Coronavirus deaths continue to rise
It’s important for companies to consider diversifying their risks—in this case, by spreading their supply chain across several countries.
Recently, we’ve seen significant volatility within the global market as investors continue to weigh the overall impact of the coronavirus (2019-nCoV). While a vaccine from drugmaker Gilead Sciences Inc. brings a glimmer of hope in finding a cure, the virus continues to spread rapidly throughout China, primarily impacting the Hubei province, the home of Wuhan, and ground zero for the contagion. As the virus causes shutdowns in Chinese factories and retail outlets, the risks to U.S. technology companies and multinational corporations grow increasingly larger.
While there are many comparisons between the 2019-nCoV and the SARS pandemic in 2002-2003, China was a much different country two decades ago when it mainly supplied textiles, clothing and shoes on a global basis. Today a technologically advanced China is a powerhouse, producing manufacturing chips, semiconductors, smartphones and hardware that comprises accounts for 21% of global IT hardware expenditure.
Smartphones, chips and memory
Apple is the most prominent example of tech companies’ dependence on China’s economy and manufacturing facilities.
Apple is the most prominent example of tech companies’ dependence on China’s economy and manufacturing facilities. Supply in memory chips, DRAM (dynamic RAM chips used in PCs, work stations and servers) and NAND storage (solid state flash memory) is expected to decline due to factory shutdowns.
In the past, Apple Inc., along with other smartphone and hardware companies, gained significant advantages in scale and reduction of cost of goods by concentrating manufacturing efforts in China. Nearly 17% of Apple’s revenue comes from China. However, the coronavirus has further underscored what many analysts have been saying about Apple–that it needs to decrease its reliance on China. Apple’s second-quarter sales will likely be impacted by the closure of 42 stores in China until Feb. 10. Not only did the epidemic cost Apple an estimated $200 million in lost sales, but factory shutdowns by major supplier Foxconn will cause significant constraints within Apple’s global supply chain. Foxconn’s largest iPhone assembly site is 300 miles from Wuhan, and a 10-day production delay is expected to reduce iPhone shipments by 5% to 10% in the quarter.
A diverse supply chain can shore up the flank
Not unlike managing a 401k financial portfolio, it’s important for companies to consider diversifying their risks—in this case, by spreading their supply chain across several countries. Although reducing dependencies on China could be costly or create short-term impacts to operations, tech companies such as Samsung and Ericsson AB have already seen benefits by shifting their global supply chain to neighboring countries in Southeast Asia due to escalating tariffs and the trade war. In fact, U.S. trade in goods rose faster with Vietnam than with any of its largest trading partners. Trade with China has fallen most rapidly, contributing to a narrowing trade deficit gap between the United States and China. The U.S. deficit in goods with China decreased 17.6% in 2019 to $345.62 billion, its lowest level since 2014.