Before Covid-19 went global, tech was mostly worried about the closure of electronics factories in China. This blog has recalled the reopening of factories after that extended Lunar New Year holiday, when travel restrictions stopped many workers returning, and when quarantine rules demanded more spacious sleeping arrangements that meant factories could only take in a limited number of people.
The production interruption highlighted flaws in the ‘just-in-time’ system of supply-chain management. Delivery times were an early casualty. When you can trust quick sourcing, you get less risk of ending up with outdated unsold stock, but this relies on all parts of the chain working smoothly. The IPC, the electronics industry body, surveyed members in February and found that on average they were expecting a five-week shipment delay, showing a lack of confidence in the estimates given by their suppliers, which were quoting on average a three-week delay. The same IPC survey noted that industry players are worried about bottlenecks in the transport system. The report described empty shipping containers piling up on West Coast ports, waiting to go back to Asia.
This early commentary showed just how much the tech industry, in common with much global manufacturing, depended on manufacturing in China. Early revisions to revenue guidance from major corporations told the same story: Apple, for instance, and its major partner Foxconn, and HP, whose CEO Enrique Lores described ‘manufacturing capacity’ as its ‘No.1 problem’ during a February call with analysts. Lores had earlier frankly stated, discussing the possible effects of what was then an outbreak centred on the country, that most of his company’s products were sourced from China. To many in the industry, the lesson was clear: it was a good idea to source from a variety of locations. The US-China trade war had already prompted Google and Microsoft to start moving some production; the Covid-19 threat continued the trend.
Yet not everybody sees diversification as the right response. The IPC dismissed what it calls ‘alternative sourcing’ as ‘by definition… a more expensive, second-best alternative’, involving an investment of expense and time which it does not advocate. Faced with the coronavirus threat, though, companies with diverse options had an advantage. Yuanqing Yang of Lenovo described being able to ‘rebalance production’ with the help of a ‘global footprint of 30+ manufacturing sites’. Tom Linton and Bindiya Vakil in HBR argued that the agility and adaptability gained from supply-chain mapping and diversification would justify the investment.
In any case, it was too late to mitigate the fallout from the disruption in China. Factories did return to full productivity, an important moment given the country’s contribution to the global economy. But around the same time, the coronavirus crisis was spreading across the world. The virus emerged at a Samsung site in South Korea, prompting a temporary move of production of the premium products made there to Vietnam, where the company already bases much of its manufacturing – illustrating the wisdom of having the wide ‘footprint’ that Lenovo’s Yuanqing Yang described.
But the problems associated with the coronavirus were diversifying beyond threats to production sites and supply times. The first report issued by the IPC, the electronics industry body, on the subject of the coronavirus, focused on shipment times from China. The latest one cites weak demand as the biggest worry for electronics manufacturers, and goes on to discuss disruptions in Mexico. Different countries are starting to ease lockdowns on different timescales. Volumes are still low; data from the Port of Los Angeles – which deals mainly with traffic from Asia – indicates significant drops compared with last year both for the first quarter of the year and for the month of March. Industry is far from being back to normal, and we are still counting the cost of the earlier delays whilst dealing with a crisis that affects everyone in the world.
Covid-19 has provided an occasion to pause and reconsider supply-chain structures, and in particular to question the wisdom of relying on too few locations for sourcing. But given the global, all-encompassing nature of the crisis, the supply chain is now only one area of concern, and not the biggest. The next challenging stage – as the IPC fears – is the drop in demand we are seeing worldwide.
© CONTEXT 2020