China is Apple, forcing it to issue warnings about the supply of its marquee product: the iPhone. The company depends heavily on factories in China to produce the world’s most popular smartphone, which generates the bulk of its revenue each quarter. While at the other end of the chain, sales of iPhones in the US dropped 56% in March compared with a year earlier, as American’s tighten their purse strings.

Companies that rely on components produced at the epicentre of the outbreak have been particularly affected. For example, one of Lenovo’s biggest factory’s is located in Wuhan – the city where the global Covid-19 outbreak originated. Having ceased production at the location in late January; the world’s largest personal computer supplier was unable to resume production until early April – when lockdown restrictions were finally lifted.

Elsewhere, shares of Japanese electronics parts producers and other tech companies that are reliant on China have been affected, with Murata Manufacturing, Tokyo Electron and Sharp all suffering from concerns about supply chain disruptions.

What does the future hold?

Since February – when the pandemic peaked in China – lockdown measures and travel bans have been gradually lifted across the country. The most encouraging sign that authorities have gained control of the virus, and life in the country is returning to normal, came at the start of April: when the city of Wuhan celebrated the end of nearly three-months in lockdown. The industrial hub of 11 million residents is rapidly returning to a state of business as usual, with official data showing over 97% of the city’s large factories reopened just days after the restrictions were lifted.

China is understandably at a more advanced stage in the fight against Covid-19 than Europe and the US, which both experienced a surge in infections later along the pandemic’s timeline. Lockdown measures remain in place in large parts of these regions; although Spain – one of the worst-hit nations by Covid-19 – has allowed some factories to reopen as the government begins to loosen restrictions.

Shockwaves from global lockdown measures are likely to be felt within the global tech supply chain for a while beyond their conclusion. These prolonged shipping delays from countries affected by the pandemic – particularly China – creates several challenges for manufacturers:

  • Many US and European tech manufacturers depend on components from China to produce products in domestic factories. Supply chain issues will result in delays in the production of finished goods.

  • Shipping delays cause factory downtime, which drives up average costs resulting in suboptimal financial performance.

  • Some manufacturers will be forced to seek alternative sources, which often takes a significant amount of time to arrange and incurs higher costs.

  • Production delays in China could result in design and prototyping delays that inhibit the development of new products.

  • As production resumes, manufacturers will struggle to take on new orders because they will be fulfilling a backlog of existing orders.

Tech manufacturers have already reported that shipment delays of key hardware components are hampering production and have begun communicating these developments to their customers further down the supply chain. Small businesses, which typically have less influence in the market and lack the finances to adapt, are expected to bear the weight of these delays. Far from being immune to the impact of the pandemic on tech supply chains, larger businesses are better placed to use their resources and market power to obtain supplies as they become available.

TDM Group (a leading Managed IT Service Provider) Director Tarek Meliti says “companies should review their IT strategy and potentially move to a software as a service (SAAS) or infrastructure as a service (IAAS) cloud model. By doing so, they will reduce their dependency on physically purchasing hardware which is likely to be in short supply because of the pandemic.”

The future is uncertain! Despite the encouraging progress being made in the global fight against Covid-19, now is not the time for the world – or the tech sector – to rest on its laurels. Chinese President Xi Jinping has warned of “new difficulties and challenges” amid the rising risk of a second wave of infections; a threat that looms large over all countries that have felt the devastating impact of the pandemic.

“Companies should assess their requirements, so they understand how they will be impacted by disruptions in all supply chains. This will enable them to implement an effective strategy that mitigates the potential risks to their business.” said Tarek Meliti.

It seems likely that over the coming months, countries around the globe could experience a cycle of lockdowns while they await a vaccine. This would put renewed pressure on tech supply chains, as factories are once again forced to close their doors for an undefined period. For decision-makers in businesses that will be impacted by a stagnation in the supply of hardware, this brings the need to mitigate the effect of prolonged lockdown measures into sharp focus.