94% of the Fortune 1000 are seeing coronavirus

supply chain disruptions: Report

February 21, 2020 11:09 PM EST

Source:

https://fortune.com/2020/02/21/fortune-1000-coronavirus-china-supply-chain-impact/

To understand the potential painful impact of the coronavirus on the Fortune 1000 takes just
one word: resin.

When the 2011 earthquake and tsunami struck the Fukushima Prefecture of Japan, the
electronics industry had a huge problem on its hands. Two Mitsubishi Gas Chemical factories
in the affected area made almost the entire world's supply of an epoxy resin called
bismaleimide triazine, or BT. Electronics chip manufacturers regularly used BT to seal their
components. No BT, no chips, without a major manufacturing overhaul.

"It was buried within a supply chain—a component of a component," said Josh Nelson, a
principal in strategy and business transformation practice of The Hackett Group, a strategic
consultancy.

Now, as coronavirus continues to spread, the region of China most heavily affected by the
outbreak is a hub of global supply chains. A new Dun & Bradstreet study estimates that 163
of the Fortune 1000 have tier 1 suppliers—those they do direct business with—in the area.
And 938 have tier 2 suppliers, which feed the first tier.

"That's where it becomes troubling," Nelson said. "It's going to be that [item] where only one
plant is qualified to make that and it's going to interrupt a whole production line."

The pinch is already being felt. Amazon has been stockpiling Chinese-made goods, Under

Beyond the already announced effects, many Fortune 1000 companies still don't know how
seriously their operations will be affected. Although likely aware of tier 1 suppliers' statuses,
they (and 5 million other companies globally, by Dun & Bradstreet's estimation) have little
interaction with the tier 2 level they indirectly use, all of which happen to be in the same part
of China.

"The waters get murkier," said Brian Alster, general manager of third-party risk and
compliance for Dun & Bradstreet. Plus, China's impact on the world's commerce has grown.
"When you look at SARS outbreak in 2003, they were 2% of global GDP," Alster said.
"Today they're 20%."

Already feeling the impact, according to the study, are the automobile and electronics
industries, which face the largest first quarter effects on earnings. Then come retail and
financial services, followed by total services, with a heavy emphasis on disrupted tourism.

"We have seen reports of customers paying air freight to get the parts out of there at a
substantially increased cost," said Ann Marie Uetz, a partner with Foley & Lardner and co-
chair of the law firm’s national automotive crisis response team. "But we haven't seen lines
shutting down here in North America." Auto manufacturers are doing what they must to keep
producing their most profitable vehicles. "To be blunt, I think GM is going to keep building
trucks—the Silverado in particular," she said.

Doing what is necessary can result in big spending. "A lot of times [manufacturers are]
working on 5% or 10% margins," said Richard Lebovitz, CEO of LeanDNA, which provides
supply chain management services to large companies in the aerospace, automotive, and
industrial controls sectors. Air freighting parts in gets expensive. "You could be adding a cost
of parts of 10% to 30% in some cases," Levovitz said. That can become a big bottom-line hit.

But the alternative is worse. Stop production and a company could lose customers. Like BT
epoxy resin, it only takes a single automobile panel or one industrial motor to keep a product
from shipping. Because increasingly work has become custom, rather than using off-the-shelf
parts, finding an alternative source may be at best costly and at worst nearly impossible.

"The tooling [to make the part] could be in the $10,000 range, but it could be in the several
hundred-thousand-dollar range" for larger items, Lebovitz said.

Beyond customer loss, a factory shutdown has another long-term implication. A company can
easily stop production. Restarting, though, means reengaging the entire supply chain and
getting it to work again on all the necessary components. The participating companies likely
have shifted attention elsewhere to keep their own revenue streams alive.

While there is concern now, the great unknown is how long the situation in China could last.
Some manufacturers and their suppliers have more options than others. "If you're a Fortune
50 or Fortune 100, you're going to have a lot of resources to identify and mitigate risk,"
Nelson said.

On the other hand, corporations in the bottom half of the Fortune 1000—which individually
still have billions in annual revenue—frequently run with less inventory and more reliance on
components, ingredients, and products arriving only when needed. That could mean having
"only 30 to 40 days of materials on hand," Nelson said. Anticipation of the lunar new year
probably meant that companies had already laid in additional inventory because of planned
shutdowns, adding perhaps two more weeks of production capacity.

"Another month beyond that you're going to see some of the companies having issues,"
Nelson said.
Omdia Update: Coronavirus afflicts more electronic supply chains, potentially impacting 5G
deployment

Want to learn more?

Have an expert contact you.

February 12, 2020

The coronavirus is spreading through global technology supply chains, impacting diverse and
interconnected sectors of the electronics industry. With the epidemic arriving at dawn of 5G’s
mainstream deployment phase, the coronavirus has the potential to disrupt the progress of the
next-generation wireless standard, as the crisis slows or threatens to slow the production of
key smartphone components, including displays and semiconductors, according to Omdia.

Amid this rapidly unfolding crisis, Omdia’s analysts are focusing their attention on how
coronavirus is affecting both demand and supply, closely examining constituent supply
chains for the worldwide 5G smartphone market. The following Omdia Update presents the
latest findings uncovered by our experts regarding the impact of coronavirus on 5G and other
technology segments.

5G at risk

The global 5G value chain is projected to generate $3.6 trillion in economic output and
support 22.3 million jobs worldwide by 2035. As a result, the stakes for players throughout
the technology industry value chain couldn’t be higher.

China’s smartphone market weakens

China is the world’s largest smartphone market, accounting for 27 percent market share in
2019, according to the Mobile Handset Database – Country report from Omdia.

In its third-quarter forecast update, Omdia predicted that the Chinese market would stop
declining and start to rebound in 2020. However, due to the coronavirus crisis, Omdia now
believes the Chinese market is likely to suffer another contraction in unit shipments.

The number of smartphones shipped to China annually is expected to decline to 373.9 million
units in 2019, a 4 percent decrease from 390.8 million units in 2018.

The biggest negative impact will be felt in Chinese domestic sales. As the outbreak period
lengthens, weakening demand will extend to other regions.

The extent of the impact will depend on the duration of the epidemic. Omdia is currently
evaluating different time scenarios and their expected impacts on Chinese smartphone
demand.
Display production slashed in February

In a new update from February 11, Omdia’s Displays service estimates that utilization at
China’s display fabs utilization will decline by 20 percent to 25 percent in February.
However, the country’s production and output will drop 40 percent to 50 percent due to
component shortages.

Manufacturing of display panels used in products including 5G smartphones has been

After closing for the government-extended Lunar New Year holiday, most display panel
makers with manufacturing operations in Wuhan and elsewhere in China resumed operations
starting on February 3. However, numerous employees and workers remain unable to return
to their workplaces because of travel restrictions in China, reports.

LCD polarizers and LCD module printed circuit boards (PCBs) are now in a state of shortage
due to the production bottleneck and also because of logistics issues. Panel makers are
dealing with low inventory for polarizers. This issue is persisting even after the resumption of
production at most facilities.

Games market influenced by coronavirus

The impact of coronavirus has had a broadly positive effect on player engagement and in-
game spending in the Chinese games market. However, when considering the supply chain
disruption caused by the contagion, the overall effect on the global market is negative.

For the period from Jan. 12 to Feb. 10, according to Priori Data, iOS mobile game daily
active users (DAUs) rose at a healthy rate 5.3 percent, while net revenue increased by 5.2
percent, due to the Lunar New Year sales surge and users under quarantine being unable to
leave their homes.

However, during the last seven days, revenue growth has flattened.

Comparatively, for location-based titles, the effect has been more severe. For example, daily
net revenue for Let’s Hunt Monsters—China’s equivalent of Pokémon Go—suffered an 83
percent decline over the past 10 days, hitting an all-time low.

Generally, the Chinese government’s move to extend the Lunar New Year holiday helped to
boost user engagement with legacy titles and increase in-game spending. As a result, we are
likely to observe an uptick in China’s PC gaming market in the first quarter, but this is
unlikely to reverse the overall declining trend in the PC games market in the region.

Semiconductor supply steady for now—but risks are mounting

Omdia so far has not detected any coronavirus impact on the supply of semiconductors used
in 5G smartphones and other products. However, the epidemic does raise some serious long-
term concerns. If coronavirus continues to spread and spur significant public-health problems
in China, electronics manufacturers in the country may be forced to slow manufacturing or
even shut down some operations. This could have a significant impact on global
semiconductor supply.

Looking at the major Chinese semiconductor foundries, the proportion of revenue they obtain
from domestic customers is significant. If there is a deceleration in manufacturing within
China, it is likely to not only impact chip suppliers but also companies that purchase large
volumes of chips to produce end products. These companies include electronic manufacturing
services (EMS) providers and original design manufacturers (ODMs).

Medical imaging takes on the coronavirus

According to Chinese officials, a total of 44,653 cases have been confirmed. Radiography
and CT imaging will play a fundamental role in mass screening and diagnosis of suspected
patients of the deadly coronavirus. In such circumstances, artificial-intelligence powered
recognition can drive case prioritization and identification of key indicators and symptoms of
the coronavirus, in particular pneumonia. This helps medical professionals to tackle and
control the outbreak of this global epidemic.

About Omdia

Omdia is a global technology research powerhouse, established following the merger of the
research division of Informa Tech (Ovum, Heavy Reading and Tractica) and the acquired
IHS Markit technology research portfolio*.

We combine the expertise of over more than 400 analysts across the entire technology
spectrum covering 150 markets and publish over 3,000 research reports annually, reaching
over 14,000 subscribers, and covering thousands of technology, media, and
telecommunications companies.

Our exhaustive intelligence and deep technology expertise allow us to uncover actionable
insights that help our customers connect the dots in today’s constantly evolving technology
environment and empower them to improve their businesses – today and tomorrow.

More than two-thirds of world trade occurs through global value chains (GVCs), in which
production crosses at least one border, and typically many borders, before final assembly.
The phenomenal growth in GVC-related trade has translated into significant economic
growth in many countries across the globe over the last two decades, fueled by reductions in
transportation and communication costs and declining trade barriers. But, at the same time, it
has contributed to distributional effects that mean that the benefits of trade have not always
accrued to all, which has, at least in part, been a driver in the backlash against globalization
and the rise of protectionism and threats to global and regional trade agreements. In addition,
new technological developments such as robotics, big data, and the Internet of Things (IoT)
are beginning to reshape and further transform GVCs. This second GVC development report
takes stock of the recent evolution of GVC trade in light of these developments.

Global value chain is a complex

financial crisis. A country’s GDP (value added) can be decomposed

into purely domestic, traditional trade, in which a product

is made in one country and consumed in another, simple value

chain trade, in which a good made in one country crosses one

border and is used in production in the partner country before

consumption there, and complex value chain trade, in which

production crosses multiple borders.