Updated Feb. 13
On January 30th, the World Health Organization declared the coronavirus a global health emergency. The 2019-nCoV coronavirus epidemic that appeared in China last December has killed 1,357 people, becoming more deadly than the SARS (Severe Acute Respiratory Syndrome) epidemic, which killed 774 people worldwide between 2002 and 2003. “While the economic impact of the outbreak will be dependent on how long it ultimately lasts, its impact on technology markets across the world is already beginning to come to the fore,” says GlobalData, a leading data and analytics company. So what are the expected consequences of the virus on the tech industry?
The last victim of the virus is the Mobile World Congress. The telecom fair was supposed to take place in Barcelona at the end of this month. In a statement, the GSMA and the host city parties have decided to cancel the event due to coronavirus concerns.
The economic impact of the disease is already being felt in China. Wuhan, the epicenter of the epidemic, is home to many electronic suppliers. Provinces like Zhejiang, Guangdong and Henan are very important for technology manufacturing and are also the most affected by the virus. Technology giants like Apple, Nintendo and Hitachi have their manufacturing hubs in the area with a variety of ICT products (PC components and peripherals, iPhones, Echo smart speakers, Xbox and PlayStations, etc.) made in China.
In order to prevent the spread of the virus, tech giants have decided to shut down their factories, which is a major concern for the industry. For Nishant Singh, Head of Technology and Telecoms Data at GlobalData:
“The manufacturing of these devices and components is via an intricate supply chain which traverses the region, and hence a prolonged outbreak could drastically affect the manufacturing obligations – this will in-turn impact the product release roadmap of these technology giants. Even if factory operations for these technology hubs are temporarily suspended, as in the case of Tesla’s Shanghai plant, the impact of the reduced production might cascade through to the rest of 2020.”
Foxconn is expecting lower growth
On February 6, 2020, Foxconn announced that its workers would be quarantined for a period of 7 to 14 days upon their return from the Lunar New Year holiday. The world’s leading consumer electronics supplier had previously indicated that one of its main production bases in Zhengzhou (in the center of China), also nicknamed “iPhone City”, would not resume operations until today. The Chinese authorities denied the reopening this morning.
While the consumer electronics giant wants to provide reassurance as to the risk of a disruption in the supply chain, it has at the same time revised its sales growth forecast for 2020 sharply downwards, anticipating an increase of between 1% and 3% compared to 3% and 5% as previously expected. In a note to investors on February 2, the group indicated it expects iPhone production to fall by 10% in the first quarter of 2020.
Apple delays the release of new Iphone
As a matter of fact, for the first time in its history, Apple had to delay the release of its new iPhone, which was supposed to be in March.
China is also an important market for Apple which earns nearly 15% of its revenue from the country. Sales of iPhones within China are expected to be low for at least a month or so, which will affect Apple’s next quarterly earnings, explains Nishant Singh:
“The outbreak will have a significant impact on the growth of the domestic technology market. IT purchases within China will be hit and sales are expected to drastically fall, at least for this quarter. This would affect companies that have a large exposure in China, such as Apple.”
According to a report from the Asian site Nikkei, Apple has ordered 65 million iPhone 11s and 15 million of the latest iPhone. But suppliers fear that the coronavirus epidemic will affect the production schedule.
Nintendo announced production delays for the Switch, their console assembled largely in China. The firm also announced that the “Animal Crossing: New Horizons” version would be delayed. Other gaming accessories manufacturers, mostly made in China, could also be impacted. Facebook, for example, has already announced that the Oculus Quest will probably face supply issues.
For Singh, it’s not just the personal computing market that could be affected. The enterprise ICT market is also at risk:
“Enterprises in China are expected to drastically slow down their IT purchases, especially their capital expenditures for IT, as they grapple with depleted productivity in 2020 owing to the outbreak. Before the outbreak, we [GlobalData] had estimated an 8% growth in 2020 for the enterprise ICT market in China. The outbreak will likely shave off around 2% of this growth, as there will be limited spending in this quarter.”
“It’s uncertain whether factories could resume production this week amid local quarantine efforts and traffic controls. Indeed, many authorities and enterprises at local levels are targeting Feb. 17th or later to restart business, and the resumption is likely to be a phased approach.”
Other sectors are affected
The tech industry is not the only sector affected. The coronavirus is also beginning to have an impact on Chinese defense companies and shipbuilders in Wuhan. According to William Davies, Associate Aerospace, Defense and Security Analyst at GlobalData,
“The coronavirus has the potential to slow the delivery of key projects such as China’s third aircraft carrier and new fighter jets.”
European aircraft manufacturer Airbus also announced last week that their A320 assembly line in Tianjin, near Beijing, would remain closed indefinitely. The production capacity of the line was expected to reach six aircraft per month by the end of 2019, according to Airbus. Robot manufacturer ABB also stopped production in China. The country is the group’s second largest single market and accounted for 15% of revenue in 2019, around 4 billion dollars.
The chemical, automotive and textile industries are also extremely disrupted by the epidemic. Toyota, for example, has suspended production at its assembly plants in China. Volkswagen has made the same decision.
What’s even more worrying is Fiat-Chrysler (FCA) is warning that they could halt production at a European plant in a matter of weeks. For David Leggett, Automotive Editor at GlobalData,
“The emerging problems for FCA outside of China are likely to be mirrored by other vehicle manufacturers and reflect both the long-run internationalisation of parts supply-chains and the predominance of ‘just-in-time’ lean manufacturing processes that keep inventory low. The next few weeks will be critical for automakers. The typical car is made up of 20,000 parts, and there is an elongated supply-chain of parts and sub-assemblies put together in complex sequence to create the finished vehicle. As the virus develops further, it will almost certainly affect nearly every industry.”
Nearly every industry in nearly every country could potentially be affected by the coronavirus.