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Electronics Supply

COVID-19 Impact on Electronics Supply Chain

Electronics Supply – The global outbreak of COVID-19, the illness induced by the novel coronavirus, was bound to put stress on the supply chain. Of the industries impacted, electronics ranks among the most important—and potentially the most difficult to put right again. As of June 2, 2020, nearly every country in the world has reported coronavirus cases, with 371,000 deaths out of more than 6 million total confirmed cases.

The electronics supply chain was already in the throes of disruption before the outbreak. The tariff war between the United States and China forced the relocation of some high-profile electronics manufacturers from China Southeast Asia, including GoPro, Kyocera and Nintendo, moving manufacturing to Vietnam, as well as Casio, Daikin and Ricoh shifting operations to Thailand.

This year could have been a year of recovery for the electronics industry. Instead, it is filled with new challenges that threaten to significantly stem the flow of critical electronics and impact the introduction of new products for many months to come. Here’s a look at how the sector has been affected and how companies are answering the challenge.

The Impact on Electronics Is an Evolving Situation

IPC is a trade organization dedicated to advocacy, education and support for the electronics industry and Electronics Supply. The group’s 5,400 member companies come from all backgrounds, including electronics designers, assemblers, suppliers, and PCB manufacturers and OEMs. IPC was one of the fastest out of the gate to start supplying up-to-date insights into the evolving COVID-19 situation.

In March, IPC conducted a survey of its members to better understand the impact of the outbreak on electronics manufacturers. Here are the most significant highlights of what they found:

  • Around 69% of respondents said they had received warnings from their suppliers about shipment delays. The average delay in March was three weeks, which has held steady since February.
  • However, 15% of respondents said in March that they had been told to expect delays of at least six weeks. In February, no company had yet been quoted a six-week delay.
  • Executives are even less optimistic than the average three-week delay indicated by suppliers. Surveyed electronics executives said they expected five-week delays on average.
  • Most of the companies polled said they “expect” their supply chains and businesses would be “back to normal” by July 2020. About 75% of respondents expect to return to normal operations by October 2020, while 25% said it is too early to make a prediction.
  • The most widely impacted sector within electronics manufacturing and distribution is consumer electronics, followed closely by automotive and industrial electronics.
  • Most of the respondents (56%) said they expect to report declines in sales through the first quarter of 2020 and 63% and said they anticipated flagging sales through the second quarter. Around 62% of company representatives said they were bracing for a sales slump in 2020.

As the coronavirus started spreading throughout China in early 2020, the country curtailed both manufacturing output and travel, meaning factories were effectively shut down for several weeks. As a result, China’s Manufacturing Purchasing Manager’s Index—a measurement of the health of the manufacturing sector based on new orders, output, employment, delivery times and other factors—fell to its lowest level since the index was rolled out in 2004.

One discrepancy to point out— between estimates of shipping delays and the “actual” delays anticipated by electronics executives— comes down to two major factors, both of which are impacted by the fallout from the novel coronavirus.

This includes manufacturing capacity and utilization. Brief periods of low utilization of existing manufacturing capacity and infrastructure can cause short-term financial hardship. However, if the disruption clears quickly, companies can bring their output back up over time to pre-disruption benchmarks.

COVID-19 has caused a significant and protracted drop in manufacturing utilization, however. Travel bans and facility closures kept workers out of their factories before and since the Chinese New Year in January 25, 2020.

And even the companies that resumed production did so in a limited capacity due to the scarcity of labor. For a long time, China’s manufacturing utilization remained far below pre-coronavirus figures because of ongoing labor shortages and skeleton crews.

Deloitte has identified several less-immediately-obvious impacts brought by COVID-19 as well. It is not just the day-to-day operations of the supply chain that are being affected. It is also the overall “velocity” of the value chain. Board and systems manufacturers have become a noticeable bottleneck as the pandemic continues, meaning there may be stock available but that it could have no way to reach its destination due to the lockdown.

It is not just electronic parts and finished products that are affected, but also products that are critical to their manufacture, such as steel baskets for cleaning and curing printed circuit boards. Every link in the electronics manufacturing value and supply chain is feeling the effects of limited travel for personnel and product.

According to Deloitte, coronavirus is creating less immediate but potentially much longer-term disruptions to the value chain. Design decisions, new product launches, and time-to-market are all being impacted due to reduced internal meetings and lost opportunities to collaborate closely with outside business partners.

How Are Electronics Manufacturers Coping?

Without a vaccine available, the only viable method for “flattening the curve” and stopping the spread of COVID-19 is aggressive restrictions on social gatherings and travel and the closure of all but the most essential industrial sites. Sony Electronics, Dell Computers, Square, VMware and others have had to withdraw their 2021 forecasts due to the ongoing uncertainty presented by COVID-19.

In Sony’s case, the company had been focused on geographically distributing its most important facilities long before COVID-19 started to upend business around the world. And even that was far from enough.

The Japanese company not only had to shut down manufacturing plants in China and Malaysia—creating an unstable-at-best flow of parts and resources from Asia—but also a manufacturing plant in the UK. The closure lasted until late April.

Most of the respondents to the IPC survey (55%) indicated they were actively seeking alternative sources for components and materials, while about 54% said they were restricting business travel. Another 30% of the IPC members said they were encouraging or mandating telecommuting to help keep their workforce healthy and maintain forward momentum.

Deloitte outlines some of the other steps that companies can take to restart their operations. They divide these into three main categories:

  • Tactical action: Rolling out travel restrictions and work-from-home policies hurts in the short term, but it helps to safeguard employees and raises the chances that they will be healthy once the outbreak wanes. Tactical actions also include expanding paid-time-off hours and understanding the risks of allowing visitors into offices and production plants.
  • Operational action: When factory closures are not mandatory, reducing output or shutting down a location may be the most logical thing a company can do. Electronics manufacturers and suppliers may need to push out product launches and discuss new schedules with customers. They may also have to find alternative sources for materials and parts, potentially looking to nations that have been quicker to contain the outbreak.
  • Managerial actions: Managers should consider creating “war rooms” to monitor the situation in real-time since it continues to evolve. Executives will also need to perform risk assessments, draw up procedures for hiring and plans for managing their workforce to quickly bring operations back to where they were before the outbreak.

In the end, it is not possible to anticipate an event like this and hammer out a perfect plan. The most important takeaway for electronics companies is to honestly address the risks of geographical concentration. Such a model constitutes a “single point of failure,” like the back-to-back earthquake and tsunami which hit Japan in 2011. At the time, around 60% of critical parts in the global automotive marketplace were produced there.

That event caused some companies to reevaluate the short-term benefits of geographical concentration against the long-term benefit of more flexible supply chains. COVID-19 represents a reckoning for companies that have not learned this lesson yet—and an opportunity for those that did Electronics Supply.

A Year of Recovery

Every company in the global electronics supply chain hoped, and had many reasons to believe, that this would be a year of recovery after last year’s downturn. Trade tensions and new tariffs between China and the United States have caused uncertainty, closures, and lost profits. Many hoped that 2020 would bring a rebound. But COVID-19 had different plans for the global electronics trade.

As the sector fights to return to normal throughout 2020, this downturn can also be seen as an opportunity. Some lessons only need to be learned once — and one is the value of geographical diversity. Every country on earth is feeling the effects of coronavirus, but not necessarily to the same degree. Globalization is a controversial subject, but it appears now that the companies with the strongest sense of global citizenship and commitment to diverse value and supply chains could be the first to find their footing again.

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