With the coronavirus outbreak showing little signs of abating, the impact on the tech supply chain could grow. It all depends on if the virus continues to spread and how long production facilities remain closed.
This is particularly important for Apple, whose main supplier, Foxconn, has major manufacturing facilities in and around the virus’ epicenter in Wuhan, China.
Currently, there is little evidence that the virus and subsequent shutdown of Foxconn’s production lines is having a material impact on Apple’s ability to deliver products to its stores.
“The rumors by supply chain experts are if they get back to work by mid-February, things will be OK,” said Frank Gillett, a Forrester vice president and principal research analyst covering Internet of Things and emerging technology.
“The ultimate question is, ‘Will I have a harder time finding products from China and might the prices go up if I can find them?’.”
The answer to both these questions appears to be no, for now. According to a sales associate in the Columbus, Ohio Easton Town Center Apple store, there is no shortage of phones on the shelves and he had not heard of any delays of new phones being shipped.
Although, apparently, custom computer orders on certain products are seeing delays.
Josh Nelson, a principal analyst in the Hackett Group’s strategic and business transformation practice, said there is still a good amount of buffer inventory available because the Chinese Lunar New Year, a long holiday similar to Christmas in the West, had caused manufacturers to build up excess inventory in anticipation of productions lines being shut down for the holiday.
“The problem is if coronavirus gets more widespread,” he said. “But, for the time being, its’ going to affect Hubei plants but they’ll be able to move products to other facilities. If you think about the supply chain, there’s generally buffer inventory in China, there’s ships at sea, and then they have buffer inventory in the US.”
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Since the 2010 Fukushima nuclear disaster in Japan, when the production of critical components for Lithium-Ion batteries was halted, companies, which had no other suppliers of the parts they needed, began to take a hard look at the potential vulnerabilities in their supply chains. This led many companies to diversify their supply chains, which provided more resilience, though chokepoints still remain.
“It’s going to be those plants much like Fukushima where you have one plant that makes 70% of the supply,” he said. “But it’s hard to predict where those are going to be at this point in time.”
Morningstar analyst Don Yew said in a Reuters article the impact on Foxconn should be limited because “its four subsidiaries in Hubei only accounted for 1.8% of the firm’s overall revenue in 2018 and vendors such as Apple maintain a diversified supply chain.”
To help control the outbreak, the Chinese government has extended the Lunar New Year holiday through this past Sunday, Feb. 2, to “reduce mass gatherings” and keep people from going back to work although some regions will keep factories closed through Feb. 9.
According to Bloomberg, “Apple Inc.’s major suppliers in China, including iPhone-maker Hon Hai Precision Industry Co., plan to resume full-scale production in the country Feb. 10 ….” The names Hon Hai and Foxconn are used interchangeably. Both companies are part of the Hon Hai/Foxconn Technology Group.
Fortune magazine reports that TF International Securities analyst Ming-Chi Kuo said in a research note that he expects first-quarter iPhone shipments to be reduced by about 10% to between 36 million and 40 million devices because of the outbreak.
This could get worse, Kuo said, if the virus is not contained and the situation brought under control.
Gartner Senior Director Analyst Koray Köse said the impact of the outbreak on supply chains may not be felt for several months.
“The consequences of a pandemic event are hard to predict,” said Köse in a blog posted on the Smarter with Gartner website. “The full impact of coronavirus on supply chains might not become obvious until sometime in the next few months and beyond. However, supply chain leaders should take initial steps now to monitor and prepare for the impact on their value chain.”
In the short term, Gartner is advising business leaders to focus on understanding first and second tier risks to their supply chain based, identify where inventory exists outside of the impacted areas, and check with legal to understand the legal ramifications if contract obligations are not met.
Nelson said, depending on the product in question, there can be 70-to-100 days of excess supply in the pipeline at any given time.
“We won’t have the issue now, but if this continues for three or four weeks, that’s where these buffers get depleted,” he said.