Will semiconductors be taking a hit from the coronavirus?

As flights are grounded, cities locked down and cruise ships put into quarantine, it’s sometimes hard to focus on business as usual. However, the rest of the world continues to turn, and we have to consider how coronavirus will impact business, including our business.

The disruption in manufacturing and supply chain, caused by measures intended to reduce the rate of infection, is already having an impact on some companies, and this will grow as inventories diminish. In the longer term, those infection-control measures will also have an impact on product demand, especially where retail outlets have closed and earnings will be lower.

We do have some precedent, in the Severe Acute Respiratory Syndrome (SARS) outbreak that started in southern China in 2002, but there are significant differences worth noting. SARS is more fatal; it kills as many as 10% of those infected, but is only infectious once symptoms show (while coronavirus seems to be infective during the incubation period). SARS lasted around six months, and the estimated impact on the Chinese economy was a 1% drop in GDP, but coronavirus hit in the middle of the holiday season when travellers carried the disease across the country (and beyond) so we should expect the impact to be greater.

China is also a very different place than it was in 2002, both in the country’s ability to respond to an epidemic and the global reliance on Chinese manufacturing. China is now a significant consumer of the electronic products that use semiconductors, and spending will slow dramatically along with restrictions on travel. That slowing will mostly lead to pent-up depend demand once the disease is under control, so overall demand for 2020 will likely be unaffected, but that demand will slip to the middle and end of the year.

When it comes to the supply chain, we have a couple of fabrication plants within Wuhan itself, which won’t be making memory chips as productivity in the city has largely been suspended to slow the spread of the disease. Those factories are pretty small, by memory standards, but Foxconn also has significant manufacturing in the region, which was enough for Apple to broaden its forecast range. Apple says it won’t be impacted immediately, as it has inventory to maintain the supply chain, but a long-running epidemic could significantly influence supply. Resources used by Apple are also used by others, so we expect significant disruption in the second quarter of 2020 as inventories run low and companies compete for alternatives sources of supply.

At the time of writing the coronavirus has spread to 18 countries, and it’s safe to assume that a large number of people are walking around blissfully unaware that they’re passing on the infection that’s incubating inside them. The World Health Organisation has just declared a Global Health Emergency, based on the expected growth in infections outside China. Therefore, we have to assume that infection rates will rise very quickly over the next few months, and that the disease won’t be (globally) under control until the middle of 2020 at best.

Manufacturers will need to establish where vulnerabilities in their supply chain might lie, and be ready to switch suppliers as the infection spreads to additional regions. Finding a single alternative supplier will not be enough to counter a disease which could strike anywhere, but countries with well-established health systems will be more likely to minimise disruption. Such countries will also be better equipped to distribute a vaccine, or cure, when it becomes available, and thus re-establish production faster.

Such diversification of supply may well be a sensible step in an increasingly uncertain world, and so form part of a general strategy, as we laid out in Electronic OEMs Must Safeguard Supply Chains to Negate the Impact of Natural Disasters and Major Accidents and Winning in the Turns: A Supply Chain Planning Action Guide — Focus on Strategy and Action Plans).

Bill Ray is Senior Director Analyst, Semiconductors and Electronics at Gartner.

This article was originally published on Gartner's blog.

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Originally published here.