supply companies production contract global coronavirus mortality
Global High-tech Supply Chains Disrupted By The CoronavirusWhy is the coronavirus disrupting global supply chains? Afterall, as ofFebruary 10th, while more than 40,000 people have been infected, only 910 havedied. That is a mortality rate of about two percent. While any mortality is atragedy to the loved ones impacted, should a two percent mortality rate shutdown the city of Wuhan, lead to the quarantine of 60 million people, impactinland transportation and transportation into and out of China, shut downfactories, and lead to global supply chain disruptions?Well, yes. Beyond the mortality rate, the National Institutes of Health isreporting that about 25% of those who have caught this pneumonia like virushave “a very serious disease, requiring relatively intensive or reallyintensive care.” Further, each person infected with coronavirus is passing thedisease on to between two and three other people on average, making it morecontagious than the flu. Finally, the vast majority of cases are located inChina, whose $2.7 trillion in exports make it the manufacturing center of theworld. The city of Wuhan, where patient zero was diagnosed, is in lockdownwith people forbidden from leaving or entering. Wuhan is a manufacturing hub.What supply chains have been impacted? The high-tech industry is the industrygetting the most attention, but the pharmaceutical and automotive industriesare also facing significant impacts. This article will focus on high-tech.Tomorrow, my colleague Chris Cunnane will focus on how coronavirus isimpacting automotive and pharmaceutical supply chains.It is known that Foxconn is a critical contract manufacturer in high techsupply chains. Foxconn, Apple’s most important contract manufacturer, wasoriginally supposed to resume production Monday after a recent forcedshutdown. But there were reports over the weekend that the factories willremain closed for some time to come. Reuters reports Monday that Chinadeclined Foxconn’s request to reopen its production plant in the city ofShenzhen today, and that employees were also not to return to work on Tuesday.Further, while the company received approval to reopen its plant in Zhengzhou,only 10% of the factory’s workforce has returned to work. If Foxconn is unableto ramp up production soon, Apple will have to delay the launch of its nextiPhone. Apple is highly likely to suffer material impact to its financialresults.With its heavy souring of contract manufacturing in China and just-in-timeshipments, the high-tech industry is among the hardest-hit by coronavirus.Dell Technologies, HP, Qualcomm, Huawei, Samsung, Qorvo, Skyworks Solutions,MagnaChip Semiconductor, and Amkor Technologies are all looking at disruptionsto their supply chains. While there are other contract manufacturing partnersactive in this industry, most of that capacity is located in regions that areunder the same kind of restrictions as the province of Henan where Wuhan islocated.When capacity does start to free up, and companies seek to shift orderselsewhere, these companies will face allocations as the contract manufacturersdivvy up the capacity between their customers in a manner that means nocompany is apt to get all of what they want (Although, more importantcustomers will get more of what they want than smaller customers). Further,many of these global high-tech companies pulled their engineering talent outof China once the virus’s seriousness was understood. When the virus begins totaper off, it is apt to take weeks, maybe several months, for productionengineers from the customer companies to certify that quality products can beproduced on alternate production lines. The numerous quarantine and transportrestrictions announced by different municipalities, and differences in howthey are implemented, have added to the difficulties.Razat Gaurav, the CEO at LLamasoft, points out that the ability to activatecontingency plans is affected by the industry. LLamasoft is a leading supplierof ai-powered supply chain analytics software. “If companies are makingsneakers in China, they can get an alternative plant up and running inBangladesh or southeast Asia relatively quickly.” The production facilitiesalready exist and the cost of adding capacity is relatively inexpensive.“But,” Mr. Gaurav points out, a typical semiconductor fab costs $1 billion toopen, so short term optionality is greatly reduced.”“This is a wake-up call for companies thinking about designing a supply chain.Risk and resiliency need to be part of the design.” Mr. Gaurav added,“Companies that have not fully thought through the details could be introuble. Many companies have business continuity plans for earthquakes andfloods (in China) but the alternative facilities were also in China.” Theproblem is that this disaster is region wide.“One immediate thing we are looking to do, is to create a war room atLLamasoft for our customers” that will provide extra resources and help. “Alot of our customers,” Mr. Gaurav explained, “are looking to update theirMarch contingency plans right now.” There is great uncertainty on how longthis crisis will run or what can be done to mitigate the disruptions to globalsupply chains.